Time to leave the deutschmark... errr I mean euro?

[youngdan]

You can dream on then and see how you fare out.

[scolairebocht]

Brio: "Euro membership has killed us by 2 things.
One inappropriate interest rates causing boom and bust, and two, harmful foreign exchange rate - strangling our exports."

Exactly, so as the ECB wipes the blood off its dagger after stabbing us twice we stagger over to it and beg it for forgiveness, promise to be good and pass the Lisbon Treaty if it will only save us. This is absolutely crazy, it is their actions which have destroyed and are destroying the Irish economy but our state controlled media - which is not just RTE by any means - are trying to brainwash the Irish people that the exact opposite is true.

Youngdan: "Finally don't worry about the punt plummeting because the further it plummets the better for competativeness."

I agree, some people have maybe missed this point. If we fell say 90% we'd be in clover, but unfortunately I don't think it'd happen. Think about it? Everybody and his grandmother in the US, UK etc would go straight to all the .ie websites and order everything under the sun so gigantically benefiting the Irish economy. Then our currency would pop back up again because all those customers would have to purchase Irish punt to make the transaction. As long as we don't go printing money, like they are doing in Zimbabwe and like the Germans did between the wars, the punt will not become like wallpaper. People have this simplistic idea that a strong currency is good and a weak currency bad, it just isnt that simple. We are now in a depression and in that cycle its well known that devaluations (and to an extent the bigger the better) are among the best solutions to go for. They call them 'competitive devaluations'. While some economists think that they are bad for the world economy in general its usually held that they are very good for the individual country that manages to devalue quickly and deeply. This in fact is what the UK is now doing:

"‘The phrase ‘benign neglect’ seems particularly appropriate as there is no doubt that the UK authorities, especially the Bank of England realised, at an early stage, that a serious downturn was on the way and that significant currency weakness might help mitigate the economic problems to come by assisting the export sector of the UK economy,’ says Ian Stannard, senior currency strategist at BNP Paribas."
( Finance-Magazine.com - Forex pressure on Irish firms: euro sterling exchange rate outlook 2009 )

And this rush to devalue is quietly spreading around the world:

"Faced with a slowing economy and a widening current account deficit, the Vietnamese central bank devalued its currency, the dong, by 3% on Thursday to boost exports. Earlier, Russia devalued the rouble for the third time in a week, as the price of oil, the country’s largest export, fell sharply.
Earlier this month, there was concern that the Chinese, faced with a drop in exports, may devalue the yuan after president Hu Jintao was reported in the People’s Daily newspaper as saying: “With the spread of the global financial crisis, China is losing its competitive edge in the world market as international demand is reduced.”
And finally, the US dollar index, which measures the value of the currency against a basket of currencies, has fallen to 81.21 from a peak of 88.28 on 21 November. The huge monetary and stimulus plans being unveiled in the US have led to worries over their effect on the dollar and brought back memories of the 40% devaluation of the dollar against gold during the Great Depression.
These are early days, but observers have been warning about the fear of competitive devaluations as export-dependent countries try desperately to boost their economies.
....
It’s clear that the falling rupee has added to the competitiveness of Indian exports. Also, while it’s true that reports have been coming in about Chinese dumping of goods into India, the 25% depreciation of the rupee against the yuan this year will act as a cushion for domestic manufacturers. In fact, the rupee has even depreciated against the Bangladesh taka and the Sri Lankan rupee this year.
Of course, all this doesn’t affect the argument that the Chinese currency is in any case grossly undervalued and they need to revalue it upwards. And if competitive devaluations do happen, the situation could deteriorate rapidly. But so far, for Indian exporters, the weak rupee has been a help." ( Fear of competitive devaluation? - Money Matters - livemint.com )

Ok say we remain in the euro, what fate awaits us? Here's a gossipy statistic compiled last month:

"A survey carried out by the NCA last week on a selection of clothing, homeware, maternity/nursery and electrical goods showed that Irish consumers are being charged an average of 51% more than consumers in the UK.
The survey was carried out on 21 January and looked at the prices of 44 products across 13 stores. Prices have not been adjusted to reflect the different VAT rates in ROI/UK." NCA - Survey shows prices higher in Republic )

51% ?!! And if they added in that VAT figure the percentage would be worse! This is exchange rate/ competitiveness armageddon we are facing here. Afaik Irish retailing and exporters never faced anything as bad as that with our main trading partner. That figure represents inevitable disaster, in otherwords it'll be the second shoe to fall for the Irish private sector after the collapse of the housing bubble. This new disaster is now unfolding:

"ISME, the Irish Small & Medium Enterprises Association, has outlined that SME exporters to the UK are facing meltdown, as Sterling continues to dramatically weaken against the Euro. The Association outlined that 95,000 jobs were at risk as the Euro has appreciated against sterling by 16% since the beginning of the year,

A recent ISME survey confirmed,

* 47% of companies export to the UK, 65% of these outlined that it was their main export market.
* 56% are paid in Sterling and 39% in Euro.
* 40% of total SME exports go to the UK
* Two-thirds (65%) outlined that the impact of the strengthening Euro vis-à-vis Sterling is having a negative impact on their business.
* 68% are threatened by UK competitors on the domestic market, 71% on the UK market and 44% in other markets.
* 55% of SMEs are tempted to source raw materials from the UK due to the value of Sterling.

According to ISME Chief Executive, Mark Fielding, “The Situation has obviously reached crisis proportions and continues to get worse ,as Sterling is predicted to weaken further. To put the situation in perspective at present Sterling is trading at .86p against the Euro. If we were still trading in punts that equates to a rate of 1.09p sterling for every old Irish pound. Before the Euro was introduced this level of trading would have been unacceptable to the Government and would have been seen as catastrophic for exporters

For example, 12 months ago a company selling £100 of goods into the UK would have converted the revenue into €135; the figure today has dropped to €116, a differential of €19. This drastic reduction in income means a similar reduction in net margin as UK customers cannot be persuaded to pay higher prices. The reality is that most indigenous SMEs are not in a strong bargaining position and therefore have to take a cut in margins, now placing them in a loss making situation.

The heavy reliance on the UK market in particular is a huge area of concern. Over twice as many SMEs (47%) export there in comparison to the overall Irish national exports at 17%. This exposure is a double whammy as not only are Irish firms finding it more difficult to compete in the UK market, they are also facing stiff undercutting from UK firms in the domestic and international markets.

“The pincer movement of reducing sales income, as a result of negative currency movements and increasing domestic costs, means that many exporters are walking a very narrow line between continuance and closure, with the most vulnerable being those with no offset on their raw material imports” according to Fielding.

“The strengthening Euro against Sterling presents a major challenge to the indigenous sector, particularly exporters, and will dominate business activity for the foreseeable future. With Sterling forecast to weaken even further, the full extent of the erosion of our competitiveness will become increasingly evident and in fact magnified. ( http://www.isme.ie/stg/public/downlo...19sterling.doc )

And in the ISME report for winter last year:

"27% of respondents [Irish SMEs] are involved in exporting. There has been a sharp, dramatic downturn in exports with 45% of companies reporting a reduction in the value of their exports in comparison to 28% who recorded an increase. This net reduction of 17% compares very unfavourably with the last quarter where a net 4% of companies recorded a reduction. The corresponding figure last year was a net increase of 9%, confirming that there has been a twenty six percentage point turnaround in the last 12 months. Much of this turnaround can be explained by a reduction in international demand. However, there is no doubt, particularly in the last three months, that sterling’s weakness against the Euro is having a devastating impact, particularly for exporters to the UK, the majority who are SMEs." ( http://www.isme.ie/stg/public/downlo...endssurvey.doc )

More on this crisis from the Irish Exporters Association and the IFA. Liam Shanahan, IEA president stated:

“National economic recovery depends on maintaining a competitive exporting sector, but the current reality is that Ireland’s traditional exporting industries including the agri-food industry are being undermined by the 20% depreciation of sterling since the end of 2007. Unless action is taken by the Government by implementing a Sterling Equalisation Fund, 13,500 jobs in exporting sectors will be lost and the recessions will be more protracted.’’

The IEA president went on to say:

“We are looking at widespread exposure by a very wide range of export companies in both the manufacturing and services sector to the collapse of sterling. The total at risk export sales exposure of manufacturing and services companies to the UK is €7billion. At risk are 13,500 jobs in export companies. A further estimated 10,000 jobs would be indirectly affected, bringing the total to 23,500.’’

IFA President Padraig Walshe said:

“The agri–food sector has suffered more than most in the current downturn and is now faced with an unviable exchange rate with Sterling. Across a range of exports – dairy products, beef, and mushrooms – there is severe pressure because of the current exchange rate.”

“In 2007 Ireland had a competitive exchange rate with sterling of £0.68 = €1. In the course of 2008, in a deliberate policy by the UK Government to gain competitive advantage, sterling fell from £0.73 against the euro at the start of the year to £0.98 at the end of the year and is now at about £0.90. At £0.90 average exchange rate to the euro in the last few weeks, €1 billion of our €3 billion of agri-food exports to the UK will be vulnerable, and 4,400 jobs are under imminent threat.’’ ( IFA and the Irish Exporters Association hold constructive meeting with Tanaiste on Sterling Support Scheme )

Btw when they say the sterling/euro exchange rate has worsened by 20% I think they are underestimating it. According to the following graph you get approx. 1 euro = 67p going to 1 euro =90p over the last two years. I make that an appreciation by sterling of approx. 34%.

Anyway we hear a lot about competitiveness in the media. No question everybody mentions it and how we will never recover till we fix it etc. Fair enough, but what percentage of our deteriorating competitiveness is caused by the disastrous fixed exchange rate we are in as opposed to domestic controllable costs? Here's the answer from Pat McArdle the chief economist at Ulster Bank:

"Arguably the most coherent contribution was made by the National Competitiveness Council in early January. They showed that we have experienced a 30% loss in competitiveness, two thirds of which reflects exchange rate movements and the remainder excess increases in our cost base." ( Irish Economy 2009: Pet suggestions for saving the economy - Pat McArdle, Ulster Bank )

Notice how this debate has developed? Somehow the media has gone on about increased costs etc etc and neglect to metion that two thirds of the problem is caused by our membership of the euro? Look at it another way, how do we solve that third of this problem, our domestic costs? It boils down to either cutting private sector wages by 20% or so or some kind of govt easing of taxes. (Don't forget that most of the increase in costs is caused by govt taxes of some sort, e.g. the increase in ESB charges is just a tax because ESB is state owned.) As regards the govt the air is thick with ideas about PRSI holidays, cuts in the commercial rates, VAT reductions and even govt subsidies to exporters. Unfortunately the govt is obviously completely broke, realistically it cannot afford to either reduce taxes or give anybody a subsidy. Far from it, it'll probably have to increase taxes. The other suggestion of cutting private sector wages runs the considerable risk of throwing large numbers of those workers into bankrupcy, bearing in mind the huge debts they are carrying. Besides if we did that it would presumably collapse consumer demand in the Irish retail sector, hitting hard the very people you were trying to help. Really its hopeless, we cannot solve, in a short timespan anyways, that 33% of the cost problem. Whereas, costless to the Irish Exchequer, you could leave the Euro and presto solve the issue that was the main cause of the problem in the first place.

Yes it is costless to the Irish Exchequer! I strongly think people have got that wrong here. Our leaving the euro would be exactly the same as our leaving the 153 year old sterling monetary union in 1979. Technically at that time you could say I think that the vast majority of the Irish national - and consumer - debt was denominated in sterling, in the sense that the Irish currency and the UK one were the same. The two currencies also circulated in Ireland exactly the same way that the different euro notes now circulate. When we left, this 'sterling' debt became a 'punt' debt one to one. We are - for a few more months anyways - still a sovereign govt. and as such we can move in or out of a currency union to our hearts content and this is definitely NOT considered a default. It wasn't considered that in 1979, nor indeed was the UK considered in default when it left the ERM in 1992, despite the fact that in both cases holders of each country's bonds lost heavily. All that happens is that we announce the creation of a new floating punt (because its floating we don't set a devaluation level, the market decides that, and the float starts at one to one, hence we are not offering to pay the bonds back at a lower rate) and will convert Irish issued euro debt and currency one to one to this new currency. Afaik all, at least I think the majority, of Irish govt issued debt, private debt in Ireland owed to Irish banks, and I think even Irish international bank bond issues, are denominated in Irish Central Bank issued or guaranteed euro currency. So there is no change, we pay back the money one to one with our new punts which is the same currency that the Irish taxpayer pays the Exchequer in. Btw you can tell Irish issued euro notes from others by the letter 'T' written beside the numbers on them. Incidentally its said that in Germany they are already checking their banknotes to see what govt issued them, because apparently they feel the euro will inevitably collapse and they want to have only German issued banknotes ( http://www.ashleymote.co.uk/?p=894 ).

You see I think people are getting mixed up about this because they think that we have a common European bond market, guaranteed by the ECB. Thats not the case, Irish govt debt issued in euro is not the same as German govt debt issued in euro because obviously they attract quite a different interest rate. Hence the market recognises this difference, and its just this different Irish Central Bank euro that breaks off and floats. I admit that some debt might not break off with us like this - e.g. presumably very old Irish issued deutchmark bonds - , but don't forget there are swings and roundabouts here, we gain in some other ways too. For example as of the end of last year the National Pension Reserve Fund had 16.4 billion euro on its books ( http://www.nprf.ie/Publications/2008...l_End_2008.pdf ) which would pretty much all rise in value under this scenario. Also the value of agricultural subsidies from the EU would rise as well giving us quite a tidy sum as it did when we devalued before.

Sure there are risks and maybe we should do the same as we did in 1978/9 and issue exchange controls during the changeover. Thats what they did that time. While they were preparing the changeover they introduced these controls (you simply couldn't buy, on a large scale, Irish punts without the permission of the Irish Central Bank) which solves the problem of speculators making hay during the changeover. After that its just a market, and yes there are Soroses out there but most of the time markets operate by standard economic goings on and there is no need to fear them that much. People are talking about capital flight etc., why then not close down the Irish Stock Exchange? They were hit by huge outflows of capital over the course of the last few months, and many calls were made to close it down, but they took it on the chin and the sooner they did that the sooner they will get back on their feet. Much the same goes with the currency. We are now trying to recover with a completely banjaxed artificial exchange rate which some are too paranoid to test in the markets. Sure it'll fall somewhat but we are only putting off the evil day. The longer we delay the more we destroy the Irish private sector, simple as that, and with that gone how do we pay any debts or stave off Irish govt bankrupcy which is looming on the horizon? Lets learn the lessons from other countries and on that score I will give the last word to David McWilliams:

If we look at economic history, we see that no small country ever recovered successfully from debt deflation by cutting spending and sticking with a hard currency. The evidence from Sweden and Finland in the early 1990s is particularly instructive. Both countries suffered from the same boom-bust cycle as we did. Their banks went bust and had to be nationalised, like ours. And the initial policy reaction from everyone - the government, the trade unions, the media establishment and the senior civil servants -was that the government must reduce spending and the hard currency link to the Deutschmark must be preserved at all costs.

This adjustment failed, as ours will do, because it is intellectually incoherent unless you are prepared to entertain massive unemployment and serious social unrest. Unemployment went to 19 per cent in Finland and the budget deficit to 14 per cent of GDP. Finally, someone shouted stop to this masochistic madness.

Against all their advice, the two governments broke their currency arrangements and reflated the economy by allowing both currencies to fall. The countries recovered quickly and again, against all conventional wisdom, the competitive edge the countries garnered endured. Their banks’ capitalisation worked a treat as well.

Both countries, being small trading economies, had significant foreign debts too. Yes, these did go up, but the revenue associated with the recovery more than covered the increased debt service. Neither country suffered any long-term ramifications in terms of access to foreign capital in the future.
( Sunday Business Post | Irish Business News )

[euroboy]

You know you dont have to accept as a given what the export lobbyists say concerning the euro.

Its true the weak pound is hurting our exporters to the UK but what is to say there is 'demand' in the UK for products(the UK is in recession)

Our lost of competitiveness is primarly due to domestic policies, wage negotiations and new wealth greed. Why is Germany competitive while we are not, we use the same currency? France, Italy too are sufferning from their failure to reform domestically. In fact, when we entered the Euro, we took the lowered conversion rate to boost our competitiveness within Eurozone.

It is fashionable to bash low Euro interest rates as the cause for our problems and it is true that rates were exceptionally low when they shouldnt have been for our economy, but there were fiscal tools available to the government to dampen that effect and they werent utilised. In fact, economic history shows than when we had 'independent' monetary policy, we didnt fare much better at 'setting' approciate interest rates, so its unlikely we could set them right if we were outside the Euro. In any case, we wouldnt be independent since its probable that we would be anchored to the ECB with a premium above that, which wouldnt help us either.

It isnt credible to call for our withdrawal from the Euro. To even entertain the idea would only add to headless image the world has of us.

[brio910]

Excellent post scolairebocht,

Thanks for for taking the time and effort for writing up your contribution.

You may be interested that CNBC today has an article about the euro and effect on govt debt.

"You can’t ignore the fact that Ireland’s not a currency issuer, and it can’t devalue the euro to “start-over” as many nations used to do in the past. Its efforts to reflate will increase borrowing -- and borrowing costs -- for years to come, potentially creating a debt trap where current service payments cannot be met but current GDP growth. Japan is facing down the barrel of that gun right, now. But it need not default on yen-denominated debt. It prints its own cash (or more accurately, credits the accounts of its own banks). Ireland can’t do this. Nor can Spain, Greece Italy or any other member of the single currency.

At present, Irish voters seem to be looking to the short-term support of the euro zone (or, more simply, German taxpayers) with an estimated 51 percent now in favor of supporting a treaty they rejected 8 months ago.

The longer-term implications of extracting an economy from the protracted crisis amid the shackles of the single currency seem too painful for the poets to contemplate at this point. But the more straight-forward prose seems to have turned the books ahead a few hundred pages to the final chapter."

Baccardax: The Wrong Irish Referendum - General * Europe * News * Story - CNBC.com

This is on top of Bloxhams who said we will have to drop our wages, because we can no longer devalue our currency.
Thanks Euro, the poison in your pocket.

[youngdan]

Those posters who were saying that default was unthinkable just a few days ago have taken flight. Never was a group shown up as foolish so quickly after defaulting as a probability hit the airways.

They are the lads that can tell us that a currency would crash so perhaps they are in the currency pits trading. Ho Ho Ho

[jpc]

Those posters who were saying that default was unthinkable just a few days ago have taken flight. Never was a group shown up as foolish so quickly after defaulting as a probability hit the airways.

They are the lads that can tell us that a currency would crash so perhaps they are in the currency pits trading. Ho Ho Ho

A lot of people here thought otherwise.
35 billion income 60 billion running cost is graphic enough for me.
Let alone next year.