If the international banking crisis isn't resolved soon,it is possible that the EU economies most vulnerable to massive credit crunches and massive,destructive recessions-Ireland,Italy and Spain-could be forced to leave the Eurozone. It is doubtful that the European Central Bank will adopt a sufficiently expansionery monetary policy to accomodate the needs of these three countries for fear of reviving Germany's historic fear of inflation. If monetary expansion were perceived as excessive,Germany would credibly threaten to leave the Euro and restore the beloved Deutchmark.
The credit crunch is a great challenge to business and government as usual.In Ireland's case,the country has been governed too long for the benefit of strong vested interests-mostly in the public sector-which need to be tackled,and there are too many barriers to competition,eg:
Overpaid public sector workers with gold plated pensions and pay far superior to the private sector's
Public sector unions with a 1970s mentality which drag out any attempt to reform work processes (eg Cork electricians' monopoly on changing light bulbs in hospitals)
ESB's stranglehold on power generation through its ownership of a large part of the power distribution grid which should have been transferred to Eirgrid years ago
The mushrooming of hundreds of dubious Quangos,a new form of jobs for the boys
Irresponsible train drivers who strike at the drop of a hat and inconvenience tens of thousands
The useless giant bureaucracy at the HSE which needs to be replaced by one of the successful models of health care on the Continent eg Holland's
Uncompetitive market restrictions in law,medicine and dentistry
Speculative property developers and their irresponsible bankers
Excessively legalistic and slow planning systems
If the government doesn't reform the above,economic recovery could be delayed for years. It is even possible that a decade of economic growth could be lost as in the case of Japan since the late 1980s.
Rather than engage in bruising confrontations with vested interests,it could be tempting for the government to abandon the Euro and restore the Irish Punt with a view to inflating the economy.Inflation would reduce the burden of mortgages on householders and developers and increase property prices in punts.This would reduce the bad debt writeoffs of banks. Inflation would also increase the assets of banks in business loans and improve bank profits,helping to recapitalise banks. It would make it easier to reduce the wide gap between public sector and private sector pay. And until wage earners woke up to the implications of inflation,it would restore competitiveness to exports.
The disadvantages of inflation would be a very sharp rise in living costs in our import dependant economy and possibly a catastrophic rise in living costs together with a big jump in interest rates if the new punt was valued too low in foreign exchange markets. To avoid undervaluation of the punt,the government could commit to holding its value to a trade weighted mix of the British pound,the Euro and other major currencies.
So one morning we could wake up to discover that our bank accounts are again full of those very artistic pound notes!