This idea has infected a number of the sub-forums with threads on the subject and I want to start a single thread about what exactly would be involved in Ireland leaving the Euro so that the same arguments don't get rehashed in multiple places.
For some reason the idea seems to have some currency (excuse the pun) in the media also; for this David McWilliams deserves some of the credit or blame.
I don't consider the idea to be a serious one because the proponents have never actually described their proposal in any detail. Generally two completely separate government actions are being confused:
1. Creating a new currency (say New Punts) for general use in the economy.
2. General public and private debt default.
These actions are completely independent and McWilliams is being disingenuous (I assume) when he conflates them for the sake of producing dramatic column inches. But I'm not so sure these days given the recent Brian Lucey gaff - perhaps he really doesn't see it.
The common factor when anyone proposes "Ireland leaving the Euro" is that they never actually describe the actual process. The reason is that doing so would expose the muddled thinking behind this idea; i.e. many of the "benefits" claimed for leaving the euro have nothing to do with what currency is in use in Ireland but would actually result from government default on its sovereign debt (which is about to happen in Greece and has happened in Iceland) combined with state theft from all the personal bank accounts, pensions, etc. in the country (like what has happened in the past in a number of South American countries) and then attempting to inflate our way to competitiveness and out of state spending deficit (like Zimbabwe) .
Obviously association with the pain of countries like Iceland, Greece, Argentina and Zimbabwe taints the idea somewhat.
So what would be involved in Ireland actually leaving the euro?
Broadly speaking, it would involve the government creating "New Punt" notes and coins in a factory somewhere and creating billions worth of Punt debt in the central bank (backed by Euro assets) for the Irish retail banks to buy. Next, when everyone was ready, the government would simply demand that all taxes and government charges be settled in this new currency. Practically speaking, this would force all shops to switch to the new currency and employers to switch to paying in New Punts. Everyone would have to open New Punt current accounts.
Existing euro accounts (savings and loans - including mortgages) would remain unaffected as would existing government debt.
The net gain for the country? Very little in Ireland's case because of the level of public and private debt. We could try to devalue the New Punt to gain export competitiveness but that would create a fiscal squeeze on the government as their euro debt payments would increase relative to the new currency. The very same pain would be felt by individual mortgage holders, for example, as their monthly payments would jump every time the New Punt lost ground against the Euro. In fact anyone earning a living in Ireland (i.e. earning New Punts) but with existing debts (in Euro) would be clobbered; this includes the state itself as well as businesses and individuals.
The inflation resulting from devaluation would also allow the government to cut spending in real terms without nominally cutting social welfare payments or public sector salaries. This is of no REAL benefit but sometimes is seen as more politically attractive because people generally are immediately outraged with nominal cuts in what they are paid while the outrage with real cuts caused by inflation takes a while to build up.
Add to this the cost of the huge bureaucratic effort to adopt the new currency - from government departments to every business in the country, big and small. As a globalized country (Ireland's imports and exports are huge) - currency risk would become significant again which would hit the general economy.
On this cost/benefit basis leaving the Euro looks like a completely daft idea.
However, the proponents of the idea generally magic away these costs by sneaking in sovereign debt default and government theft from savers. In one article McWilliams claims that re-denominating existing debt from one currency to another "is commonplace in the markets". This is simply a lie or a gaff on McWilliams' part. In the bond markets where Ireland borrows money, this re-denomination of debt is considered default. This is not some subtle legal aspect of bond markets, it is very obvious; for example, if I owed you 100 Euro but then told you that instead of paying you back the Euro, I was going to pay you back in cowry shells (an ancient form of money) or in Zimbabwean dollars, then you'd consider that I had welshed on my debt. The bond markets are the very same.
But lets play along with the idea; the government then defaults on its debts but offers to pay back some of what they owe using New Punts. For a country that needs to borrow 20 billion a year to pay salaries to teachers, guards and nurses, for example, this would be suicide. Irish sovereign debt yields would spite horribly meaning huge costs for new government borrowing. The numbers might make some sense if Ireland's existing debt was huge reletive to it's new borrowing requirements but this is not the case; our existing national debt is relatively small compared to the size of the deficit which needs to be funded by new borrowing. Thus the state would be forced to make more spending cuts OR go the Zimbabwe route and print New Punts like there was no tomorrow (massive inflation, huge interest rates, government debt payments gobbling up a huge proportion of the budget, etc.).
But government default doesn't address the pain felt by individuals and businesses where the interest payments in Euro would become intolerable to service using New Punts. The government would have some equally unpalatable options here too; forcibly convert all domestic accounts from Euro to New Punts at a fixed exchange rate. Effectively this would involve stealing from savers/investors to pay debtors. This has been tried with very unpleasant results in Argentina for example. Also such a move would require a referendum to remove the constitutional protection of individual property rights.
So while McWilliams or any of the other proponents of this vague idea of "leaving the euro" ignore all these unpalatable choices, then the idea deserves no serious consideration in my point of view.
For some reason the idea seems to have some currency (excuse the pun) in the media also; for this David McWilliams deserves some of the credit or blame.
I don't consider the idea to be a serious one because the proponents have never actually described their proposal in any detail. Generally two completely separate government actions are being confused:
1. Creating a new currency (say New Punts) for general use in the economy.
2. General public and private debt default.
These actions are completely independent and McWilliams is being disingenuous (I assume) when he conflates them for the sake of producing dramatic column inches. But I'm not so sure these days given the recent Brian Lucey gaff - perhaps he really doesn't see it.
The common factor when anyone proposes "Ireland leaving the Euro" is that they never actually describe the actual process. The reason is that doing so would expose the muddled thinking behind this idea; i.e. many of the "benefits" claimed for leaving the euro have nothing to do with what currency is in use in Ireland but would actually result from government default on its sovereign debt (which is about to happen in Greece and has happened in Iceland) combined with state theft from all the personal bank accounts, pensions, etc. in the country (like what has happened in the past in a number of South American countries) and then attempting to inflate our way to competitiveness and out of state spending deficit (like Zimbabwe) .
Obviously association with the pain of countries like Iceland, Greece, Argentina and Zimbabwe taints the idea somewhat.
So what would be involved in Ireland actually leaving the euro?
Broadly speaking, it would involve the government creating "New Punt" notes and coins in a factory somewhere and creating billions worth of Punt debt in the central bank (backed by Euro assets) for the Irish retail banks to buy. Next, when everyone was ready, the government would simply demand that all taxes and government charges be settled in this new currency. Practically speaking, this would force all shops to switch to the new currency and employers to switch to paying in New Punts. Everyone would have to open New Punt current accounts.
Existing euro accounts (savings and loans - including mortgages) would remain unaffected as would existing government debt.
The net gain for the country? Very little in Ireland's case because of the level of public and private debt. We could try to devalue the New Punt to gain export competitiveness but that would create a fiscal squeeze on the government as their euro debt payments would increase relative to the new currency. The very same pain would be felt by individual mortgage holders, for example, as their monthly payments would jump every time the New Punt lost ground against the Euro. In fact anyone earning a living in Ireland (i.e. earning New Punts) but with existing debts (in Euro) would be clobbered; this includes the state itself as well as businesses and individuals.
The inflation resulting from devaluation would also allow the government to cut spending in real terms without nominally cutting social welfare payments or public sector salaries. This is of no REAL benefit but sometimes is seen as more politically attractive because people generally are immediately outraged with nominal cuts in what they are paid while the outrage with real cuts caused by inflation takes a while to build up.
Add to this the cost of the huge bureaucratic effort to adopt the new currency - from government departments to every business in the country, big and small. As a globalized country (Ireland's imports and exports are huge) - currency risk would become significant again which would hit the general economy.
On this cost/benefit basis leaving the Euro looks like a completely daft idea.
However, the proponents of the idea generally magic away these costs by sneaking in sovereign debt default and government theft from savers. In one article McWilliams claims that re-denominating existing debt from one currency to another "is commonplace in the markets". This is simply a lie or a gaff on McWilliams' part. In the bond markets where Ireland borrows money, this re-denomination of debt is considered default. This is not some subtle legal aspect of bond markets, it is very obvious; for example, if I owed you 100 Euro but then told you that instead of paying you back the Euro, I was going to pay you back in cowry shells (an ancient form of money) or in Zimbabwean dollars, then you'd consider that I had welshed on my debt. The bond markets are the very same.
But lets play along with the idea; the government then defaults on its debts but offers to pay back some of what they owe using New Punts. For a country that needs to borrow 20 billion a year to pay salaries to teachers, guards and nurses, for example, this would be suicide. Irish sovereign debt yields would spite horribly meaning huge costs for new government borrowing. The numbers might make some sense if Ireland's existing debt was huge reletive to it's new borrowing requirements but this is not the case; our existing national debt is relatively small compared to the size of the deficit which needs to be funded by new borrowing. Thus the state would be forced to make more spending cuts OR go the Zimbabwe route and print New Punts like there was no tomorrow (massive inflation, huge interest rates, government debt payments gobbling up a huge proportion of the budget, etc.).
But government default doesn't address the pain felt by individuals and businesses where the interest payments in Euro would become intolerable to service using New Punts. The government would have some equally unpalatable options here too; forcibly convert all domestic accounts from Euro to New Punts at a fixed exchange rate. Effectively this would involve stealing from savers/investors to pay debtors. This has been tried with very unpleasant results in Argentina for example. Also such a move would require a referendum to remove the constitutional protection of individual property rights.
So while McWilliams or any of the other proponents of this vague idea of "leaving the euro" ignore all these unpalatable choices, then the idea deserves no serious consideration in my point of view.
For a start everybody including myself would have moved their euro deposits well off shore in advance of P-day. The move would have to be accompanied by a confiscation tax of 50% of all foreign deposits opened since the announcement of P-day.