Ireland, Greece and leaving the euro

By Michael Hennigan, Founder and Editor of Finfacts
Feb 22, 2010 - 3:53:09 AM


Green: EU countries using the euro: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain

Mauve: EU countries not using the euro

The economic travails of Ireland and Greece have provoked a debate on the wisdom of the two most vulnerable members of the infamous PIGS (Portugal, Ireland, Greece and Spain) grouping of Eurozone members, on leaving the euro.

On Sunday, in an article in The Sunday Independent, economist and Group Business Editor of Independent Newspapers, Brendan Keenan, pointed out that both Ireland and Greece are largely dependent on foreign lenders to fund their public debt and suggested that if an exports boost did not follow from devaluation, leaving the euro could result in a more dire situation for a country than it had faced within the EMU (European Monetary Union). He says it depends on how sensitive a country's exports are to internal costs, and whether those costs rise quickly because of the increase in imported costs from the cheaper currency. Keenan concludes that those countries which think the balance of advantage for them lies with euro membership will have to tailor their policies to achieve growth within the single currency. Ireland has not yet done so. "We should worry less about debt and defaults and more about enhancing the economy itself," he says.

Also on Sunday, in The Sunday Business Post, economist David McWilliams, donned the mantle of the Great Depression era economist, John Maynard Keynes, who had been considered an "eccentric" when he had opposed Britain returning to the Gold Standard in the 1920s. McWilliams writes that the gradual questioning of economic orthodoxies takes time. It might take years of needless underperformance where unemployment remains incredibly high, real interest rates do too and defaults are the norm, not the exception. "Ultimately, the old way - in our case, adherence to the euro - is thrown out. The only question economic historians of the future will ask is why didn’t we act earlier and prevent all the pain," he writes and concludes that even suggesting such ideas as quitting the euro is heresy. But so too - back in 2002 - was forecasting that we were in a credit/ housing bubble, after which houses would collapse in value and banks would fail. He says: "if we do what is logical, there is nothing to stop this country growing rapidly again very soon."

According to Ron Chernow in his book, The House of Morgan, in 1923, former US Treasury official and then JP Morgan partner, Russell Leffingwell, warned that "Keynes...is flirting with strange Gods and proposing to abandon the gold standard forever and to substitute a managed currency...it is better to have some standard than to turn our affairs over to the wisdom of publicist-economists for management."

While Keynes liked public attention he was closer to academic economics as modern day celebrity economics is to what could be termed pub-stool economics i.e propose economic fixes without having to do the graft on implementation scenarios and building a credible case.

David McWilliams proposes a momentous decision but does not bother credibly analysing how a new currency would be implemented without crashing the economy. He also shies away from the issue of overdue structural reform without which any benefit from devaluation would soon be fritted away. It's as if he is reluctant to alienate part of his public audience. We have an unreformed public sector and a sheltered private sector where charges are not responding to market forces. Meanwhile the other celebrity economist George Lee proposed his own menu of economic fixes after his resignation. Even though he denied he advocated leaving the euro following the publication of an interview with the Sunday Independent, the newspaper reported that he proposed "we should take the fight to Europe and claw back our economic-control instruments -- which include our own currency, the deficit, the ability to print our own money and setting our own interest rates."

Speaking to the Sunday Independent, Lee said: "If Europe is not prepared to help us, we should cut the corporation tax rate even further and take in as much money as we want, and if it is a problem for Europe then so be it. Why should we help them out when they are not going to help us out. We are doing all this because we decided we should cut to increase competitiveness and Europe tells us to do this too."

Ólafur Ragnar GrÃ*msson, the president of Iceland, remarked to Simon Carswell of the Irish Times, at the World Economic Forum in Davos, Switzerland, last month that the Irish people might be interested in how the devaluation of Iceland’s currency has made the export sector “much more profitable in a matter of weeks.â€