Ireland, the next Iceland

David McWilliams (Irish economist) has an article in which he all but said Ireland needs to leave the Euro to be able survive the recession. Although I’m somewhat disheartened by the disbelief in the mere mention of leaving the Euro (in the articles comments)  I’m glad we’re on the same page. Although we may not have to actually leave of our own free will, as of this moment there is a very high chance that we be flung from the Euro as the economic pariahs of the EU.

Events have moved fast since the announcing of the closing of Dell in Limerick and now Anglo Irish Bank (the third largest bank in the country) has been nationalised. It seemed when the government began having a look into the institution to give it a €1.5Billion bailout package it found something much worse, something that €1.5Billion couldn’t fix.

No big deal some may say, and in the whole scheme of things across the world this is now becoming the norm. But here is the issue, in taking on this bank, the state has now taken on it’s liabilities. All €30Billion of them. This is now thrown on top of a €40Billion national dept. Overnight (literally as the takeover order was given Thursday night) the national dept of the country has nearly doubled, and this is a dept which our country of 4 million does not have the resources to pay.

And on top of this there is at least another of the banks that are likely to follow Anglo Irish in the space of a few months.  The debts being taken on are far greater than the entire state is capable of paying, the Irish government has followed Iceland into this grey abyss. Instead of letting the bank fail the government has caused the state to fail.

So what might happen, there are a few possibilities.

1. We get a bailed out by the ECB and other EU countries.
2. We get kicked out of the Euro.
3. We go to the IMF for help (either in or out of the Euro).

In the first case Europe may try to use us as an example of the stability and power of the Euro and bail us out. But it would effectively mean that the EU owns Ireland and would expect the country to tow the line in future EU issues. Effectively the country would lose it’s indepenedence.

The second case the EU decides to toss us out of the Euro, Ireland reverts to the Punt and begins massive currency devaluation, following exactly in Icelands footsteps.

And in the third case of IMF involvement we could expect the selling off of all government assets, raised taxes, and removing 30-50% of civil servants (without any redundancy pay). In short whichever of the above options is taken people across the country must realise we are all Icelandic now as in we are all truely fucked.

The good

Despite the depressing sounds coming from headless chickens in government there does seem to be some good news that I picked up on in the Independent today. Someone (possibly Brian Lenihan) has an ounce of sense. The theme of the article is that there is some “disagreement” between Cowen & Lenihan on whether there will be job cuts. Someone is looking at the numbers and realising that cuts need to be made.

Serious pay & job cuts across the entire government are inevitable, we don’t have the money to keep all the extras hired in the boom years and they need to go. I’m a little happier knowing Brian Lenihan seems to know.  It’s looking like Lenihan is shaping up to be the man to handle this meltdown, he was the one to guarantee bank deposits, and now seems to be (trying) balancing books.

Sadly Cowen, the unions, and other cabinet members have their heads in the sand (or in the case of the Greens, the sky, yeah a new greed economy is going to save us) and are refusing to see pay cuts and layoffs as an option.

The Euro pulling us down

We’ve been part of the Euro for a good while, since it started in fact. And for many who haven’t thought about it more in dept it could generally be seen as a good thing.

Sure prices went up a little with it’s introduction but that’s pocket change for most. I mean we can go on holiday or do business with most of mainland Europe and not have to change our money (forget that the US & UK are our largest trading partners). And isn’t it great that we’re part of something big during this whole upheaval in the global economy, a country our size would get swallowed up in the chaos if we weren’t part of the Euro, look at Iceland.

Despite these advantages the Euro is a double edged sword, and we are now getting caught on the backstroke.

When we joined, with other members we gave up our control of interest rates and foreign exchange, interest rates hit a record low and a weak Euro served export business well.  The Euro hit us as the Celtic Tiger was in full swing and brought us to new heights.

The low interest rates (coupled with 100% mortgages, again thanks to the EU) caused house prices to rocket and brought a new wealth to those (usually older) who had property before it all kicked off. The low value of the Euro against the U.S. Dollar & Sterling made us cheap & competitive when exporting to these economies; with genuine competitiveness being eroded behind the scenes by high costs (of living & doing business). Soon we were the most wealthy (when you included the puffed up value of our homes) and expensive country in Europe, and all was good.

Then everything changed, like getting thrown by a car into oncoming traffic we were hit by a double blow that has left us in our current situation.

Our property bubble was at it’s peak, the financial crisis began to unfold, and the European Central Bank which had already increased interest rates a number of times made further increases, and kept them there until the crisis was at melting point with large mainland European banks failing. But for us it was too late.

Being part of the Euro robbed us of the ability to react to the crisis, at a time when we should have (and, had we had the power would have) lowered interest rates, which would have significantly slowed the decline (not stopped it, overpriced is overpriced, no financial wizardry can change that). Our bubble would have wheezed to lower levels instead of the sudden burst we have undergone. Or may never have happened had we raised the rate sooner. It would give us more a sense of control over our own destiny instead of this victim persona that has overcome our country folk.

Along with higher interest rates has come a stronger Euro, our exports became more expensive in the UK & US, the easy competitiveness we had was now gone, and we now bear the full brunt of being the most expensive country in Europe. The country is bleeding jobs to Eastern Europe, and now bleeding business to the UK because of the lower Sterling. Our businesses can’t compete, shoppers are going north to save (big savings), buying from English websites (I bought a trip to China on an English travel site, over €250 cheaper, not to mention books, music, digital camera’s etc).

This second blow could very well be the finishing one if we remain in the Euro; had we our own currency, the Punt, we could have devalued it to match the Sterling, it would have protected us from the forces of pure competition. We are not competitive. We can either get cheap fast, get out of the Euro, or get in the dole queue.