Irish pound could rise in case of euro break-up, say analysts
Published 12/12/2011 | 05:00
A new Irish pound would probably rise against other currencies, not fall, with Ireland appearing to be the most competitive of the major euro economies, research by Bank of America analysts has found.
Their study reveals a huge difference between Ireland and the other pressurised economies of Italy, Portugal and Spain -- which would need devaluations of 11pc, 14pc and 20pc respectively against the dollar to restore lost competitiveness.
But the Irish economy could take a 9pc rise in the value of the euro against the dollar before its competitive position was "fair value", currency analysts Richard Cochinos and David Grad say.
Only three of the countries studied would have under-valued national currencies -- Germany, the Netherlands and Ireland -- and the notional Irish punt would be the cheapest. A French franc would be 7pc over-valued.
The analysis is based on exchange rates last month. Currency values move around daily on the market but, with member states locked together in the euro, the relative position between them does not change.
The research challenges the widespread view that a new Irish pound would suffer a huge fall in value if the euro broke up. This has led thousands of people to move money into sterling and other foreign currency accounts.
They face possible exchange rate losses if the euro crisis abates, but might also find in the medium term that a new Irish pound could rise above the old one's value of €1.27.
The Bank of America analysts say a break-up of the euro is not their expected outcome. If it did happen, "there would be large shocks to all the currencies involved, with violent swings in the euro. No model can fully account for this."
Economists say the main implication of a disorderly break-up of the euro would not be the effect in currencies, but the collapse of a large part of the European banking system and another great depression.
The significance of the research is that it suggests Ireland is well capable of prospering within the euro, and does not need a devaluation, unlike the countries with over-valued real exchange rates. The question of debt levels is separate, although it is included in the analysis.
This went beyond the question of what a euro will buy in each country, to take in factors like productivity, real yields on bonds, the balance of payments with the rest of the world, budget deficits and prices for exports and imports.