Saturday 10 December 2016

France and Germany want us out of the party

Published 04/12/2011 | 05:00

LAST week the prospect that the euro might suddenly cease to exist suddenly moved from the hypothetical to the very real. While the unprecedented intervention by the world's six leading central banks has saved the single currency for now, Europe's leaders have at best weeks to prevent the collapse of the euro.

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Will we wake up on January 2 to find that the euro, which at one time looked set to replace the dollar as the world's most important currency, has disappeared and that Europe has reverted to a plethora of national currencies?

The speeches by French President Nicolas Sarkozy, German Chancellor Angela Merkel and ECB boss Mario Draghi spelled out a possible way forward for the euro. Draghi called for a "new fiscal compact" between eurozone countries, while Sarkozy went much further coming out in favour of a new EU treaty with "economic governance" (ie, intrusive supervision of the tax and spending policies of eurozone countries).

On Friday, Merkel spelt out her vision of the future of the eurozone. In a speech to the German parliament she called for "a fiscal union with strict rules". Ah the rules, where would we be without the rules?

So will Merkel, Sarkozy and Draghi succeed in saving the euro? It might not be a good idea to bet on it. Talk of treaty change and stronger supervision of spendthrift PIIGS is all well and good but the necessary treaty changes could take years to agree. Meanwhile, the pressure on the euro is continuing to mount.

With the possible exception of Draghi, who seemed to indicate that the ECB might become more proactive when he said that "other elements might follow" if eurozone members signed up for his "new fiscal compact", none of the three leaders held out any hope of taking the sort of measures that might deal with the immediate crisis, the issue of jointly-guaranteed eurobonds or allowing the ECB to operate as a "normal" central bank and engage in unlimited purchases of eurozone government bonds. Indeed Merkel specifically ruled out the issue of eurobonds, stating that those recommending such a policy, including EU Commission president Jose Manuel Barroso, "had not understood the nature of the crisis".

Germany's continued refusal to countenance the issue of eurobonds or unlimited bond purchases by the ECB means that the future for the eurozone as it is currently configured is most likely an extremely bleak one. This point was rammed home for us in Ireland when Sarkozy used his speech to call once again for an end to "unfair" tax competition, ie we should give up our 12.5 per cent company tax rate.

It is now clear that abandoning our low corporation tax rate will be the price we will be forced to pay if we wish to stay in the eurozone. But should we? Far more likely is that several of the weaker members including Greece, Portugal, Ireland, Italy and Spain will either leave or be ejected from the eurozone, something that could happen as soon as the Christmas/New Year break, and that the eurozone, if it survives at all, will shrink to a hard Germanic core.

It is clear that France and Germany want us gone. Perhaps we should oblige them. With our EU-dictated austerity programme clearly not working, indeed all of the evidence now indicates that it is making an already bad situation even worse, we badly need a change of economic course. That will not be possible while we remain within the eurozone.

Membership of the euro was one of the major contributors to our current economic woes. The property price bubble and the resulting inflation in domestic costs was largely driven by the virtually unlimited amounts of cheap money that the Irish banks could borrow from other eurozone banks. If membership of the euro was one of the main causes of the Irish economic collapse might not leaving the single currency be one of the factors driving the subsequent recovery?

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