Saturday 17 March 2018

Accepting more debt is an offer we'd have to refuse

Brendan Keenan

Brendan Keenan

THE French are on the sea, says the 'Sean Van Vocht'. Unfortunately (or was it fortunately?), they had a tendency to stay on the sea, it being a bit windy for the beach, and did not contribute much to anything in the end.

Are they still heaving to? This bit of whimsy was provoked by economist Cormac Lucey's presentation on exiting the euro to the Dublin Economic Workshop in Limerick a fortnight ago; and a piece of apparent French apostasy in a new book on the same subject.

Lucey noted that, since 1916, the thrust of Irish political strategy (it might be said, the only political strategy) was "less Britain and more Europe". But it was the nationalist strategy even before there was the makings of an Irish state; the Spaniards before the French, and the Germans afterwards, both imperial and fascist.

Lucey's paper was graphic, not just in its content but in its honesty. He was making the argument that Ireland should leave the euro, or at least make plans to do so.

He did not, however, gloss over what this would mean in practice. One result would be more Britain and less Europe. This is not because an Ireland that had thrown off the constraints of the euro would deliberately seek closer ties with the UK. It is because an economy as small as Ireland's will always be in someone's orbit, and in this case the gravitational pull is either to Britain or mainland Europe.

It was also admirably honest to spell out how such a break would have to be be engineered, and what the immediate consequences would be. "They would involve special sittings of the Oireachtas, bank holidays, capital controls, currency stamping and printing, expedited bankruptcy proceedings and negotiations with Ireland's creditors. They would also render Ireland's banks insolvent once again," Lucey chirpily informed the audience.

There was also the problem that any country exiting the euro precipitately could unleash financial contagion and cause collateral damage on a global scale. We know from political journalist Pat Leahy's book that such a plan already exists, but one can see why leaving the euro is not on any practising politician's agenda.

Could the French provide unlikely allies in avoiding such a terrifying vista?

A new book, 'La Fin du Reve Europeen' ('The end of the European Dream'), says the euro must be abandoned to save the rest of the EU project.

"We must face the reality that the EU itself is now threatened by the euro. The current efforts to save it are endangering the union yet further," writes the author, Francois Heisbourg.

Mr Heisbourg is the big surprise. He was a champion of the single currency and is an influential figure, serving as chairman of the International Institute for Strategic Studies.

It is not clear how representative such views are among the French elite, but French dreams for the euro have faded fast.

Rather than the currency allowing the eurozone to follow the pro-growth tendencies of the USA without being undermined by financial markets, the zone is enmeshed in Germanic financial rigour, coupled with the possibility of permanent transfers from richer to poorer states.

Irish concerns about the euro are more pragmatic, but also more urgent. Three reasons to abandon the currency are regularly cited. Ireland would get more appropriate interest rates, the economy would benefit from a devalued national currency and the enormous national debt could be restructured – also known as default.

The general tone of such discussions tends to be that these advantages are self-evident, but that is hardly the case. Cheap euro loans exacerbated the Irish bubble, but there were, and are, other forces at work.

The "Irish Economy" website picked up a paper by three US economists on the explosion of private debt worldwide in recent years. Having maintained a fairly stable inverse relationship to government debt from 1870 (apart from wartime), it took off in the 1990s – coincidentally or not alongside financial deregulation – doubling as a percentage of GDP in only 20 years while government debt was stable.

It is far from self-evident that the theoretical ability to set its own interest rates would protect a small open economy from such global forces. The question of devaluation of a new pound is even more uncertain. It is often said that a Nobel prize (not to mention untold riches) awaits the economist who can predict currency movements.

Lucey made the point that any departure from the euro would require deep structural reforms and an end to inflation-linked pay claims by the trade unions. Apart from the fact that such changes would make it a lot easier to prosper inside the euro, it is hard to see why a national currency belonging to such a country would be particularly cheap.

That leaves debt – an issue that is a good deal clearer. The Taoiseach's letter to his colleagues at the EU summit last week could hardly have been more pointed. The size of the national debt is the main threat to a full return to the markets and, therefore, indirectly, to Ireland's continued membership of the single currency.

It would be folly to allow that threat to materialise, leaving Ireland dependent on even more official borrowing from the EU and no second door marked "Exit". Unfortunately, scaling heights of folly is something of a speciality among eurozone leaders.

Mr Kenny again drew their attention to the fact that, in Ireland's case, they can avoid a technical default by re-capitalising our rescued banks and thereby reducing government liabilities.

The precedent would be enormous, and there is no sign that this otherwise obvious solution will be adopted. In such circumstances, the Government must be ready to go it alone, should the markets prove unwilling to live with the size of its debts.

National debt is a national matter. Theoretically, opening negotiations with lenders does not require departure from the euro. But any unilateral national decision to default could bring down the currency.

Paradoxically, that means debtor countries are far from powerless in negotiations with creditor countries. But this is not a matter of bargaining. Accepting any more loans on top of the existing 120pc of GDP would spell an end to Ireland's prospects of solvency.

It would be an offer we would have to refuse. The sooner it is made clear to other governments, however privately, that it would be refused, the better the chances that such an appalling outcome can be avoided.

Irish Independent

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