Tuesday 19 November 2019

Don't blame euro for economic woes

The idea of ditching the common currency is a laughable diversion from how we ourselves messed up, says Marc Coleman

Marc Coleman

Hilarious, ludicrous and -- at the same time deadly serious -- an old anecdote given by Peter Ustinov at a comedy night in Dublin some years ago shows the strange paradoxes life throws at us from time to time.

One of many stories that the great man gathered in his rich life -- and told at such events around the world to raise funds for Unesco -- was about the famous marine explorer and documentarian Jacques Cousteau. Diving into the blue one day, Cousteau's boat hit a rock and started to sink. "Jacques, Jacques, come up, we're sinking!", ordered the captain. Already underwater, Cousteau was being ordered to climb on board a ship already on its way back down into the deep. With his genius for story, Ustinov used the paradox beautifully and had the audience in Dublin's Gaiety theatre roaring with laughter.

The cold facts, of course, show the captain -- however laughable his order -- was right: without the ship's oxygen supply Cousteau was a goner and by clambering on board he would at least join his mates on a lifeboat in the precious minutes before it went under. The ship's crew survived and Cousteau went on to make many more documentaries.

Like that story, the cold facts of the day also spoil another good yarn I've heard lately. Perhaps you've heard it too -- the one about Ireland leaving the euro. On the face of it, Ireland's monetary situation is also open to parody: last Thursday's official figures showed our inflation rate is now running at minus 5 per cent. Had we our own currency, so the argument goes, we would be printing money and cutting interest rates. The European Central Bank, on the other hand, is preparing to raise rates. But as ECB president Jean-Claude Trichet hinted last week this won't happen soon because the eurozone economy is too weak.

But leaving rates at 1 per cent in the long run is unsustainable. The eurozone's recovery is welcome, but as Trichet also pointed out it is to some extent dependent on "temporary factors". Like someone taking multiple hits of caffeine to stay awake, it's not a situation that can continue. Eurozone recovery will only be real and solid once it has been tested by a return to more normal interest rates.

So, like old Cousteau, ECB rates will have to go back up just as -- some would argue -- our situation would justify bringing them down. Negative inflation is usually, after all, a sign that rates need to fall. And, they tell us, we would benefit from a devaluation. Like hell we would. As Thursday's consumer price index also shows, the real problem with our exchange rate regime is not the euro, but the relative price of non-traded and traded goods. While the traded sector of our economy has been bringing prices down, even in boom times, the sheltered sectors of our economy have been ratcheting prices ever upwards ruining our competitiveness in the process.

Devaluing our currency will not change this a jot. In fact, it will make things drastically worse. Although refusing to pass on the benefits of cheaper sterling, importers would use the rise in the euro against our new currency to ratchet up prices. The cost of our internationally denominated debt -- both private and public -- would explode and the good work done in bringing down the interest premium on government debt would be undone. Worse still, Ireland could find itself unable to borrow on world markets. Like Cousteau with two concrete blocks tied to his ankles, our currency and reputation would sink like a stone while our interest rates soared to heights unseen since the early-Nineties. The country would be ruined forever.

It has also been argued that Ireland never passed the real test of eurozone membership and that our economy was never in sync with eurozone growth patterns. In fact, we passed the Maastricht criteria with flying colours. And our economy has been in sync with Europe. But because we stuck with a failed boom-bust UK-style system of inflating the economy via the property market, our cycles have been more volatile and extreme. Hence the National Asset Management Agency and hence our savage public finance crisis. What we need to do now is to move toward a sane continental-type of housing market with secure rental tenure, proper urban and spatial planning and more sensible approaches to pricing and taxing land and property.

Of course, some people don't want to have that debate. Replacing the old xenophobic "Blame the Brits" mantra so beloved of politicians who mismanaged our economy in the past (and needed someone else to blame), the "Blame the euro" argument is a convenient diversion from how we've messed up our micro-economy. They will use the prospect of rising interest rates to try and discredit the euro in coming years. But however rates might rise, they will rise nowhere near the awful levels that characterised the years before we were in the euro.

Besides, ultra-low interest rates were what caused this crisis. Like the energy you get from drinking 10 cups of coffee a day, growth in any economy that depends on low interest rates is illusory in the long run, and the ECB knows it.

From around 1 per cent, the ECB will now have to reset average real interest rates -- the interest rate less inflation -- towards a healthier rate of at least 2.5 per cent. The good news is that process will take at least five years. But starting in about a year from now, rates will have to rise. And they can never come back down to 1 per cent again, but will have to stay within a band of between 2 and 6 per cent.

All of the mistakes are ours and ours alone and even if we had our own currency, we would have to correct them anyway. Ireland's problem is not euro membership, but as both the National Competitiveness Council and Jean-Claude Trichet have pointed out, our chronically high cost base. That -- and not our interest rate or exchange rate -- is what needs to come down, and pretty damn quickly. As for those spinning the "leave the euro yarn", as a comedy routine, it's all good clean fun. So long as they don't expect to be taken seriously.

Marc Coleman's latest book 'Back from the Brink' is on sale now; www.marccoleman.ie

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