Friday 23 February 2018

David McWilliams: Leaving the euro may be our least extreme option

In the year ahead, the exchange rate question will rarely be far from the headlines. If we are to have a referendum -- which, according to the Finance Minister, will be a vote on whether we are in or out of the euro -- we should get our heads around what the exchange rate does, what having your own exchange rate allows you to do and why that might be a valuable alternative for Ireland.

At the moment, the central plank of Irish economic policy, backed by the IMF and the EU, is something called "internal devaluation" and the logic of it goes like this: Ireland is uncompetitive and needs to export its way out of the recession. As we don't have an exchange rate that can fall, we need to grind down wages over a period of years so that Irish industry can be competitive again.

At the same time as we are forcing down wages, we must also reduce government expenditure, because we can't afford to pay for it. As the government deficit at the start of the IMF bailout programme was 14pc of GNP and we need to get the deficit down to 3pc, we will reduce spending by 11pc of GNP over the next two or three years.

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