Opinion Editorial

Saturday 20 July 2019

If Germany stops shivering, our 'boom' will catch cold

MONETARY unions are not new. They have been around for ages and have been used to achieve a variety of different objectives. History tells us that they are fragile, much more fragile than we sometimes think and countries can pull out of the union if it no longer makes economic sense.

Before EMU, there was the Latin Monetary Union of the mid 19th century which stretched from France to Bulgaria. At the turn of the 20th century we had the Scandinavian Monetary Union.

Parting

Both of these fell apart as individual countries pursued their own economic agendas. In 1979, Ireland pulled out of a 400-year-old monetary union with Britain without as much as a whimper.

The first monetary union was set up by Alexander the Great and stretched from Greece and Egypt in the west to India in the east. Alexander realised - like today's European elite - that successful empires could only be maintained by providing a strong single currency that traders, merchants and ordinary folk respected.

His conquests can be traced on a map of the gold and silver mines of the ancient world. At the height of his powers the mines of Macedonia, Asia Minor, Egypt and Sudan were churning out gold and silver.

This was circulated throughout the empire. He paid his soldiers, scientists and architects well and insisted that all old debts were to be redeemed with new Greek coins. Very quickly the coins became the common currency and trade flourished.

A great arc of 80 new cities and towns sprouted up from Egypt through the Middle East to Iran (Persia) and on to India.

Like today's multicultural cities in Europe, trade and commerce inspired an unprecedented movement of peoples around the empire, with Greeks, Egyptians, Jews and Persians living cheek-by-jowl in new towns. The common currency and the increase in trade prompted most of the conquered peoples to buy into and identify with the ancient Greek empire.

Alexander's single currency lasted for 150 years, until the Greeks were finally defeated by the Romans.

Unlike the Greeks, who were more frugal and used currency for political and unifying ends, the Romans became obsessed with cash, inspiring jealousy and contempt.

They flaunted their cash, and initially kept their currency out of the hands of their vanquished neighbours. This only heightened resentment, and possibly explains some of the more gruesome punishments meted out to defeated Roman leaders by their foes.

For example, Julius Caesar's patron, Crassus - widely known for his wealth and love of money - was captured by the Parthians in 53BC. Instead of the usual crucifixion or beheading, the Parthians expressed their disdain for the money-mad culture he represented by pouring molten gold down his throat.

Despite Crassus' fate, the flashy Romans loved "bling". They borrowed, stole and plundered gold from everyone to finance their extravagances. When the Roman Empire was at its height, stretching from Scotland to Syria and beyond, the Romans began to run out of gold and silver. So what did the Romans do?

They tried to fool the subjects and debased their currencies.

Historically, this involved changing the metals in your currency.

If there was a shortage of gold and silver, then cheaper nickel or copper were used in the coins. The Emperor Nero was a great man for this carry-on, as much later on was Henry VIII of England, who earned himself the title of 'the great debaser'. So in the past a country living beyond its means either had to debase its currency or find cash elsewhere, usually by invading neighbours.

Fast forward to today and we see that a country like Ireland which is now living way beyond its means has another method of financing profligacy. In a monetary union - such as EMU - a small country can borrow a big country's savings. We are now doing this.

Where do you think all the money for flashy cars, expensive houses, new bathrooms, third holidays and the like comes from? It is borrowed by young Irish spenders from old German savers. This is how we are able to increase our borrowing by close to 30pc per year. In effect, EMU has given us access to the pin number and ATM card of the Germans and, because there are over 80m of them and only 4m of us, they barely notice.

This is how we have arrived at a situation where private sector credit, which is how much we are all borrowing, stands at around ?240bn. Our total GDP is approximately ?135bn. This means that borrowings are now running at 180pc of our income.

This is the highest level in the world and, as it will grow at about ?55bn this year, it is also growing the fastest. That growth alone is 42pc of our total national income.

There is no historical precedent for this type of borrowing anywhere in the world at any stage in economic history.

Ireland is truly in unchartered territory and because the German economy is sickly, we can finance all we like at low interest rates - so we keep getting deeper into debt.

Of this borrowed loot, about four euro in every five is being "invested" in property as mania grips the country.

These days, the glossy property section of our papers is typically the first page people read. We are all on a group trip.

The drug is the most addictive financial narcotic - property - and no-one is allowed wreck the buzz.

Go to most hotels this weekend and you will enter the dream-world of the property show. Nowhere is too remote.

How about a one bed in Shanghai, or a beach villa in Kusadasi? Maybe you fancy a little retreat in Andalucia or a time-share in Dubai? Why not, go on, all you have to do is borrow for the pleasure and with our new "interest only" package, iyou won't feel a thing.

All these properties are being financed by collateral in Ireland, typically a family home. We can call this process the Kilmacud Paradox, whereby a three-bed semi in Kilmacud is put up as collateral to buy a place in Turkey. The cash is released.

The bank has a charge over the family home and earns fees on the mortgage and you have taken the Turkish risk, the bank has taken the Irish security.

Thus, the Irish property bubble serves to inflate another bubble far away. For example, in recent weeks Estonia has been revealed as the best performing property market in Europe. One wonders how it would perform without the help of the Irish.

So, as we can see EMU is facilitating a recycling of German savings, through the mechanism of equity release in Kilmacud, to inflate the property market of Estonia.

How long can this last? As long as Germany remains weak and sickly. But what happens if Germany recovers vigorously? Then interest rates would rise strongly.

This could collapse the entire Irish property pyramid scheme. Faced with defaults, parts of the banking system - which is the lynch pin of the entire structure - could easily become insolvent.

Banking crises have been seen in every property/credit cycle in economic history. In such circumstances a country such as Ireland would need dramatically lower interest rates to refinance the economy.

This might demand thinking the unthinkable. The Government might, in search of lower interest rates, be faced with no other option but to pull out of EMU.

History suggests that monetary unions have a finite shelf-life and as we pulled out of a single currency with Britain in 1979, we have form.

If the property boom goes pear-shaped - and they tend to do so - not only will our feeling of prosperity evaporate, our European credentials might go too.

The writer will be speaking on Why the Future for the Irish Language is bright" at T*stal na Gaeilgethis Saturday at the Corrib Great Southern Hotel, Galway.

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