Another Route to Ireland's Needed Devaluation?

[unspecific]

Since the recession began, Ireland - constrained by the euro - has been pursuing a policy of internal devaluation to rebalance the economy. That is to say placing the huge crushing "readjustment" on the shoulders of the public through a massive program of cuts and wage repression thereby making us cheaper relative to everyone else.

If Ireland has its own currency, it would be significantly weaker than the euro is at present. That we are running a current account surplus at all is impressive. This has happened at the cost of mass unemployment and 5 percent wage cuts a year.

This was the aim of the EMU: the "golden straightjacket" as monetarists like Friedman described it. By being unable to devalue your currency, in times of economic difficulty, the only option would be to cut and cut. The thinking behind this was that eventually such cheap and productive labour would be rewarded with a flow of foreign direct investment... with scant regard for the human cost.

However, Ireland has implemented such a program of internal devaluation as far as it can.

We are the second most productive workforce in the economy after Germany and have restored the "competitiveness" (ie. wage levels) we lost during the bubble and then some. The state has been pared back. We remain one of the lowest taxed economies in the industrial world. Government involvement in the economy is also one of the lowest in the world.

Of course these are false readings of what constitutes success as Scandinavian countries with the highest levels of taxes and government involvement also have the strongest economies with the lowest debts. Alas, this is how are politicians see things.

Then I came across this and thought, how has this not been raised as another option?

http://touchstoneblog.org.uk/2011/12...ible-solution/

There might be – artificial devaluation. By imposing a duty on imports and equal subsidy to exports a country can, in effect, devalue its currency without leaving the Eurozone. A, say, 15% surcharge on imports and a 15% subsidy to exports in Greece would be effectively a 15% devaluation in the currency.

Then I saw this post in another thread (Hat-tip to Dcon).

http://blogs.telegraph.co.uk/finance...ic-as-assumed/

But look at the countries thought to be undervalued. Ireland, on the Merrill Lynch analysis, is the most undervalued even though it is undoubtedly completely bust, while Germany, which conventional wisdom would say was massively undervalued as a result of its membership of the euro, is actually only quite marginally undervalued – by around 5pc.

Now, certainly internal tariffs are against the current rules of the eurozone.. but so are bailouts and the ECB printing money.

If the "PIIGS" were temporarily allowed to reintroduce import tariffs by 10 percent or so on goods from the core eurozone(maybe the USA) to artificially devalue their currencies, then we would see their internal economies pick up steam fast. Current account imbalances would swing into much healthier positions, budget deficits would be gobbled up quickly by growing tax revenues. It would even be good to place countries closer to a position of leaving the euro, without being so explicit as to cause a run on their banks.

Obviously this is the inverse of the proposal for the German economy to heat up and run at a higher inflationary target... but maybe, is this one more likely?

Does anyone see any pitfalls or problems with the plan?

[C. Flower]

The pitfall is political. Germany, France and the other exporting economies joined the EU for access to a large open market. The EU is all about facilitating corporate gain through access to this market.

So they would not permit it.

In exchange for a few billion "Structural funds", and access for FDI firms into the EU market, Ireland gave away its fish, its right to control capital flows, right to control interest rates and to control import and export duties.

Far from wanting to row back on any of this, France and Germany, who have bankrupt Ireland by the throat, want to centralise control over budgets and taxation.

[Holly]

If Ireland leaves the Euro, all debts currently owed by us will still need to be repaid and a devalued punt will not affect that amount which will remain in Euros.
The only advantage having our own currency will have is the ability to impoverish ourselves even further through devaluation.
Banks would love it as commission on exchange rates will be a tidy sum at no cost to them.

[TotalMayhem]

Does anyone see any pitfalls or problems with the plan?

[unspecific]

The pitfall is political. Germany, France and the other exporting economies joined the EU for access to a large open market. The EU is all about facilitating corporate gain through access to this market.

So they would not permit it.

In exchange for a few billion "Structural funds", and access for FDI firms into the EU market, Ireland gave away its fish, its right to control capital flows, right to control interest rates and to control import and export duties.

Far from wanting to row back on any of this, France and Germany, who have bankrupt Ireland by the throat, want to centralise control over budgets and taxation.

I'm not so much querying the possibility of getting something passed, moreso the viability of this as a solution in itself. I haven't seen it touted as a solution by anyone anywhere, which is odd seen as though we've heard a multitude of weird and wonderful solutions from all shades of the spectrum - most of which similarly politically unconscionable for Germany.

However, when push comes to shove Germany will have to spend a few bob to sustain the eurozone. That is unavoidable. Likewise it would have to spend a few bob to suffer the consequences of a break up. And every which-way will result in changing the eurozone rules. If Germany will tolerate bailing out other countries(even though half the money goes back to their own banks) then I don't think a temporary tariff is too out of the realms of possibility?

If Ireland leaves the Euro, all debts currently owed by us will still need to be repaid and a devalued punt will not affect that amount which will remain in Euros.
The only advantage having our own currency will have is the ability to impoverish ourselves even further through devaluation.
Banks would love it as commission on exchange rates will be a tidy sum at no cost to them.

Sorry Holly, you must have misread. I'm not talking about our own currency, rather the opposite. Stay within the euro but put temporarily put tariffs on imports to produce the same effect. Do you think that would work economically?

Haha! Top reply TM!

The ability to control their policy and their independence was lost when ECB took over the CB at the time of Euro.

It became more harder and difficult for Dame st CB to control as they wished re money supply and inflation etc.

I think the competence for tariffs is held by the Trade Commissioner and not central banks?

[Holly]

... Sorry Holly, you must have misread. I'm not talking about our own currency, rather the opposite. Stay within the euro but put temporarily put tariffs on imports to produce the same effect. Do you think that would work economically? ...

Oh! I thought the abolition of trade barriers and import taxes was not allowed between states of the EU. Aren't internal tariffs contrary to the principle of a common market?