Wednesday, January 4, 2012

Vincent Browne and the Euro

Vincent Browne is one of Ireland's most venerable journalists. He and I will agree on some things and not on others. One area of accord is probably (based on Vincent’s writings to date) the belief that the study of economics is not a science. Note that I did not write “exact science”. It is not a science at all. It is a set of beliefs that are held by individual practitioners and invoked under any and all conditions. Economists are Keynesians, Monetarists or follow the Austrian School in the same way as the devout adhere unquestionably to Mohammed or Christ or L. Ron Hubbard. Economists cannot agree among themselves on the right course of action under any given set of circumstances and they most certainly cannot predict what will happen in the future.

Vincent doesn’t claim, of course, to be an economist although I understand he has standing as a lawyer. His piece (Irish Times Wed Jan 4th 2012), on the possible upcoming referendum on fiscal measures that have been mooted in the context of resolving the debt crises of certain members of the Eurozone, seems to rely on a legal interpretation of the relevant treaties, especially when he claims that no country can be expelled from the Euro zone, and also when he implies that Ireland can veto the proposals and thereby do a “service to all the people of Europe”.

Taking the last point first, we need only look back a short number of weeks to when the British attempted to use their veto to block EU Tobin tax proposals. In short order they found themselves completely circumvented by the other EU states and at the same time pushed noticeably closer to the EU exit door than even the most rabid Euroskeptic could have wished for.

With regard to the existing treaties not allowing a state to be expelled from the Euro, no nations have better illustrated, through history, the adage that there are many ways to skin a cat than the Germans and the French. In the limit, both of these (along with other fiscally responsible states such as Finland and The Netherlands), could themselves opt to leave the single currency and put in place an alternative that would satisfy their requirements. For those left in the rump Euro the effect would be just as devastating as if they were expelled from the original. I cannot tell the future any more than Vincent or an economist can, but history has indicated a high probability that they would be subjected to very high interest rates, including on home mortgages, speculative attacks on the currency that they would not be in a position to defend, an inability to borrow internationally to repay either the amounts owing as a result of the bailouts or for current requirements, and a fall off in Foreign Direct Investment (FDI) due to uncertainty and a lack of confidence in the currency. The rump Euro would also be subject to significant devaluation, which Vincent and others would probably welcome as an aid to exports and tourism, but this also carries a price, and that price is excessive inflation. We would be back, at best, to the situation that pertained in Ireland in the 1970s, when savings and pensions were destroyed and when profiteering was rampant.

Vincent Browne, and all the rest of us, should be very concerned that he might just get what he has wished for.

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