Dan O’Brien rates the collapse of the Euro as more likely than not. Meanwhile, George Soros has commented that the Eurozone fiasco could well prove lethal. David McWilliams highlights the ‘lootocracy’ effect the Euro is having in Greece – the same is going on here in Ireland.
This blog sets out the case for a planned partial withdrawal of Ireland from the Eurozone which could take place during 2013.
The main options available for the Eurozone appear to be (a) further integration of Eurozone members involving a pooling of sovereignty or (b) the break-up of the Eurozone with members reverting to national currencies. In the current euro sceptic environment option (a) is not viable, as citizens of the Eurozone would not support such a move. Option (b) on the other end of the spectrum would pose existential questions for the whole European Community project – in the case of a disorderly disintegration of the Eurozone the potential for catastrophic wealth destruction is alarming.
Option (c) should be considered – an orderly partial withdrawal of peripheral countries involving devaluation, debt restructuring, but protecting selected cross-border segments of their economies which would remain Euro denominated.
In April this year Arnab Das and Nouriel Roubini set out the formula for an orderly Eurozone divorce where a fundamental restructuring of debt in Greece, Portugal, Ireland, Spain and Italy took place. As part of this process, these countries exit the Euro through a devaluation and revert to their original currencies on an agreed basis with the core Eurozone countries.
I agree with the Roubini approach of amicable divorce, but think we should seek to retain the Euro for three elements of the Irish economy: IDA clients (i.e. foreign multinational firms), the IFSC and the SEPA payments infrastructure. Banks in the IFSC should be subject to regulation by a pan-European regulator rather than the Central Bank of Ireland and should also be subjected to the Financial Transaction Tax.
With this selective Euro exit strategy, Ireland would be able to achieve debt sustainability whilst also regaining export competitiveness. The vexed question of how to reduce government spending would be resolved – public service and social welfare would be paid in Punts.
Partial withdrawal would be a complex and difficult process – one which would need to be carefully planned and might require the temporary imposition of capital controls on domestic bank accounts. It would nonetheless be a process which addresses the fundamental issues of debt sustainability faced by Ireland, and other peripheral Eurozone countries.