Monday, 13 February 2012

Guest post by Arthur Doohan: Loose lips sink ships

Arthur Doohan: The "grown-up's" will remember the opening sequence to the 'Mission Impossible' TV series, where the tape self destructs a few seconds after being played.

I have sad news for you. That technology has not been perfected.

So ... There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank's ATMS disappear in a puff of smoke.

As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the "Euro". Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to "shouting 'Fire!' in a crowded cinema".

Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of "fags" and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal "dressed as lamb". We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.

And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.

Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person's usage of it or to the French Government's usage.

Finally, the concept of 'leaving the Euro' is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.

If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).

Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for 'real stuff'.
And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'.

I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default.

To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.

The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the 'Growth and Stability Pact' is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.

The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing.

So, can we please take a haircut now before we all go bald?
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring


Pavement Trauma said...

I am not an advocate for Ireland leaving the Euro but this article is pretty weak.

"Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro"

Maybe for Euro coins, but there certainly is a way to distinguish between the rather more important notes:

"But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever."

The State certainly can force Euros in your (Irish) bank accounts to be changed to NewPunts. How do you think the (old) Punts in your bank account became Euros?

At the same time debts would become denominated in NewPunts too. Interest rates would soar. The value of NewPunts in EUR would plummet leaving us poorer for anything we import such as oil but more competitively priced for our exports.

artied said...

Fair point about the 'country code' but actually the coins also have a distinctive obverse side for each country.

The point I was making is that the Eurosystem cannot distinguish between them. Apologies if I made the point badly.

Thank you for echoing my main point which is that leaving the Euro is not a solution and makes all of our problems worse not better.

Brian said...

Thanks for this - saw your comment on McWilliams' page and followed the link. Good article, wish there was more people clarifying things these days!

Anonymous said...

I followed your link from David McW's blog. First of all I would say there is no problem shouting fire in a crowded cinema if the cinema is already on fire. In fact not to do so would be irresponsible. Also to say their is no mechanism by which Greece can leave or be forced to leave the Euro is too suggest that contracts cannot be broken. The stability pact (sorry if that's not the correct term; translated from German) which defined the economic KPIs that needed to be adhered has already been broken by Germany a number of times with the contractually agreed fines not being paid by Germany also.

Der Spiegel has repeatedly now said that Merkel and the FDP understand that this is the end game for Greece and hence they are suggesting increasinly absurd solutions (e.g. a savings commissioner for Greece or an account controlled by Germany and France) so that when Greece is forced to leave they can hold their hands up and say "well you could have taken the new rules from us. Sophies Choice comes to mind. In fact the CEO of Bosch has also just come out stating that the best option for Greece would be to leave and recover outside of Europe - the austerity is killing their economy, the middle class are already the new homeless.

You say "I am not recommending, in this post, any particular course of action"

Thats not really helpful now is it. What you call "loose talk" is democracy in action - people speaking their mind - people with track records of being right as in David McW case or the CEO of Bosch Fehrenbach - and presenting scenarios that might emerge. To ask people to stop doing that as if they are causing the problem by talking is in itself "loose talk"

Just my two cents - but at least your comment did get me to come to your page and make a click and comment

artied said...

It is a very fair point to say that others, especially Germany have broken the rules. But 2 wrongs don't make a right and neither does 'breaking contracts' set a good path for sorting out the EZ problems.

The point of the blog is to say the Euro as a currency is not broken and not the cause of the problem. The issue is the level of debt that some countries are carrying and the stupidity of other countries trying to prop up/enforce that debt level.

I still think it is fair to threaten the shutdown of the ATM's as 'loose talk' that only frightens people and I thought it possibly helpful to point out that it is virtually impossible to force us or anyone else out of the Euro-system.

Thanks for the comment.