The problem with devaluation as a strategy for small countries' currencies is that it results in only a short term re-adjustment of the cost base, to be rapidly eroded by inflation, and carries a huge "exchange risk" price tag in the form of higher interest rates almost on a permanent basis.
The Euro in large part caused and also ended the Celtic Tiger. Businesses used to high and fluctuating interest rates could now plan on the basis of low and stable German style interest rates. This led to rapid expansion and inflation which should have been counter-balanced by fiscal policy in the absence of independent monetary policy levers.
Unfortunately the Government, for political popularity reasons acted in a pro-cyclical fashion, and the ECB rates - at first far too low - were then raised just as we were going into recession and needed them reduced. So we are always going to pay a price for ECB rates being determined by the Franco-German business cycle and need to use fical policy to counterbalance this.
However, otherwise, we benefit greatly from having a common currency with most of our main tarding partners, and from the protection the sheer size of the Euro gives us from speculators. notes from no w here
I think everyone was paying double-digit interest rates for mortgages in the 1980's, not just "peripheral" economies. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Anyway, Volcker raised interest rates above 20% in 1982 and that propagated to the whole world... En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
In addition, the Irish banking sector would be a 20-times-bigger smoking crater than Iceland's were it not for the Euro. The fact is that just the impossibility of an attack on the currency has allowed the Irish government to get away with a blanket guarantee of all liabilities or all banks (which adds up to several multiples of GDP) without having to actually make good on it or accounting for it explicitly as government debt. If you had had the punt, the reaction of the markets would have likely turned that massive contingent liability into a disaster. But the markets can't attack the Deutsche Mark so the Irish government gets to make promises they can't possibly keep because they won't likely be forced to make good on them.
NAMA is a different issue - that's an actual, not contingent, liability. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
NAMA is a different issue - that's an actual, not contingent, liability
Nah - its off balance sheet - in a special purpose vehicle - so its not really real in the world of "modern" accounting.
If there is a negative with the Euro for us, it is that it made the lunacy of the bank guarantee to bond-holders possible. Otherwise we would (presumably) have let the banks go into into examiner-ship (our Chapter 11) or some such purgatory, and reconstituted them as new banks the next week - with shareholders and non-senior bond-holders and not taxpayers taking the hit. notes from no w here
Like I said, the Irish banking sector would be a 20-times-bigger smoking crater than Iceland's were it not for the Euro. It's a mixed blessing. I'm not sure what's worse for ordinary people. Systemically, in the long term, maybe the smoking crater is preferable. But zombie banks are less immediately painful. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
