Should Ireland leave the Euro and devalue as suggested by economist David McWilliams?

Figures published by the Central Statistics Office show that the number of people signing onto the Live Register increased by 16,300 to 293,500 in December 2008. The unemployment rate rose to 8.3% in December from 7.8% in November. Exchequer figures for 2008 show that spending overshot Government income by €12.7 billion during the year. The deficit for 2009 could hit €20 billion.


Economist David McWilliams has suggested that Ireland should leave the Euro and then devalue its currency. He argues that no small country like Ireland has ever solved its problems without currency devaluation. It is incontestable that many Irish firms have been priced out of the UK market by the appreciation of the Euro against Sterling, which has suffered a massive devaluation as the Bank of England reduced interest rates. Similarly the Euro has risen in value against the Dollar.

The Euro is now overvalued against both Sterling and the Dollar. The Euro as a currency should be devalued by a slashing of Euro interest rates over a very short period of time. This is the route forward. The Irish government must administer the harsh medicine required and improve competitiveness.

David McWilliams suggestion that Ireland should leave the Euro is fraught with difficulty. Because the fundamentals of the Irish economy are so weak the Irish pound as a small currency would suffer a massive drop in value. Once it was floated it would go into freefall. This would trigger a massive rise in interest rates to protect the pound. The last state would be worse than the first.

Latest ESRI report paints gloomy picture on the economy:Ireland is now in recession

According to The Economic and Social Research Institute (ESRI) in its latest Quarterly Economic Commentary the economy will experience a recession this year for the first time since 1983, and a return to net emigration in 2009. Ireland of the Celtic Tiger is no more.

It expects that the economy will contract in size by 0.4% this year. The ESRI calculates that the volume of domestic spending this year will fall by 2.6 %. Investment spending is expected to fall by 14.9%. Real consumer spending growth in 2008 is expected to reach just 1%.
The ESRI predicts an economic growth of 1.9% for 2009.
It expects that net emigration will reach 20,000 in 2009.

The unemployment rate is forecast to rise from 4.5% in 2007 to 6% this year and 7.1% in 2009. The Government had a budget surplus of €5.2 billion in 2006. It will have a budget deficit of €7.4 billion in 2009 according to the ESRI. This represents a deterioration of more than €12.5 billion in the space of three years.
The ESRI predicts an inflation rate of 4.5 % for 2008.

Quite frankly many of the problems were foreseeable three years ago. In the run in to the 2007 General Election the FF/PD Government ramped up public expenditure. It rose by 13% alone in 2007. It undoubtedly helped FF win the General Election. However the flood of taxes into the Government coffers-which supported this splurge- stemmed mainly from an unsustainable property boom. Now the bubble has burst with house construction down from 90,000 three years ago to 40,000-45,000 this year.

The economy was growing strongly in 2005, 2006 and 2007. It did not need a huge injection of public expenditure, which just fuelled inflation. Richard Bruton FG spokesman on Finance railed strongly against this approach as did some economists such Dr. Alan Ahearne , David McWilliams and George Lee. Dr Alan Ahearne warned about the dangers of a crash in house prices. More recently Jim Power has been critical.
Unfortunately many economists were swept along on the tide of boom and bloom.
Critics were painted as prophets of doom who were talking down the economy.

A more prudent approach to Government spending from 2005-2007 would have allowed the Government some leeway. Now the cupboard is bare. There are precedents for the inadvisability of the budgetary strategy adopted by FF/PDs in 2006 and 2007.
The boom bust approach was adopted by FF in 1977-81. Its 1977 Manifesto was a winner with the electorate promising no rates and no car tax. FF inherited an economy, which had come out of recession and was growing solidly. The Lynch and Haughey Governments pump primed public expenditure –much of it funded by borrowing. By 1981-82 the economy was in serious trouble. The hardship of the 80s had its genesis in this irresponsible Manifesto.

In the run in to the 2002 General Election the FF/PD Government let public expenditure rip. Once more Charlie McCreevy slammed on the brakes in the wake of the 2002 General Election.
The FF/PD/Green Government is now facing a double whammy. Internally tax revenue is way below expectations, the housing sector is in free fall, inflation is close to 5%, and unemployment has risen by 48,000 in the last twelve months. Externally rising fuel prices and higher interest rates have impinged strongly on the Irish economy.

The ESRI expects the general government balance to show a deficit of 2.8 % of gross domestic product this year after a 0.3 percent surplus in 2007 and worsen to a 3.9 % deficit in 2009.
"On the face of it, a breach of the 3 % ... (EU Stability and Growth Pact) guideline in a single year does not signal the death knell of fiscal prudence and given our very low debt levels could well be afforded," it said in the survey.

This advice from the ESRI should be binned immediately. The country cannot buy its way out of the mess. Unfortunately hard decisions on public expenditure are necessary. The advice from the ESRI would return Ireland to the failed policies of the late 70s and 80s.
It is likely that the real tax burden will rise. This will be supplemented by increases in stealth taxes such as local authority charges, and by large public expenditure cuts. All in all not a pretty picture.

Ireland-Construction Downturn

There is increasing evidence of a downturn in the building industry. House prices are overvalued by about 20% . Some optimists forecast that the moderate fall in house prices would have run its course by early 2008. It is more likely that the correction underway will continue for some time. The spectre of negative equity looms for some.
There are several reasons for the decline in house building:

• The 2% rise in interest rates has impacted strongly on repayments.
• Many builders were over optimistic in their assumptions in relation to future demand. They are now left with unsold houses.
• There has been an unsustainable rise in house price inflation.
• The Government takes 30%-40% of the cost of a new house in tax.
• The Stamp Duty issue has not been resolved.
• Unemployment has begun to rise.

There is a tendency to scapegoat economists -like David McWilliams- who have forecast choppy waters ahead. Some have gone so far as to blame them for the fall in house prices. This is of course nonsensical.

There are indications that on average builders have up to 10 new houses unsold in some parts of Ireland. In 2008 a more conservative approach will be adopted. Forecasts for 2008 vary widely.It is likely that new house starts will drop from 90,000 to 60,000 in 2008. There is a danger that it could drop to 50,000 as builders must first off load large numbers of unsold houses.

The growth rate for the economy will drop to 3.5%-This is the benign scenario. Government cutbacks rising oil prices and a housing crisis could drag the rate down to 1% or less.

Ireland-If there is a slump who talked us down?

Today the Sunday Independent hit out at those who it alleges are talking down the economy.
In an amazing article headed IF THERE IS A SLUMP WHO TALKED US DOWN?
There are quotations from David McWilliams and George Lee and Alan Ahearne. The implication is that all three are somehow economic saboteurs.
Ireland's economic boom was fueled by a number of factors:

• The Irish pound was devalued by 10 per cent within the ERM at the end of January 1993. Bertie Aherne as Minister for Finance opposed this. However the power of the markets forced the FF/Labour government to back down. This gave Ireland a competitive advantage.
• Membership of the Euro resulted in a reduction of interest rates. This boosted the property market. The country was awash with cheap money. The fact that the German economy was in the doldrums kept Euro interest rates low. We benefited from German difficulties.
• A favourable Euro/Dollar exchange rate boosted exports to the US.
• The 12.5% Corporation Profits Tax proposal of the Rainbow Coalition of FG/Labour/DL was a masterstroke.
• Now conditions have changed. The German economy is picking up. Euro interest rates have risen. The Dollar has dropped because of economic difficulties in the US . This has major implications for US companies operating here.We are caught with a double whammy. The astronomical volume of private debt in Ireland is exacerbated by rising interest rates. The building industry boosted by cheap money has begun to contract as interest rates rise. An economy over-reliant on building and construction must restructure. Exports are under pressure further threatening jobs.
• High levels of Stealth Taxes have also blunted competitiveness.
• It is not economic sabotage to point out the facts. It is economic sabotage not to deal with the realities. In saying this I do not necessarily always agree with David McWilliams and George Lee and Alan Ahearne. However it is most unfair to demonise them.
• This country has a great future if the correct decisions are taken.

In the Sunday Business Post today David McWilliams answers his critics with an article titled "Ireland has become a fat, flabby nephew of an ailing Uncle Sam".