RSS FeedCurrency Devaluation - An Option We Don't Have
Posted by Senan
David McWilliams makes some very interesting points in his latest article in The Sunday Business Post today. He is mostly paraphrasing Patrick Honohan - new governor of the Central Bank, and economist - when he highlights the fact that during this current economic crisis, Ireland does not have the usual fiscal armory that it should have in order to drive us out of the hole - currently devaluation.
It's something I've been thinking about since the recession began. In particular it frightens me a little that rate decisions will be based to a large extent on the performance of the German and French economies. This could leave Ireland and the Irish out in the cold. The problem became glaringly obvious to me when I realised that my treasured tracker mortgage would probably bounce up and down more in tune with the DAX and CAC than the ISEQ!
Our crash has been more severe than most in Europe, therefore it is highly conceivable that other economies will recover first and faster (a scenario that is already coming to pass). Therefore, when the time comes, the ECB will raise interest rates in order to curb the inflation created by fiscal stimulus. That's fine. However, it will be the same rule for all countries across the common currency. So next year possibly, when we are still struggling, the rates will rise. This will put further pressure on households, and further pressure on businesses, especially exporters. This will in turn further depress the economy.
In McWilliams' article, it is argued that with currency devaluation not at our disposal, then unemployment and consequently depressed wages is the inevitable side-effect; as businesses are squeezed. We're in for a rough ride. Ireland must now focus, not on our internal problems with external entities (such as the ECB, the IMF, and multinational companies), but on our own productivity. The infamous anti-Lisbon posters showing how insignificant our say in Europe (Germany 17%, Ireland 0.8%) actually is are correct. So no one is going to come along with a blank cheque (sorry farmers!) and save our bacon. We need to go to work and we need to do a good job, and we need our government to invest in our future in the form of education, health, and business incentive. And for heaven’s sake, no public sector strikes; that will make the public’s blood boil.
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