From David McWilliams – EU now being threatened by its own central bank:
Those who, during the boom, pointed out that there was a central problem at the heart of the euro were dismissed as cranks. Now there appears to be a realisation that, from Ireland’s point of view, the entire euro project might not have been the smartest thing to do. And from an economic perspective, it is becoming apparent that we can’t get out of this mess quickly in a single currency with low inflation.
Historically, when a country has been hit by the bursting of a property bubble, a bank crisis and the destruction of the national balance sheet, this has been followed by a massive devaluation of the currency.
This allows three things to happen. First, the country becomes internationally competitive quickly and the exporting sector — not only the multinational sector but also the domestic exporting sector – gets an immediate boost. Second, the subsequent inflation allows a drop in public sector salaries and the wage bill without huge pay cuts — which is politically easier to achieve. And third, the same inflation begins the process of inflating away the huge debts built up in the boom, reducing the need for debt forgiveness and reducing the likelihood of default.
That’s the way the economy works. It is what happened in the Asian Tigers in the late 1990s and Finland and Sweden in the early 1990s. It is not that complicated really.
However, in a currency union, this process can’t happen. What happens instead of the currency falling is that people’s wages are supposed to fall. It is important to remember that we are flying blind here. We are in a trial and error process because there has never been a currency union without political union, so we don’t know for sure where this will end. But what looks likely is that the dogma of the ECB will cause successive Irish governments to try to grind down wages and prices in order to be competitive. This will take years and much strife.
What does this “drawn out” grinding process do to an economy? In an economy that is facing a balance sheet meltdown — where the middle classes’ balance sheet is bust — such an approach will result in more financial insecurity, causing people to spend less, not more and result in higher unemployment. Higher unemployment results in a higher social welfare bill, which combined with less taxes causes the budget deficit to explode. This increases the default risk. This is exactly what the financial markets are saying to us. The rate of interest on Irish bonds is over 10pc because the market thinks that the “ECB” approach will make default more, not less, likely.
Unfortunately, our deep establishment — the political, the academic and the media — has adopted a position which sees any questioning of the euro project as being “unpatriotic” and “dangerous”. Therefore, debate on the currency and the likely trajectory for the Irish economy and people is being actively quashed because to question the wisdom of European central bankers is being seen as unpatriotic. When did questioning a German or French banker’s motives and intelligence become anti-Irish?
But this is what has happened. The ECB — which is only a central bank after all — has a veto on Irish economic policy. Isn’t it time for all of us to question just who are these people, who has mandated them and who are they to dictate anything to anybody?
These guys are there to represent the banking industry, not the people.
Would you like to know more?