Roadmap For Departure

Today it was announced that the Wolfson Economics Prize has been awarded to a proposal on how a country could best leave the Eurozone. A year ago such a proposal would have been greeted with little more than a theoretical appreciation, now it has real world significance. 
Credit Suisse, in May, estimated there was about a 15% chance of Greece leaving the Euro. Others like Standard & Poor's believe this likelihood to be "at least" a one-in-three chance of leaving the Eurozone. While the Greek election results may have allayed fears to some degree, the threat looms large. Fears also remain over other fragile Euro economies like Ireland or Spain for example especially should the Greeks leave which would set a precedent and perhaps initiate a domino effect.


Advocates of leaving the common currency point primarily towards the benefits of a cheaper currency on exports, leading to increased employment and eventually sufficient levels of growth to escape from the grips of seemingly endless austerity. Accompanying such a plan would be an Icelandic style debt default and away we go free of our terrible debt burden and with the reassurance of more prosperous times ahead. So the attractions are clear, how about the practicalities? We will examine these from an Irish perspective. 

                                                           Economist Roger Bootle of Capital Economics

As the Wolfson entry states leaving the Euro would be a combination of two distinct monetary events;


(a) Currency Conversion and redenomination of wages, prices and all other domestic values into the new currency; (an Punt Nua as it is being touted)


(b) Change in the exchange rate of currency, i.e. a devaluation


In addition to the core monetary events are other concerns;


-How and when to leave.
-Subsequent legal effects and relations with outside interests, i.e. EU, creditors, markets.
-Consequences of debt default.
-Social Consequences.


It is would be desirable that any decision to leave the common currency be made in private as much as is possible. Additionally the imposition of capital controls to combat the risk of large scale withdrawals would serve to protect the exiting country's interests. There are many obvious obstacles to this optimal exit strategy. Firstly the ability to keep plans of such a nature confidential is far from certain. Given that reports, although not substantiated, have already surfaced over plans for a Greek exit being drawn up the question must loom even larger. Additionally any sudden announcement of withdrawal from the Euro would seriously damage the democratic foundations of the State having allowed for no discussion or democratic will of the People to be accounted for. Policy makers should thread very carefully in this regard. Setting a precedent for the abandonment of sound democratic practices, regardless of necessity or motive, would have a strong and long-lasting impact on society. While it seems likely that a country would be able to leave the Euro while still remaining part of the EU and that a new currency would be acknowledged by the International community this should not serve to disguise the inevitable difficulties with such 'successes'. It would be desirable to disclose as much information as possible in a reasonable time frame to other EU member states in order to retain goodwill and to smooth the transition for the entire EU. This unfortunately would compromise the need for secrecy in any such plans. Similarly honouring a large degree of debt obligations would lessen the negative impact of a withdrawal but a weak nation like Ireland would be in no position to do so. From the outset then it appears that the theoretically most advantageous exit strategy is questionable at best when faced with the realities of  the political and legal backdrop.


The redenomination of euro to the new currency (An Punt Nua) offers an array of difficulties. The Capital Economics Report dismisses the notion of stamping euro currency to indicate its new identity as An Punt Nua. This 'overstamping' has previously been the most common method of administering a new currency. As the production of new notes and coins is likely to take between four and six months this has often proven to be the most convenient method. The report's suggestion is two-fold;


a) To rely on non-cash transactions
b) To continue to trade in euros for the remainder of transactions where option a) is not viable


The notion of using a new currency of lesser value (the exchange rate of the euro having risen in comparison to An Punt Nua) to pay for goods seems to be somewhat overlooked by the report. The authors contend that small level payments becoming hypothetically 30% more expensive (given the rate change) should not pose a significant concern. While it is important to remember that no ideal solution exists and that this method may indeed offer the most desirable option, I would tend to disagree with the opinion expressed in the report. The ordinary consumer whose disposable income is already greatly reduced due to austerity measures that have been implemented is likely to find it extremely difficult to manage in a scenario where such transactions, even if infrequent, become far more expensive. One doesn't bare to think what anarchy would befall the nation should a situation akin to that presently at Ulster Bank again rear its head. In such a scenario cash becomes an ever more valuable asset.

A capital flight or 'run on the banks' is also a very acute risk. It is extremely likely that citizens would seek to withdraw large amounts of cash from banks, especially if the euro were to be worth more than the new currency. The solution offered to this is largely to prohibit access to deposits for a period of time until arrangements could be made for withdrawals to be treated as foreign currency debited against An Punt Nua. There is also the likelihood that institutional investors will seek to withdraw their holdings from Irish banks and instead deposit them in a 'safer' bank. Such a 'flight to safety' further diminishes the liquidity of the banking sector. Less liquidity means greater likelihood of a banking collapse or alternatively greater outside assistance from the ECB in the manner we are currently witnessing. It would, however, be foolhardy to expect the ECB to blindly continue to pump vast sums of money into a failing banking sector once they become sufficiently disillusioned with their chances of getting their money back.


The devaluation of the new currency is the kernel of the argument for leaving the common currency. Devaluing to such an extent that competitiveness is restored and export led growth allows the economy to grow out of its current difficulties. Managing the devaluation is fundamental to the success of the strategy. It is estimated by the report that Ireland would require a devaluation of roughly 15% but that initially this may reach closer to 25%. A problem arises when the depreciation goes beyond the desired levels and are marginally less beneficial to the economy. That is, that the price of imports rise by more than the price of exports as seen in the Icelandic economy. The core solutions set out by the report are;

"Act pre-emptively and put in place credible monetary and fiscal frameworks: inflation targets should be laid down; establish limits to the use of quantitative easing; publish a framework to constrain fiscal policy; and task an independent body to monitor the authorities' adherence to these targets."

Should these measures fail however, and the new currency devalue to a larger extent than is expected or desirable it will serve to devalue citizens personal wealth while delivering diminishing positive impact to the growth of the economy. Devalued wealth means more expensive goods and services. The impact could not be avoided. The average price of petrol is, at present, 159.9 c per litre. Already hugely costly. Now imagine with a devaluation of An Punt Nua of 25% and the price at the pumps becomes a frightening 199.88 c per litre. And lets face it we may export a lot in this country but equally we import a lot too. Expect many of what we would consider to be fundamental goods & services to either disappear completely or become significantly more expensive.


The other main concern raised by leaving the Euro is that in the minds of most experts it would absolutely be accompanied by a large-scale debt default. Both go hand in hand. A debt default means we as a nation could not, in all likelihood, access credit from anywhere. Certainly not the money markets, and probably not the IMF. Should this arise where then do we find the money to continue the smooth running of the country. The payment of wages being perhaps the most obvious casualty. A deficit of €16bn would have to closed in this country through extreme cutbacks in expenditure. To put it into context the current public sector wage bill is approximately €14bn, cut that and you still have another €2bn to find. It's a huge swathe of money that would have to be cut and which would in all lieklihood result in untold hurt for citizens. Unfortunately we have already witnessed across Europe the degradation of social harmony and a disregard of peaceful protest. Given the circumstances in which people find themselves in their motives can largely be appreciated. Should even greater hardship be placed on the shoulders of our citizens I wouldn't bet against the same unsightliness on the streets of our cities, towns and villages. Eventually people will tolerate no more.

I may seem to have disregarded the work of the Wolfson prize winners in the summary it inspired above. Far from it. As the saying goes; you can't make a silk purse out a sow's ear. The contents of the report will never make for pleasant reading and will inevitably raise concerns as to the efficacy of the recommendations as expressed above. Perhaps given all its drawbacks it may be the best option for a struggling nation like Ireland, burdened by a crippling sovereign debt and bowed by continued austerity and the absence of growth. It is my opinion that this is not the case and that exiting the Euro remains the option of last resort, that for now at least we need not consider. What is not in doubt is that this is an issue that is becoming increasingly significant across the Eurozone and will in all likelihood continue to do so for the forseeable future. For now the departure remains conveniently contained in its hypothesis only. Should the time come for it to break into reality we'll all be scrambling for the Woolfson Prize winning entry 2012, here for your convenience.... 


http://www.policyexchange.org.uk/images/WolfsonPrize/

Spain.
A few questions answered.

So Euro 2012 in the end went the way of WC 2010 and Euro 2008, no surprise there. In winning an unprecedented three major tournaments in a row the debate has been opened as to whether this Spanish team is the greatest international side we've ever witnessed. Certainly they are the greatest I have ever witnessed. That, however, won't count for much come the final reckoning I'm sure.

What matters more than debating the merits of the great teams and ultimately declaring one the greatest is that we appreciate each of their contributions while we can. Its easy to lose oneself in the nostalgia of the past and forget the joy of the present. Spain have developed the game, brought something new to the table for all to examine, dissect and try to imitate. They have set their own course and remained true to it. As Cesc Fabregas reminded everyone after Sunday nights final their style is borne out of necessity as much as anything else, "We have to play this way. We can't play long balls because Iniesta is not strong, I am not strong, Silva is not strong, Xavi is not strong." Borne of necessity or not, what this group have moulded their strengths into is something to behold. The passing is incredible but that is only part of the greater story. Sublime passing is futile if not facilitated by the imperious movement of the Spanish. Angles are of the world of mathematics but so too of football; creating and exploiting in an endless, fluid cycle. Defensive strength is in turn a product of the possession game. This side is unusual in their defensive emphasis; defend WITH the ball, 'typical' defense is only a contingency plan should the original fail from time to time.

That is not, to answer another pressing question regarding this team, to say that they are boring. Arsene Wenger became an unlikely traitor from the cause when he claimed that the sole purpose of Spain was to hold onto the ball to defend rather than to attack. Rubbish Mr. Wenger. As one of the greatest purveyors of the finer points of the game Wenger's comments were disappointing to say the least. He is not entirely wrong either though. Possession is little without penetration. The marriage of these qualities makes for joy, excitement and exhilaration. Mostly it brings success. At times it looked as if Spain's success in this tournament was in doubt. Times when the aforementioned penetration was lacking, to be more precise. The fact that the matter is that they rely on Iniesta, Silva, at times Fabregas and lately Jordi Alba for this crucial facet of play. The rest play in front of the opposition. As such the burden is great on only a small few and at times they falter. Crucially though, as is they crux of Wenger's comments, it isn't for the want of trying. The way in which the Spanish play requires that quartet to go past the defenders and relies on the ability of others to find them. The accuracy required is incredible and invariably more often than not the ball will be intercepted. But such is the manner of their game plan, they need only make it work once and the likelihood is that win the game.

Wenger's misunderstanding is this: Spain are limited in ability not in attitude. Limited may seem a perverse tag with which to label some the greatest footballers of our time, but they are. Fantastically good in the strength of their play but limited in their range of abilites and consequently the team's ability to change style when required. Even the 'false 9' is only a tweak to the same system. There is no Plan B, pass to win or pass to lose. Consequently La Roja are predictable and generally quite easy to plan for. In theory if not in execution. Furnishing the enemy with the plan of attack and implementing it to claim victory regardless is no small feat. This is what Spain do time and again. Excuse them please if this bunch of players who have developed a style of play that has brought joy to millions, reinvented the game and won three major tournaments sometimes falls short of the thrills and spills we demand of top level football. The improbable skill of their players renders their shortcomings largely meaningless, and allows them triumph over all before them time and again.

The European champions are not boring. They simply are not cavalier, they are not pacy, they are largely not spectacular. Their expression of the Beautiful Game is a subtle, refined, exquisitely beautiful version. Don't look for joy where it is not, don't intentionally ignore the gifts this team frequently bestow upon us. Appreciate, instead, their style, their manner, their brilliance where it does exist; pass and move football. They lack the flying wingers, the goalscorer phenomenon centre forward, the cult figure enforcer, all these qualities with which we readily identify with and reward with adulation. What this team lacks in such qualities they more than make up for in their abundance of skill and guile. Outwitting rather than out-running, out-muscling and out-jumping.

In my humble and in many ways uneducated opinion this Spanish team will be ranked among the greatest but not quite at the pinnacle of the finest teams ever. That title, for the time being at least, still rests with the Black Pearl and the Samba beat of Brazil's incredible 1970 World Cup winners. Crucially that team provided the exhilaration that Spain cannot frequently muster. 

What cannot ever be taken away, however, is their achievements and the manner in which they were attained. Limted, but undeniably great- the ironic truth of this fabulous group of players that must be acknowledged to protect their legacy from detractors in the ilk of Mr. Wenger.