Abandoning the euro

The recent call by Ming Flanagan TD, who is an independent candidate in the forthcoming EU Parliament elections, prompted us to look for a succinct commentary on the mechanics of abandoning the euro.

Two years ago, a team headed by Roger Bootle won the prestigious Wolfson Prize for Economics with a paper that outlines the smoothest process by which a member-state could give up the euro. We publish a summary below.

■ The most realistic scenario for the break-up of the euro is that one or more of the weaker peripheral countries will leave the euro zone, introduce a new currency, which then falls sharply, and default on a large part of their government debt. Other forms of break-up are possible, but the analysis of these will involve the same issues, although, in the case of strong countries leaving, often with the signs reversed. Accordingly, our analysis centres on the departure of a single weak member, and we then note any instance where the issues and conclusions need to be modified for other forms of break-up.

■ It will not be possible to be open about preparations to leave for more than a very short period without precipitating a damaging outflow of money, which could cause a banking collapse. Accordingly, preparations must be made in secret by a small group of officials and then acted on more or less straight away.

 recommend that the country should immediately announce a regime of inflation- targeting, monitored by a body of independent experts, adopt a set of tough fiscal rules and outlaw the indexing of wages but announce the issue of index-linked government bonds. The government should also continue with structural reforms designed to increase the flexibility of product and labour markets.

■ To facilitate the convenient use of euro notes and coins, to help to maintain price transparency, and to boost confidence in the new system, we recommend that the new currency be introduced at parity with the euro. Accordingly, where a price used to be 1.35 euros it would now be (for example) 1.35 drachmas. The drachma would be free to fall on the foreign-exchange markets, and indeed it is vital that it should do so.

■ We reckon that when any or all of the weaker members of the euro zone left, their currencies would depreciate by something like 30 to 50 per cent. This would add another 10 per cent to consumer prices, or even more, which, spread over two years, would cause the annual rate of inflation to rise by roughly half this figure. But international experience suggests that such a spike can be short-lived, and inflation can then return to something like its previous level.

■ Given the short time from announcement to implementation, it will not be possible to have new notes and coins available immediately. This is unfortunate, but it is not as serious as is often imagined. The authorities should allow euro notes and coins to continue to be used for small transactions; but immediately after the decision to abandon the euro has been announced they should commission new notes and coins to be produced as soon as possible.

■ To facilitate the convenient use of euro notes and coins, to help to maintain price transparency, and to boost confidence in the new system, we recommend that the new currency be introduced at parity with the euro. Accordingly, where a price used to be 1.35 euros it would now be (for example) 1.35 drachmas. The drachma would be free to fall on the foreign-exchange markets, and indeed it is vital that it should do so.

■ We reckon that when any or all of the weaker members of the euro zone left, their currencies would depreciate by something like 30 to 50 per cent. This would add another 10 per cent to consumer prices, or even more, which, spread over two years, would cause the annual rate of inflation to rise by roughly half this figure. But international experience suggests that such a spike can be short-lived, and inflation can then return to something like its previous level. 

■ Just before the changeover, some form of capital controls will be essential, including at least the closure of the banks. But after the changeover, capital controls should be avoided and, if used, should be withdrawn as soon as possible.

■ The government should redenominate its debt in the new national currency, and make clear its intention to renegotiate the terms of this debt. This is likely to involve a substantial default—perhaps enough to reduce the ratio of debt to GDP to 60 per cent. But the government should also make clear its intention to resume servicing its remaining debt as soon as practically possible.

■ The central bank of the country should stand ready to inject liquidity into its own banking system, if necessary by quantitative easing. The monetary authorities should also announce their willingness to recapitalise the banks if necessary.

■ The authorities should provide as much clarity as possible on the legal issues, including the status of the country’s membership of the European Union and the effect on international contracts at present denominated in euros. Approval by the EU would also be needed for any capital controls, but this would have to be sought retrospectively. All this would require close co-operation with other EU member- states and institutions, including countries in the northern core.

■ Domestic economic policy may also have to adapt. Indeed policy-makers in the northern core should have more freedom once they are no longer constrained by the need to set an example for weaker countries that have left. As the value of the euro would rise, the northern core would at first suffer from a loss of domestic demand, though it would enjoy a lower rate of inflation. This combination would give it the incentive to undertake measures to boost domestic demand, especially through monetary policy and structural reforms.

■ A rebalancing of the economy away from reliance on net exports would be in the interests of the whole of the present membership of the euro zone, as well as countries outside it.

Of course, giving up the euro without breaking from the dominance of neo-liberalism would result in further significant hardship for ordinary people, as the price of imported goods, especially food, would increase. Austerity would not just go away either; so repudiating the debt would be necessary in order to force the highest possible write-down. This would allow social measures and strategic economic investment to be given priority, rather than paying the bondholders, and for the people of this country to be put first. 

"Ireland is not Greece"

Speaking in Luxembourg on 4 October 2011, Michael Noonan insisted that “Ireland is not Greece.” Now, in April 2014, the graph below by David McWilliams proves that Noonan was correct—to the detriment of us all.

The fact that the Greeks can raise money shows that the markets have absolutely no memory. Two years after the biggest sovereign default in history they are back at it—though it should be noted that their balance sheet is immeasurably better after the default than before.

Greece’s debt is still almost 180 per cent of GDP. But the bulk of the debt is owed to other

euro-zone governments, as a result of its two “bail-outs.” Not only do these loans pay a low interest rate of a little over 2 per cent, but Greece doesn’t need to begin repaying them until 2022, and then it has another twenty years to complete the job.

Greece shows just how quickly things can turn about. Note also that its ten-year bond yield, which hit 30 per cent after the debt default two years ago, is now 6.2 per cent.

Two of the country’s big four banks— Piraeus and Alpha—have raised €3 billion of equity between them in recent weeks, and Eurobank, another big lender, is planning to follow with a €3 billion issue later this month.

So it was just more bragging from Noonan when we should have been planning to emulate the Greeks, if not surpass them, by repudiating the debt. Instead we have water charges, another austerity budget ... and so on.

Doesn’t it make your blood boil? 

Commentary on the EU Permanent Austerity Treaty (Fiscal Compact Treaty & Irish referendum)

After they had agreed the final wording of the intergovernmental agreement—the "Treaty on Stability, Coordination and Governance in the Economic and Monetary Union"—the member-states of the euro area pronounced that the treaty “represents a major step towards closer and irrevocable fiscal and economic integration and stronger governance in the euro area,” which they claimed “will significantly bolster the outlook for fiscal sustainability and euro area sovereign debt and enhance growth.”

According to the German chancellor, Angela Merkel, the euro-zone member-states have set themselves on an “irreversible course towards a fiscal union.” She told an international gathering at Davos:

“We have to become used to the European Commission becoming more and more like a government.”

The Government seems determined to push ahead in the next few months with the ratification of this treaty and its partner, the revised Treaty on the European Stability Mechanism (ESM).

The two treaties would make euro-zone member-states into regimes of economic austerity, involving deeper and deeper cuts in public expenditure, increases in indirect taxes, reductions in wages, sustained liberalisation of markets, and privatisation of public property.

The cumulative effect of being bound by both treaties would be an obligation to insert a balanced-budget rule

“through provisions of binding force and permanent character, preferably constitutional or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes,” 

put Irish budgets under permanent and detailed euro-zone supervision, make the existing subordination of Ireland’s interests to those of the “stability of the euro area as a whole” even more systematic and pronounced, impose conditions of “strict conditionality” without limit for ESM “solidarity” financial bail-outs, and require Ireland to contribute some €11 billion to the ESM fund when it is established later this year.

In other words, the EU Permanent Austerity Treaty will make a permanent feature of that external interference in our economic governance that was so obnoxious when Fianna Fáil surrendered sovereignty to the European Central Bank and the International Monetary Fund. But if it’s bad in the short term—and it is—it’s even worse when it’s made permanent.

The fact that the British and Czech governments are not going to ratify the treaty is clear evidence that an EU member-state can stay outside it and still remain within the European Union. So the Irish Government cannot avoid holding a referendum by claiming that signing it is, in the words of article 29.4.10 of the Constitution, “necessitated by the obligations of membership of the European Union .”

And from a democratic and sovereignty point of view the treaties represent an abject surrender of governmental powers clearly vested by the Constitution exclusively in the democratically accountable organs of the state. This places a clear obligation on the Government to seek the consent of the people in a referendum before it makes any attempt to ratify these treaties.

Below is an annotated version of the treaty, which the Taoiseach, Enda Kenny, hopes to sign at a meeting of the European Council in March and which his Government hope to be able to ratify by the end of the year.

There is a fundamental division between those who advocate that euro-zone member-states should abandon more and more control over their financial and economic affairs and those who see a solution to our crisis in establishing genuine national independence and democracy. Central to the latter position is winning back for this country, and the other countries of Europe, the fundamental state powers that have been surrendered and using them intelligently for the benefit of the majority of the people, rather than for the social and economic elite.

The treaty has been drafted in such a way as to hoodwink the gullible into believing that the institutions of the European Union will not be involved in actions and procedures beyond those that they have already been involved in and that they will act only within the framework of EU treaties. However, the fact is that the EU institutions will be used in new procedures and would exercise new powers created by the treaty.

What is involved is further EU integration through an intergovernmental agreement that confers new powers on the EU institutions outside the EU legal framework and changes the rules concerning the powers of the EU institutions. The main issue during the negotiations on the treaty was whether the contracting parties should be allowed to use the EU institutions to implement, monitor and enforce compliance with the proposed new set-up.

The EU institutions were created by the EU treaties, which conferred upon them powers and duties. The role of the EU institutions is not only dened by the European Treaties fi but is limited by those treaties, and it would be unlawful for an institution to operate beyond the powers granted to it by the treaties.

---

TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC AND MONETARY UNION

Annotated version

THE CONTRACTING PARTIES [. . .]

No cancer drugs for fiscal sinners

The reality of austerity

The European Commission has said that its austerity measures are not to blame for a decision by the pharmaceutical giant Roche to halt delivery of cancer drugs to Greek public hospitals. In a fresh example of how the EU austerity measures are having an acute impact on citizens, the Swiss firm has halted shipments of cancer drugs and other medicines to a number of public hospitals in Greece after years of unpaid debts. The company warned that Italy, Portugal and Spain might be next.

With Greek spending on health care accounting for 10 per cent of GDP, the EU, the IMF and European Central Bank have told the government to cut at least €310 million this year and an additional €1.43 billion in the period 2012–15. In February this year doctors and other health-care workers marched on the Greek parliament in protest over health cuts and scuffled with the police.

Meanwhile the European Commission is keen to wash its hands of the problem. “It’s a commercial decision from a company,” the Commission’s spokesperson on health, Frederic Vincent, said. “We would have to see if the countries make any specific request if this problem is conferred to Spain, Italy, Portugal,” he said.

It’s a question of budget management by the Greek authorities. “Greece has money,” he explained. “The financial assistance package decided one year ago covers the financial needs of the Greek state. Then how this is micro-managed is the full responsibility of the Greek authorities.” He added that the case would be the same if the drugs dry up in Spain, Italy, and Portugal—and presumably Ireland.

Ireland has undergone first “audit” of national debt—results “truly frightening

An idea borrowed from developing countries and recently used to good effect by the Ecuadorian government has now been applied to the Irish debt.

Ireland has undergone its first “audit” of national debt—the results of which have been called “truly frightening.” The report, An Audit of Irish Debt, was commissioned by Afri, the Debt and Development Coalition and the trade union Unite and carried out by a team from the University of Limerick.
www.debtireland.org/resources/publications/an-audit-ofirish-debt/

The report calculates a potential national debt of €371.1 billion. This figure includes a “conservative” estimate of the state’s contingent liabilities: money for which the state is on the hook in the event of a fresh collapse in the banking system. The €371.1 billion breaks down into €91.8 billion in direct Government debt and €279.3 billion in bank debt backed by the state.

Dr Sheila Killian of the University of Limerick, who led the research, said the audit “seeks to quantify and explain Ireland’s sovereign debt, both real and contingent, for which the Irish people have become responsible”. 

Frankly weird

The report concludes that the “constructive ambiguity” of the European Central Bank’s policy on bank bail-outs is “certainly not a concept consistent with transparency,” and it addresses what Dr Killian describes as “quite intricate layers of anonymity” in relation to bond-holders. The long-standing anonymity of bond-holders “has some justification” in normal circumstances; however, in times when bond-holders have influence on policy it is “frankly weird,” she said.

The €279.3 billion in bank debt includes €111 billion in guaranteed deposits and bonds under the Eligible Liabilities Guarantee Scheme, as well as €74 billion under the Deposit Guarantee Scheme. It also includes the €30.9 billion in promissory notes issued to Anglo-Irish Bank, Irish Nationwide, and the EBS, outstanding NAMA bonds with a nominal value of almost €29 billion, and a net increase of €34.6 billion in the national debt caused by emergency liquidity assistance provided by the Central Bank. The figures contain the caveat that a large part of the €91.8 billion raised by the Government was due to the banking crisis.

A crucial citizen's tool

Explaining the genesis of the audit, Neasa Ní Chasaide of the Debt and Development Coalition said that audits were “a crucial citizens’ tool” that had been used in campaigns against unjust debts in developing countries. In November 2008 Ecuador became the first country to undertake an examination of the legitimacy and structure of its foreign debt. An independent debt audit commissioned by the government of Ecuador documented hundreds of allegations of irregularity, illegality and illegitimacy in contracts of debt to predatory international lenders.

The loans, according to the report, violated Ecuador’s domestic laws, the regulations of the US Securities and Exchange Commission, and general principles of international law. Ecuador’s use of legitimacy as a legal argument for defaulting set a major precedent; indeed, the formation of a debt auditing commission sets a precedent in identifying illegitimate debt.

Subsequently, in June 2009 Ecuador announced that it had reached an agreement with 91 per cent of creditors to buy back its debt for 35 cents in the dollar.

If only!