THE 27 EU LEADERS continue their two-day summit in Brussels today where the eurozone crisis remains the main issue.
The Irish government has already signalled its support for stronger eurozone governance to protect the single currency.
But, as international pressure grows on the euro, why should we stick with it?
Here are the main factors to consider:
Cost of leaving
One of the first things to consider when contemplating leaving the eurozone would be the cost of switching currencies. It’s a one-off cost, yes, but it could be so severe as to counteract any of the benefits resulting from a separation.
Apart from not knowing how exactly to leave the euro, economist Ronan Lyons points out that it’s unclear what the impact of a currency switch would have on the mortgages and savings of those making the change. Do mortgages become cripplingly large? Do savings shrink?
“People would be affected by the transition – and that could be messy,” he adds.
Pegged
Another issue is the ability of a small country to support its own currency. When Ireland had the Punt, it was pegged to the Pound sterling (meaning, our exchange rates followed the sterling rates both up and down) because the state was too weak to have its own standalone currency.
The lone currencies of smaller states are much more susceptible to currency speculators and volatile markets, which can push up interest rates and make it harder to borrow and invest in new capital for both businesses and the government. Lyons says:
You’ve got to remember the reason we went in – life in the eurozone was one where we had a stable currency and a stable interest rate and we took those benefits. The downside is that you couldn’t get to set your own interest rate, but obviously we were willing to take that.
A ‘cheap’ option for some countries to deal with external pressure is to devalue their currency (meaning you reduce the value of that currency relative to other currencies).
Trade
Exporting to other countries is easier if they have the same currency.
Although larger companies still have to work in other currencies, this is particularly important for smaller businesses for whom it is more expensive to work in multiple currencies.
Ireland exported €35.45bn to other EU countries between January and August 2011, of which €24.28bn was to eurozone members. Globally, Ireland exported goods and services to the value of €61.235bn for that period.
Euro restrictions
One of the main problems with the euro, according to Lyons, is its inability to accept that some investments fail.
“You need to be able to fail,” he says, because knowing a country could default should encourage investors to be more careful about selecting their investments. People within the defaulting country are encouraged to pick their politicians better and consider the sustainability of spending plans.
The eurozone’s moves to reassure investors that if they invest in an EU bond it won’t fail is a subversion of the rules of capital. Lyons says investors know there should be a risk of failure and the markets don’t believe otherwise, or else there would be no interest rates.
Putting measures into a country’s constitution to insist on its adhering to a particular deficit target is “economically illiterate”, according to Lyons.
“The agreement to put these deficit targets sounds sensible, but it’s one of the most economically illiterate things you can do. Governments don’t control their own revenue or deficits, but their spending. [The EU] views any sort of deficit as a bad thing, but you should be focused on your current spending not being in deficit. Capital spending can be raised through bonds and if done wisely should pay itself off by supporting the future growth of the economy.”
To embed this post, copy the code below on your site
have your say