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Between a Rock and a Hard Place

Snippits from McWilliams whose warm up prose is getting longer with ever more colourful vignettes.  Cut to the chase already, we beg.

David McWilliams, 4 March 2009

….Ireland has abandoned macroeconomics and is now being run by mantras, which allow our leaders to avoid honestly assessing our situation.

Ideally, we would devalue our currency and print money to get us out of this mess. We should also increase government investment, not reduce it. This is after all the core of macroeconomic theory as I learnt it.

When you have a liquidity problem where the people are hoarding, not spending, the state takes up the reins and spends. This is what every country did in the 1930s and goes to the heart of the response to the crisis which President Obama unveiled last week. But the Irish government is trapped, we have got ourselves into a stupid situation whereby we can neither devalue nor spend excessively. Therefore, our present European arrangement is the worst of all worlds.

But we are going to vote on Europe again this year with Lisbon II, so what should we do?

Less Europe and an ability to devalue our currency would help enormously but so too would more Europe and fiscal federalism where real political and budgetary integration accompanies monetary union and free trade.

This implies that the best policy for Ireland is either to dilute our commitment to Europe or enhance it greatly! Both outcomes are better than keeping the present status quo of being full members of the euro in a half-constructed political union. This is a disaster. So something has to give.

The financial markets have twigged this Irish dilemma and are betting that Germany will not tolerate more European integration, which the Germans could rightly see as yet another attempt to extort from the German taxpayer money to pay for Ireland’s sins. This is why the market which measures the risk of an Irish default, known as the credit default swap market, is suggesting that a default in Ireland is likely.

However, as against that, the political class in Europe and in Germany in particular, by proposing a European bond, is moving gradually towards more muscular political integration backed up by these monetary measures.

At the moment Germany, while admittedly footing the EU bill, gains tremendously from the EU because it can export its goods freely in the union, without having to worry too much about the budgetary implication of an EU-wide recession. So German trade benefits are amplified in a Euro boom but its fiscal downsides are capped in a recession. So it is win, win for Germany.

Granted it is the largest contributor to the Euro budget but this budget is modest when compared to a national budget and the national responsibility of proper EU governance.

Thus this crisis is not just a challenge to Ireland but it is also a challenge to Europe. We can improve our lot by taking either radical option.

We would be better off being the most ardent pro-Europeans or by being the first to leave the currency union! Equally, we know that if we stay as we are, we will have a much longer recession than is warranted, which is political and social suicide….Link to full article

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