As the $9.4 billion austerity cuts being made by the Irish Government appear unlikely to be enough to cure Ireland’s financial difficulty the Financial Times questions whether Ireland should leave the euro zone.
The article points out that over the last number of years sovereign default, massive bank recapitalizations and sharply falling real wages are given as reasons for countries to stay in the euro monetary union. Unfortunately in Ireland’s case all three of these things are going to happen regardless. The article points out that Ireland has too much debt and the €85 billion loan from the IMF and the EU will only buy the country a little time.
The article, by Megan Greene, says “Further bank recapitalization is also so certain in Ireland that the EU, IMF, European Central Bank and Irish government have already set aside €35bn of the new €85bn bail-out package expressly for this purpose.” Regarding wages she points out that as Ireland is unable to devalue its currency it will cut wages and prices in order to regain competitiveness.
If Ireland left the euro it would have reasonably good prospects for growth. Ireland has a highly skilled labor force, open labor and product markets and a robust export sector. Also its export sector would be bolstered by the devalued Irish punt. Also Ireland’s biggest trading partner is Britain, which has much better prospects that other peripheral EU countries.
Politically, the Fine Gael / Labour Party government which is expected after the General Election in the beginning of 2011 will gain support by exiting the euro. Voters now extremely frustrated with years of austerity, EU and ECB’s decisions could show their anger by opting out of the euro.
However, Greene, points out that leaving the euro would not be easy. She explains “Ireland would be frozen out of debt markets in the short term, although investors would eventually recognize that the country has hit the bottom, and would quickly be on a path towards sustainable growth.
“A run on Irish banks, widespread bank debt default and capital controls would also likely ensue. Multinational companies based in Ireland as a gateway to the euro zone market might also leave, severely dampening the country’s growth prospects.”
She points out that although this may sound a little painful for Ireland, there is no pain free way out of this financial crisis for Ireland. Perhaps leaving the euro really is a viable option.