Betting on ‘punt nua’ to save us could be fatal

Does the euro have a future? More importantly, does Ireland have a future as a member of the single currency?

The answers to these questions will have a huge say on the prospects for the economy. Yet there is very little public debate about these crucial issues.

To this end, the economic commentator Cormac Lucey is to be commended for his recent tome, Plan B: How leaving the euro can save Ireland.

He leaves the reader in no doubt that it is in Ireland’s best interest to reintroduce the punt. The argument is certainly compelling. If this country remains part of monetary union, then the economy will be perpetually locked into an inappropriate interest rate policy. Just as the interest rate was too low during the heady days of the Celtic Tiger, it will be too high during Ireland’s long road to recovery.

Very painful internal devaluation is the only lever to regain competitiveness in the absence of a free-floating currency.

Mr Lucey’s cure is to pursue a massive debt default and at a stroke introduce the punt nua over a weekend.

But there are huge and intangible costs to this strategy. The only certainty is that there is no certainty the benefits would outweigh the costs. The short-term damage could be so devastating it could overshadow any gains.

Ireland is an open trading economy. Much of the country’s success is based on membership of the biggest single market in the world. If Ireland exited the euro and defaulted on its sovereign debt on a unilateral basis, then expulsion from the EU would inevitably follow. In that scenario, what would be the incentive for foreign multinationals to stay? Their exodus would bring with it a sharp rise in unemployment.

The bulk of exports from this country stem from the multinational sector. But companies such as Google, Facebook, and Intel trade in a number of currencies. They would be unaffected by the reintroduction of the punt nua.

The launch of a new currency would most likely be greeted by a massive outflow of capital, leading to the punt nua plummeting in value against our main trading partners. The cost of imports would surge, prompting a tightening in monetary policy and further damaging the economy.

The taxpayer has pumped €64bn into the banking system. In the event of a euro exit and default, the banking system would be forced back into crisis mode.

In the event of a default, there would be an immediate halt to any short-term sovereign borrowing. Anybody who thinks this strategy is risk free need look no further than Argentina. More than a decade on from its default, the country is subject to ongoing lawsuits in several jurisdictions around the world.

In the absence of short-term borrowing, the Government would have to balance the books over-night, which would require a massive cut in spending that could put unbearable pressure on the social fabric of the country.

There is no reason to believe the euro will break up in the short term. ECB president Mario Draghi’s public commitment to do whatever it takes to save the euro has convinced markets. Borrowing costs are at historic lows across the region.

There is also no reason to believe the eurozone has to be an economic area defined by homogeneity. Look at the US, for example. But what it does need is a mechanism for fiscal transfers. As with everything in the EU, this will come.

More labour market mobility is also needed. Greater progress on the internal market for services would be hugely beneficial for the eurozone. After all, in the medium to long term, growth will be the most important determinant of the eurozone’s economic viability.