Devaluation is not a panacea for troubled Euro economies but because it is a neat conventional wisdom to argue that a plunge in a currency can provide instant competitiveness, it is common to ignore inconvenient facts and tailor others to suit the argument. Celebrity economics commentator, David McWilliams, a claimed architect of the disastrous Irish State bank guarantee in 2008, is back with new radical proposals based on dodgy 'facts'.
One issue to also take on board is that armchair commentators who have had no exposure to international trade, are unsurprisingly drawn to the apparently self-evident dictum of devaluation.
In Europe from the experience in recent years, the UK will not be used as an example to support the devaluation argument while Iceland which had a big jump in exports in recent years, is a convenient example. On closer examination, it's not.
Research done by JPMorgan, the US investment bank, estimates that sterling’s fall of about 25% since the middle of 2007 against its major trading currencies, has had little effect on trade. Meanwhile, European Commission research shows that demand is more important than price competitiveness in determining export growth.
A survey of exporters by the public agency, UK Trade & Investment, recently found that less than a third saw the fall in the value of the pound as being good for their businesses - - in part because many exporters also rely on imports.
Newspaper reports as distinct from commentary, often laud favourable short-term movements in exchange rates as a boost for exports. This again is usually nonsense.
It's important to distinguish a commodity producer like Argentina selling wheat, iron ore and beef into global markets at the current world price with the challenge and hassle of selling manufactured goods, infrastructure expertise or services.
It's very hard to open new markets today unless you are a company like Apple.
Germany for example has a very valuable reputation worldwide for its engineering tradition and for rivals, price is just one among many factors.
Iceland’s total export value is
split about 40% each between marine products and the aluminum industry, linked
to its geothermal resources.
So Iceland can be a good example of benefitting from devaluation but an analysis of trade tells a different story.
Devaluation would produce a wave of defaults in euro-denominated contracts and the prospect of exiting the Eurozone would set in train a financial stampede from that country.
On Monday there was a radio interview on RTÉ between Pat Kenny and David McWilliams.
McWilliams advocated that a country like Greece should replace the euro with a new drachma on a 1 to 1 basis.
As for Ireland, we could declare all euro contracts void and presumably suspend the Constitution and the right to appeal to the EU Court of Justice.
McWilliams agreed that it would make US and Irish exporters massively competitive at a stroke - - which is absolute rubbish.
The only jobs growth in the foreign-owned sector recent times has been in the international financial services sector (IFSC).
We would give then all new punts!
Irish exports are dominated by US-owned firms and most of trade is with other units with their group.
The high import content is ignored.
So the individual who himself claimed to be an architect of the disastrous State banking guarantee in September 2008, was given about 30 minutes on the State broadcasting service without anyone challenging his proposals.
Listen to Kenny-McWilliams interview here. Check for Monday 9th May 2011.
In the Irish
Independent in Sept 2010, McWilliams used false export data
to argue against the euro.
Without the right product mix, a country can have as many devaluations it chooses without much impact.
Last January, McWilliams was dreaming of
leprechauns in his quest for painless panaceas for his fans. In a putative
election manifesto, If I was Taoiseach… what I would do to save Ireland,
published in The Irish Independent on Jan 08,2011,
McWilliams outlined 10 steps to save the country and besides the absence of his
proposal to exit the euro, the menu had the knack of appealing to protected
wealthy medical consultants and lawyers at one end of the spectrum and to the
desperate unemployed at the opposite end. The word 'reform' did not appear once
in the 10-step manifesto of more than 3,000 words.
The trouble with step 10 was that the $800bn crock of gold was as real as a leprechaun's:
It's a strange world today, when people who have likely never made a consequential decision in their professional lives, that could impact many people much less able to cope financially than themselves, are making radical proposals with huge risks, without really bothering how the scenarios would work out.
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