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Analysis/Comment Last Updated: May 11, 2011 - 7:00 AM


Devaluation: Panacea for troubled Euro economies from architect of Irish State bank guarantee
By Michael Hennigan, Founder and Editor of Finfacts
May 10, 2011 - 6:25 AM

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Michael Noonan, Irish Minister for Finance (left) and Jean-Claude Trichet, President of the European Central Bank, prior to the meeting of the Eurogroup of Eurozone finance ministers, Brussels, March 14, 2011.

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.

The biggest annual changes in exports in recent years have been in 2008.

The banking system collapsed early in Q4 2008.

In 2008, marine product exports jumped 33% in value on a volume rise of 13%. This was against a backdrop of global food prices rising to record levels.

Aluminum exports jumped 127% in 2008 and volume increased 71%. US giant, Alcoa, opened a new smelter in East Iceland in mid 2007 before the króna plunged.

Fish export volume fell 4% in 2009 but the export value jumped 22%; aluminum export volume rose 6% in 2009 but the value of exports fell 6%.

Fish export volume fell 5% in 2010 and the export value rose 5%; aluminum export volume rose 1% in 2010 and the value of exports jumped 30% - - the average aluminum price on the London Metal Exchange in 2010 rose 24%.

As for marine products in 2010, the movement of large shoals of mackerel north to cooler waters off Iceland and the Faroe Islands prompted both countries to unilaterally hike their catch quotas.

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.

He wrote:

"The most damning statistic of our entire euro venture is that from 1990-2000 when we had our own currency and we devalued in 1993 to get competitive, Irish exports grew by 360%. Between 2000 and 2009 with our overvalued new euro currency, Irish exports grew by 0.3%. That says it all really and yes, that figure is 0.3%, not 30%!"

Absolutely wrong!!

We at Finfacts take facts seriously and it's very important when commenting on economic trends and policy.

There is the simple support for an argument by citing relevant facts. There is alternatively the selective use of facts to support a position and there was a classic example of both in the Irish Independent.

In 2000, tradeable goods and services exports were €102bn; in 2009 they were valued at €144bn - yes, an increase of 41%! McWilliams said 0.3%!

There was a 10% devaluation in 1993. So that is a fact but it is not credible to claim that an export boom depended on a small scale currency revaluation while ignoring a key fact that with 1% of Europe's population, we were attracting 25% of US greenfield investment. Besides, a paper published by the Central Bank in 2005 shows that the trend of exports from Irish-owned firms in the period 1990-2002, hardly changed. Have a look at a chart here which shows the true facts.

Sweden and Finland are cited as examples of the success of devaluation but why ignore the impact of an international boom.

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.

McWilliams' Step 10 said
"in the IFSC (Dublin's International Financial Services Centre) there is over $800bn of US multinational money on deposit. This cash is there as a result of the amazing success of the multinationals repatriating their profits to Ireland to avail of the 12% corporate tax rate. But if they want to redistribute these profits to their shareholders they have to pay American corporation tax of 39%. To avoid this, they just keep all this cash on deposit at the IFSC."

The trouble with step 10 was that  the $800bn crock of gold was as real as a leprechaun's:

Irish Economy 2011: US multinationals have $800bn on deposit in Dublin; Fact or leprechaunic fantasy?

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.


© Copyright 2011 by Finfacts.com

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