|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
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,
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
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
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
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
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
Check for Monday 9th May 2011.
In the Irish
Independent in Sept 2010, McWilliams used false export data
to argue against the euro.
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%!"
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
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