Don't let scaremongers fool you, the euro is here to stay
Published 22/11/2011 | 08:00
In recent days Northern Ireland has heard rash opinions that the eurozone is at risk of breaking up. Some of the local comments have even seemed irresponsible.
Whether a country is within the eurozone or not, imbalances in Government finances, leading to excessive borrowing needs, can lead to an erosion of confidence that Government borrowing can be securely financed.
Greece was the second to stumble and is seeking assistance within the eurozone. The Republic of Ireland, in contrast, attracted eurozone assistance first and is now working towards restoring its public sector finances.
There remains a possibility that Greece and maybe one or two other countries may withdraw from the eurozone. Withdrawal would cause major disruption. However, to jump to a prediction that the eurozone will collapse is excessive.
Reports that Germany and France are preparing for a 'new,' smaller eurozone are a misreading of their motivation. Germany and France would admit that entry to the eurozone was too easy. The essential rules of a single currency agreement were neither made clear nor enforced from the start.
For a common currency, the euro, to function successfully, there must be rules of financial discipline. Individual governments can continue to make their own decisions about specific taxation and spending totals but the overall budgetary balance (including a formula to constrain Government borrowing) should be tightly controlled.
Within the UK, sterling is a tightly managed common currency. The UK Treasury controls the security of sterling both because the UK Government is trying to maintain a manageable Government deficit and also, critically, the Scottish, Welsh and Northern Ireland administrations are controlled against taking on extra levels of official debt.
If the Northern Ireland Executive was permitted to borrow excessive amounts of extra funds, then both the credibility of Northern Ireland debt held by 'bondholders' would be suspect and, critically, ultimately the security of sterling denominated debt (and therefore the UK Government) could be eroded.
This is the reasoning that motivates the German government in the current eurozone tensions. How can monetary and fiscal policy be regulated across the whole eurozone?
Hardly surprising, therefore, that Germany, as the largest eurozone contributor, is seeking to introduce stronger discipline to constrain financial excesses in other members.
In these circumstances, suggestions that the Republic of Ireland might be deliberately excluded or forced to withdraw from the euro, are farfetched.
The evidence that contradicts the catastrophe theories of the pending collapse of the eurozone lies in the behaviour of the financial markets. If the instability theories were credible, why has the exchange rate for the euro remained so stable?
The problems in the eurozone are not based on fundamental flaws in the concept. The problems are essentially in the fiscal irresponsibility of individual Governments. Of course, finding competitiveness through currency devaluation becomes impossible. Internal steps to retain international competitiveness are essential.
Once in, opting out is a potential disaster, probably worse than the domestic turmoil of painful deflation.
The euro is here to stay. Republic can expect to remain a member of the eurozone. Sterling's relations with the euro will vary with normal market forces. This crisis is manageable, even if painful.