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Preparing for the end of the Euro

With the Republic of Ireland and other nations reconsidering their commitment to the eurozone, can NI businesses prepare for a possible break up, asks Paul Gosling

Last month, the leaders of the eurozone’s two largest economies — Germany and France — agreed to jointly put forward measures to turn the currency union into something close to a fiscal and economic union. If the move by Angela Merkel and Nicolas Sarkozy fails, the prospect of the break up of the eurozone moves closer.

Besides, there are questions being raised about whether the Irish government will reconsider its commitment to the euro.

Fiscal and economic union would lead to the creation of a single corporation tax rate — by 2013, suggests Germany — and eliminate Ireland’s tax advantage in attracting inward investment.

What would Ireland and other weaker eurozone countries do if faced with a choice between accepting an economic and tax policy that is effectively determined by Berlin and, to a lesser extent, Paris, and leaving the euro?

Even before this latest response to the crisis, there have been many economists who have predicted that the eurozone cannot survive — at least not in its current form and with its existing membership.

The Centre for Economics and Business Research (CEBR), one of the UK’s leading economic advisory firms, has said for several months that the eurozone will probably disintegrate. But, it admits, suggesting a timetable for this is, at present, impossible.

“To be honest, this is not necessarily an economic issue,” says Tim Ohlenburg, the CEBR’s senior economist. “At the end of the day, it’s a political issue, so it is difficult to call a time on it. When there was civil unrest in Greece, we thought it would be about three years — by the end of 2013.

“But the break up of the eurozone does not necessarily mean that no one will use the euro. Some members may choose to leave to make their economies more competitive. For them, it is difficult to get their economies more competitive, to get their economies back on track, while being part of the eurozone.”

Yet, the CEBR is reluctant to suggest to businesses in Northern Ireland and GB that trade with the eurozone as to how they might prepare for a possible break up. “To be honest, I don’t think there is much you can do until it’s really on the horizon,” says Ohlenburg.

Colm McCarthy is an economics lecturer at University College Dublin and lead author of the report that advised the last Irish government on its spending cuts and austerity programme. He suggests there remains much uncertainty about what is going to happen with the euro. “The answer is that nobody knows at this stage,” he says. “There are several countries that would probably prefer if they had not joined, but they have.

“For any country — Greece is the [one that] people think of as top of the list — to choose to leave is very difficult. The mechanics of establishing a new currency from scratch is very difficult. People think that the drachma exists somewhere out there and can be re-established, but it has gone.

“It’s rather as if the state of Minnesota gave up using the dollar and set-up its own currency. This is a huge undertaking. There is an irreversibility about the decisions people took [to set-up the euro] in 1999.

“It’s not a straightforward policy option. But that doesn’t mean the euro won’t break up. If the situation is mis-managed — and it has not been managed well so far — then you could get a break up of the currency zone. Currency zones have broken-up before — the most recent is the break up of the rouble in 1991, when it imploded. So it can happen. But it’s a pretty chaotic process.

“I am not saying it’s not going to happen, but if it does, it will be by accident.”

So what does McCarthy think businesses in Northern Ireland should do to prepare for a possible break up of the euro? “The fast answer is nothing,” he says. “It is not obviously going to happen. If it does happen, it will be by accident. I can’t think of anything that a business firm could do to prepare in advance.

“It might happen in a year, or two, or three years; it might never happen. If I was in business, I would not spend too much time worrying about it.”

Esmond Birnie, Northern Ireland chief economist for PwC, is also equivocal about the chances of a break up. “It’s a non-negligible possibility,” he explains in the language of his profession. “I would not say it is a 50 or 60 per cent likelihood, but it is more than 5 per cent likely. What is driving it is that since the euro was created, the PIG [Portugal, Italy and Greece] economies’ cost competitiveness have moved significantly out of line with those of Northern Europe, for example Germany and the Netherlands.

“So the question is whether the PIG economies and Ireland can regain their competitiveness without devaluing.

“Those factors make [leaving the euro] a strong possibility, though not a strong likelihood. You can envision some weaker economies, like Greece, jumping out, but it is much more difficult to predict the Irish Republic leaving. That is because almost all of the political establishment has nailed their colours to the mast of staying in the euro.

“And there are signs that export orders are picking up. So it could be argued that they just have to endure more years of pain and then the economy will eventually come through.”

But unlike his fellow interviewed economists, Birnie believes that Northern Ireland companies can consider ways to mitigate the risks emerging from a break up of the euro. One consideration might be to maintain minimum amounts of holdings in euro bank accounts. But, he suggests, companies should also think more fundamentally about which export markets they target.

“In one sense, it is obvious, but difficult to do in practice — and regardless of whether the euro breaks-up [it is sensible],” he says. “Given that the rates of growth across the EU are relatively slow, companies should diversify their export markets. They should diversify out of [dependence on] their nearest export market and focus on the markets with the highest rates of growth.”

This means trying to export to the obvious growth nations of China, India and Brazil, but also to other expanding countries, such as Turkey, Indonesia and Mexico, suggests Birnie.

The future of the Euro

The leaders of Germany and France, Angela Merkel and Nicolas Sarkozy respectively, made a joint statement on August 16, containing proposals to rescue the euro.

  • A single ‘genuine economic government’ would be created for the eurozone.
  • All eurozone governments must commit themselves to a ‘golden rule’ of fiscal management which would return them to balanced budgets.
  • A tax to be applied on all financial transactions.
  • Eurobonds — under which Germany and France would guarantee the borrowing of weaker eurozone governments — would not be introduced at present. Only if there is economic integration could these be considered.

Belfast Telegraph