Thursday, 18 November 2010

How Ireland can solve its problems

So, despite having no real economic background and a complete ignorance of all the complexities of their situation, I'm going to give the Republic of Ireland some advice about how to get of their current difficulties.

First, leave the euro and readopt the Irish Pound. Quite frankly, being in the euro is doing you no favours and, as it's the Central Bank that control interest rates and the like, leaving the euro would give you a lot more tools to deal with your problems. Leaving would be problematic for a while but at least the Irish Pound would settle at a value representative of their economic strength and would be weak enough to allow them to start exporting competitively.

Second, default on your debts. Sure, the banks may collapse but if your government sets up an internal state owned bank to continue lending internally then you won't suffer many serious internal effects and at least you won't be paying huge amounts of interest to foreign banks and bondholders any more.

Third, take a very state directed view of your economy for the time being. People homeless on the verge of being evicted from their homes? Cancel all mortgages and other debts, you own the home you live in. You've got thousands of empty homes so move the homeless people into them and if there aren't enough then start a state run house building program to build more - it would at least provide some meaningful employment for those without jobs.

Fourth, the basic human needs nowadays are shelter, food, water and energy. We've already dealt with the shelter problem so ensure that a) no food is exported until internal demand has been met b) that the water supplies are nationalised so that everyone has access to it and c) that the energy industries are nationalised so that you can keep the lights on. Put simply, Ireland is self-sufficient in basic necessities. there's no need for people to go cold or hungry as long as the state intervenes to make it so.

Now, this is in effect heavy socialism. I, like a lot of people take the view that state socialism can be a bad thing in the long run, but in the short term it's exactly what Ireland needs. The crisis facing them is comparable to that of Britain in the First and Second World Wars and what did the government do in those situations? It assumed control of key industries and resources for the duration of the crisis. Ireland should do the same.

Once your internal economy is working again, when you've reduced unemployment figures through mass national work programmes (such as infrastructure building) and people no longer need fear losing their homes or being bankrupted by the banks, you can start privatising things again and loosening state control. Only this time make sure there are regulations in place to prevent this kind of crisis from ever happening again.

4 comments:

  1. I like your enthusiasm, I really do, but there are some problems:

    1) If Ireland leaves the Euro and defaults on its debt, it creates a new currency that no-one is going to want to buy sovereign debt in.

    2) This means that the only way Ireland would be able to fund the borrowing required for the activity you specify above is by printing money.

    3) Printing money while the economy isn't expanding will lead to inflation. Lots of inflation, because you need lots of money for the activities you've given above.

    4) Most Irish banks will hold significant quantities of Irish mortgages. The sudden cancellation of all of those mortgages means the likely collapse of those banks in a state-mandated repeat of the financial crisis.

    We funded the cost of the world wars through war bonds and other offerings, not through printing money. It still took us decades to pay off the debt. It's an option to be avoided if at all possible.

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  2. 1 which is certainly correct is not socialism it is simply a sovereign country having sovereignty over its currency.
    2 makes some sense but a total default would endanger trade. In fact Ireland's own economy is not in a particularly bad way - the debt is actually bank's debt, owed mainly to German & swiss super rich individuals & banks, which the irish government have foolishly undertaken to look after. They should pay it off in long term interest free vouchers, which would keep the new punt down but solvent.
    3 - the idea of a massive house building programme when there are a large number of empty houses may be masive socialism but it isn't sane. The market, by driving down housing prices, is working in a way any liberal would understand.
    4 - You do not appear to know that Ireland, despite a history of poverty has moved over the last 20 years to being 1/3rd wealthier than us, through exactly the sort of frwe marketis liberalism that all liberals but few socialists approve of. They don't need soup kitchens.

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  3. @Adam

    1) This is true but, as has been shown in the past where other countries have defaulted on their debts, the currency eventually reaches a value of some kind. Granted, there is no precedent for a country leaving one currency and adopting another during the middle of an economic crisis but ultimately the new currency would reach a value with regards to other currencies.

    2 and 3) Indeed, it would be printing money. But there are measures that could reduce the inflation problems such as price fixing. After all, the value of currencies is, in reality, purely imaginary. If markets lost confidence in Britain our credit rating could be lowered and would result in the pound losing value - but the actual strength of the economy might not have changed at all.

    4) Indeed it would, that's why they would probably need to nationalise those banks at the same time - something which the Irish government has already effectively done to the majority of its banking sector.

    Ultimately I'm talking about what would essentially be a massive economic reset for Ireland - going back to square one and starting again.

    @neil Ireland became a third wealthier by lowering corporation tax whilst high liquidity and easy loans fuelled a housing boom which the government began to rely on as its main source of tax income to support further tax cuts for businesses. It was a runaway bubble which was never going to last. Personally I take the view that economies should be based on actual tangible value unlike the current situation where the global debt is larger than the entire value of the world's assets.

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  4. P.S.

    As I said at the beginning, I am pretty much talking out of my arse.

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