Collapse of the euro would herald a new level of crisis for Ireland - PowerPoint PPT Presentation

Dr. Pat McCloughan Tier One Presentation 30 June 2011

Collapse of the euro would herald a new level of crisis for Ireland and Europe � For Ireland, there would be little or no hiding place in terms of credible alternatives � What might the ‘alternatives’ be? � ◦ Reversion to the punt without capital controls – likely disastrous ◦ Reversion to punt with capital controls – unsustainable in a very small economy ◦ Align punt to another currency (sterling, dollar or mark) – complex issues � Monetary policy risks being ineffective with capital movement � Consequences for inflation of maintaining alignment � Re-denomination of national debt ◦ Two-speed eurozone – huge challenges for the lower tier Best outcome: Greece knuckles down and the euro lives to fight another day � 2

� Fire-fighting and longer-term economic reform strategy � The crisis has resulted in a horribly complex maze of emergency interventions � Sustainable vision for Europe needed – rapidly changing world economic order � Full economic union not feasible…political union not possible � Basic principles of the EU plausible � Fiscal and monetary policy – support euro and macroeconomic stability � Microeconomic policies – underpin basic principles � Every major crisis reveals a new lesson for economists and this one has taught us that Don’t get too hung up on ‘knob-twiddling’ inflation control 3

� Triad → BRIC � Share of world GDP: Change ( Δ ) % Share Abs ( Δ ) % ( Δ ) 2010 2030 EU27 27 14 -13 -48% US 24 12 -12 -50% Japan 9 3 -6 -67% China 9 24 15 167% India 2 10 8 400% � China in the coming years ◦ Low-end manufacturing → research and innovation → services ◦ Higher value consumer society – Chinese tourists, even bigger middle-class ◦ Property development – urbanisation of the rural interior, small to mega cities ◦ China as a home country for FDI – vigorous competition between host countries 4

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� Main manifestations are ↑ inward FDI and ↑ exports � But no room for complacency and more action needs to be given to: ◦ Public sector reform – but not so that the private sector is (inadvertently) depleted ◦ Promotion of competition policy to improve the functioning of goods and services markets ◦ Research, development and innovation (RD&I) – SFI and PRTLI, and EU FP7 ◦ Educational reform – through the lifelong learning process (focus on STEM, Chinese) ◦ Cross-border dimension for cooperative initiatives, including energy, infrastructure, health � Banking sector ◦ Risk that the re-structuring plan will result in over-regulated and uncompetitive banks ◦ Re-structuring plan will need competition as well as regulatory/supervisory monitoring 8

� Best case scenario for Ireland ◦ Greece bites the bullet ◦ Euro survives ◦ Consolidation of Irish competitiveness � Inward FDI � Exports growth � Moderate but steady growth � Improved international markets � Ireland unlikely to return to bond markets until 2013 (at the earliest) � Euro collapse would be unthinkable � European reform � China’s century 9

30 Pembroke Street Upper Dublin 2 Ireland Tel: +353 1 234 2507 Fax: +353 1 234 2400 Email: pat@pmca.ie or info@pmca.ie Web: www.pmca.ie 10