Ireland has been given a tax cut and a painless devaluation

Opinion: Swiss franc capitulation and oil price drop mean we are suddenly cheap

People line up at a currency exchange office in Geneva last Friday. ‘One of the richest, most stable and economically successful countries in the world was forced to abandon policies it deemed to be in its best interests.’ Photograph: Martial Trezzini/AP Photo/Keystone

People line up at a currency exchange office in Geneva last Friday. ‘One of the richest, most stable and economically successful countries in the world was forced to abandon policies it deemed to be in its best interests.’ Photograph: Martial Trezzini/AP Photo/Keystone

 

The way in which the markets overwhelmed the Swiss central bank is eerily reminiscent of exchange rate crises of a bygone era.

The adoption of the euro brought to an end the recurring currency crises that afflicted us every few years. But one form of instability had merely been swapped for another rather than being eliminated: we enjoyed the luxury of never-needing reserves to defend an exchange rate but acquired new banking instabilities that will haunt us for years to come.

It is worth remarking on the forces that defeated the Swiss. One of the richest, most stable and economically successful countries in the world was eventually forced to abandon policies that it deemed, loudly and unambiguously, to be in its best interests. For good or ill, that’s the interconnected world we live in.

The inevitable temptation to blame speculators for the sharp rise in the Swiss franc is, for once, wrong. The spectacular failure of various foreign exchange players points to gamblers who were betting the wrong way.

Digging for gold

This should serve as a salutary reminder to any amateur investor thinking of getting involved in the foreign exchange market: don’t do it. You stand more chance of making money by digging for gold in your back garden.

During the peak of the most recent euro crisis it was often suggested that one solution would be for the single currency to split. This took various forms but essentially was an idea based on Germany and some of the other hard money countries spinning out of the euro to form their own new currency.

This, it was argued, would allow the weaker countries to achieve a much-needed devaluation. Not much attention was paid to what would happen to the new Germanic currency but, thanks to the Swiss experience, we now have a pointer. It would have soared in value.

There are plenty of very smart people who think that the end game for the euro still involves a split, although it will take a few more years and several bouts of crisis for this to happen. Just as the Swiss were defeated, so will the ECB.

But the Germans have just been reminded why the euro has been such a fabulous gift to them, one that keeps on giving: they have been granted an exchange rate that confers an extraordinary degree of competitiveness on their already formidable exporting machine.

The squeals of pain from Swiss exporters and tourism sectors is a foretaste of what would happen to Germany if they were to leave the euro,

Imagine, for a second, a finance minister in any euro area economy announcing a budget that magically boosted export competitiveness at a stroke while at the same time granting a significant cut to income and corporate taxes.

It would be quite a trick, one that Michael Noonan and his counterparts must regularly fantasise about. Amazingly, it isn’t a dream, it’s just happened. We have achieved the much sought after devaluation and the oil price fall is that tax cut.

This, of course, is a boost for all euro area countries. Those German exporters are getting even more help that they don’t really need. The euro’s devaluation won’t help everyone equally; only those economies that trade a lot with countries outside the euro area will see a big benefit. Top of that list, of course, is Ireland.

Exchange rate

Those ancient times when we still had the punt witnessed an obsession with, in particular, our exchange rate versus sterling and the dollar. Newspaper headlines and stockbroker scribbling regularly bemoaned the behaviour of our exchange rate.

Quite rightly too: the last of the great currency crises 20 odd years ago resulted in a devaluation that was resisted by the authorities on the grounds that it would cause a permanent economic nuclear winter.

They couldn’t have been more wrong of course: the fall in the exchange rate prompted years of economic growth. I am reminded of those forecasts of economic apocalypse when I hear similar prognostications for what will happen should Greece exit the euro.

We have been granted the finance minister’s fantasy: a painless devaluation and a tax cut. Not nearly enough is being made of this. At the very least we can assume that Fáilte Ireland is preparing aggressive marketing plans pointing out how cheap we have suddenly become.