Monday, November 22, 2010

Ireland's Bail Out and the Euro

Don't just be aware of politicians and their inability to grasp the simple economics you'll be learning this year and throughout your degree, be aware also of journalists who peddle bad economics and bad science in the pursuit of convincing you of their prior prejudice.

Today, Ireland will be bailed out by a number of international institutions: The Eurozone, the EU and the IMF. It's the upshot of Ireland's banks taking on a vast amount of liabilities, way in excess of the entire GDP of Ireland. In other words, it's the upshot of hugely bad decisions on the part of bankers in Ireland.

Of course, this is grotesque for so many Irish people, who have had to endure massive austerity measures as a result of these terrible decisions. However, if you read the Telegraph, the Daily Mail and the Sun today about the situation, you'll probably come away believing the Euro is the sole reason for all of Ireland's problems.

You may even hear Tory politicians like Douglas Carswell who may try to tell you that Ireland's difficulties are entirely Euro based and that in fact we're not bailing out Ireland today, but the Eurozone.

Let's stand back for a moment. A single currency between Ireland and most of its major trading partners has existed now for 10 years, against the pleasure of people like Douglas Carswell and the right-wing, Europhobic media. So you have to take things with a pinch of salt. You have to ask things like, as an economist: What is an Optimal Currency Area? Is it the Eurozone? Is it bigger? Is it smaller? The North East of the UK often struggles with being in the same Poundzone as the South East - although of course Carswell and co don't call for the break-up of the Poundzone which bears all the characteristics of the Eurozone.

The answer, of course, is that there are some benefits to a common currency. It's nice to not have to change currency, to be subject to the whims of the foreign exchange markets. But as economic experience and theory has shown over the years, this is only true to the extent that changes in the level of competitiveness (reflected in productivity) can be recognised within this arrangement: Either by the moving of prices or exchange rates to ensure the Law of One Price, or PPP, roughly holds.

More on all of this next term. In the meantime - look beyond what journalists and politicians write and ask why they write it in the first place...

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