Yet the underlying tale of Ireland and Iceland, and the tale of the 1930s, is that a devaluation shock may cause a violent crisis – that looks and feels terrible while it happens – but the slow-burn of policy austerity and debt deflation does more damage in the end.
As I\’ve been saying, Iceland is going to come out of this better than Ireland.
And as I\’ve also been saying, here and there, one of the important points about this \”free market\” stuff (you can call it capitalism if you wish) is how it deals with failure.
No one aims for failure, no one desires it, of course: but what do you do when it inevitably happens? Bankruptcy, that\’s what.
No, no money left, sorry. So accept that there\’s no money left, write down the debts and try not to make that mistake again in the future.
True of individuals, companies, banks and countries.
As I\’ve commented over here, what\’s going on in Ireland isn\’t \”free market\” in any relevant sense of the phrase. Corporatist perhaps, statist even (the pressure from the EU seems to be that \”while your banks are bust we\’re not going to allow that to make our banks bust\”…..even if because the Irish banks are bust some of the European ones are, if not bust, at least close to it), but not free market.
And as I\’ve also been saying for 15 years now, ever since I discovered Usenet, there must be flexibility in an economy. That\’s why we like things like separate exchange rates (and separate interest rates). So that when, as inevitably will happen, there is a fuck up, it\’s possible to change just one of the prices in an economy (that exchange rate) instead of having to change all of them individually: that slow-burn policy of internal devaluation.
Finally, as I\’ve also been saying, a fuck up was inevitable. It didn\’t have to be banks going wild in a low interest rate environment, as did and would happen in a fast growing country with negative real interest rates. It could have been the other way around: imagine Germany had been growing quickly and getting a bit of inflation. Euro interest rates would have risen to kill that inflation and this would have pushed the peripheral countries, Eire, Spain (both of which have large percentages of the population on floating rate mortgages, as opposed to Germany\’s much lower owner occupation rates and those with mortgages on fixed rate loans) into near depression conditions anyway.
Just as happened with the EMS and the £ shadowing the DMark those 20 years ago. Interest rates, over such a wide area with such different fundamentals, will always provide such asymmetric shocks. And thus, in conclusion, we shouldn\’t have the same interest rates over such a wide area with such different fundamentals.
Thus we shouldn\’t have the euro.
For some such fuck up was bound to happen with the existence of the euro. It happened to be low interest rates in a boom that did it: but over a couple of decades, whether interest rates were too high or too low in the periphery, a fuck up there was going to be.
And yes, I did tell you so.