David McWilliams should stop stealing his ideas from this blog

Last week I pointed out that Ireland actually has a much higher debt burden than Greece because total debt consists of public debt AND private debt – and Ireland’s private debt is much higher than Greece’s. Imagine my surprise when I looked at today’s Irish Independent, only to find David McWilliams making the exact same point.

What can weak eurozone economies like Ireland do to get out of the mess they are in? There are essentially four options:

1. Leave the euro, return to the punt, and then devalue. This would be a political and economic nightmare for Ireland in particular. Most of our debt is denominated in euros, so if we returned to the punt and devalued, the real cost of paying back those debts would escalate. We would be totally bankrupt, like Iceland. It would also be a PR disaster for the country - and perceptions matter, especially for FDI.

2. Default on our debt. Another not very attractive option. Again, look at Iceland. We would be subjected to merciless financial bullying from stronger economies.

3. Further radical cuts in expenditure, and increases in taxes, leading to massive further increase in unemployment, emigration, deflation, with all the misery and social unrest that this would entail. This is the current strategy of the Irish government. It means that the country would suffer the contemporary equivalent of a Great Depression.

4. A bailout by the richer Eurozone countries. Politically difficult for the richer countries, to say the least.

What we are likely to get is a mixture of two, three and four i.e. in return for the bailout, the governments of the bailed-out countries will hand complete control of their economies over to Brussels, Frankfurt and Berlin – and the subsequent cuts in expenditure and increases in taxes will be decided and monitored from there. Debt for equity swaps at the Irish banks could reduce our external debt burden – this basically means handing ownership of worthless Irish banks over to foreign banks, in return for them writing down the money they are owed. So, in addition to handing over entire control of Irish economic government to Europe, Ireland would also hand over entire ownership of its banking system to Europe.

The only alternative interesting suggestion I have heard for dealing with the weak Eurozone economies was from a professor of economics at Harvard.

“Allow Greece [and the other countries] to take a temporary leave of absence from the Euro with the right and the obligation to return at a more competitive exchange rate. More specifically, Greece would shift its currency from the euro to the drachma, with an initial exchange rate of one euro to one drachma. Bank balances and obligations would remain in euros. Wages and prices would be set in drachma … If the agreement called for Greece to return at an exchange rate of 1.3 drachmas per euro, the Greek currency would immediately fall by about 30 per cent relative to the euro and other non-euro currencies. If there is little or no induced inflation in Greece, Greek products would be substantially more competitive in both domestic and foreign markets.”

This would allow Greek real wages to decrease, without nominal wages decreasing, thus regaining competitiveness. The same could be done in other weak Eurozone economies. Decreasing nominal wages is almost impossible without severe social unrest.