“We have to keep the British economy safe, to take the British economy through this storm. That means preparing for all eventualities” British prime minister, David Cameron speaking on 10th November in the UK and responding to concerns about the EuroZone
Germany is reportedly doing it, the British prime minister has admitted the UK is doing it, the French are strongly suspected of doing it, but when asked if Ireland is preparing or has prepared a Plan B for dealing with a break-up of the EuroZone, Taoiseach Enda Kenny said last Tuesday 8th November 2011 that “on behalf of our own country he [Enda Kenny] had contributed to that debate [the EU summit last month which addressed Greek debt, European banks’ capital and expanding the EFSF]” and “unlike what happened here in this country a number of years ago, I [Enda Kenny] don’t expect that if a crisis does arise within the EuroZone that it [Plan B] will be took at 2.30 or 3.30 in the morning with nobody present except a very few, I would expect that the leadership of the EuroZone would call a special council meeting if there is to be a special focus on any particular crisis or any particular aspect of a crisis. I expect that European leadership will deal with this politically” You would hope and pray that the Taoiseach avoided confirming the existence of a Plan B in order not to undermine confidence which might lead to the withdrawal of euros from Irish banks and conversion to a more secure currency (I suppose the good old Swiss Franc, but even the US dollar and sterling look strong compared to the euro at present); you would hope the NTMA and the Central Bank of Ireland and the Department of Finance have prepared a Plan B, and hope also that it is never needed.
There seems to be a lot of chatter presently flying through cyberspace about Ireland’s contingency planning for a break-up of the euro. But for the last couple of years there seems to have been periodic rumours about Punt Nuas being secretly printed at the Central Bank of Ireland in Dame Street, with stocks of the new currency all ready to be dispatched to banks once the mushroom cloud rises over the ECB in Frankfurt; normally the rumours are based on whispers by a friend whose boyfriend’s sister’s cousin twice-removed claimed that they’d seen actual evidence of the new currency. Of course there may be a secret store of a new currency but given the size of this small country, the fact that nothing concrete has leaked out suggests gossip and misinformation. The view on here is that there would be a number of future junctions to pass before the euro collapsed, there would at least be an attempt at closer fiscal union involving Ireland, an attempt to expand the ECB’s balance sheet (in other words printing more euros which would help indebted nations, and nations with deficits, but would tend to push up inflation) and a better attempt to recapitalise EuroZone banks, before France and Germany allowed a collapse. But you never know, and next weekend we may find that other EuroZone countries have deployed their long-prepared contingency plans and we are forced to manage our economy with Punt Nuas.
So what would that mean?
For the household, it would mean bank accounts denominated in euros would be converted to Punt Nuas and for the sake of simplicity let’s say EUR 1 = PNTn 1. The banks would also allow you to convert your notes and coins to Punt Nuas. Your borrowings from Irish institutions would be converted to Punt Nuas. So the Central Bank would need have a stock of notes and coins but remember that most money in the economy is in bank accounts.
For businesses, like households, their bank accounts, borrowings from Irish banks and cash on hand would be convertible to Punt Nuas. Sales would be in Punt Nuas so prices in the shops would be in Punt Nuas, your newspaper would in Punt Nuas and your salary and any welfare benefits would be paid in Punt Nuas.
For banks, they’ll need change the currency on their computer systems and ATMs, and they’ll need convert any cash on hand at the Central Bank of Ireland to Punt Nuas.
What about international debts? By default these will still be payable in the currency specified when the debt was incurred in the first place. I note that our bilateral bailout agreement with the UK requires us to repay the maximum of GBP 3.2bn in sterling in the event that the euro collapses. The worrying thing is that the betting is that following the creation of our currency, it will lose value against stronger currencies so these debts will increase. It is unclear how the remainder of our national debt will fare. It is also unclear how the Central Bank would limit the euros which it exchanged, presumably there would be a strict time-limit for exchange but there might need be further restrictions to stop euros in the other 16 countries being exchanged. And it is unclear if foreign currency accounts at Irish banks in Ireland would be affected, for example by a decree that they must be exchanged at a fixed rate.
Protecting your savings. Now this might be the subject which is soooo dangerous to talk about that Taoiseach Kenny gave the anodyne “it’ll be all okay” response when asked about Plan B in the Dail during the week. If the Punt Nua is to depreciate against established currencies then should businesses and households be converting euros now to a stronger currency? Notwithstanding the fact that exchange will carry a cost and commission, you’ll need find a foreign currency account, you may need access to the funds now to pay day-to-day expenses and you may find that you have exchanged your euros into a currency which loses value. So there’s no clear answer.
During the week it was claimed in the Irish media that there had been some 39 currency unions across the globe in the last century which failed but that subsequently “the sun rose in the morning” meaning that life went on after the break-up. Looking at the Wiki list of currency unions they all appear to be based on the gold standard or else a pegged to a traditionally strong currency like the US dollar or pound sterling. A break-up of the euro currency union between 17 developed countries, where the currency is not pegged to any external currency or standard, seems like a completely new proposition. The sun may well rise in the morning but a sudden euro collapse looks very messy indeed.