- The euro’s fall will benefit the Irish economy.
- The implicit punt/sterling rate has been exceptionally high
The evidence from a host of cross-country experiences with fiscal contraction is that it tends to dampen economic growth unless offset by one of two countervailing forces – lower interest rates or a currency depreciation. In the euro zone fiscal deficits have been falling since 2009 but interest rates are already exceptionally low – the repo rate is 1% and short dated money market rates are lower still – so support from that source is unlikely to prove significant, although for some countries, including Ireland, effective rates are higher, reflecting a risk premium, so there is some scope for improvement if a less risk averse environment was to develop, according to Bank of Ireland’s Monthly Bulletin published today, 08 June 2012.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “There are fewer constraints surrounding the currency, however, and a weaker euro might help to boost exports and hence support growth, particularly for these countries that are less dependent on intra-eurozone trade. This is certainly true for Ireland, with only 40% of exports going to euro countries. The US is Ireland’s largest single country export market and although exports to the UK are less significant than they were, that market is still very important for Irish indigenous firms and therefore for growth and employment.
“Consequently, the fall in the euro over the past year is positive for the Irish economy, particularly the 10% decline against sterling, to around 80 pence. To put that in historical context, Ireland’s currency crisis in 1992 was triggered by a rise in the punt/sterling rate to above parity, a rate viewed as unsustainable at the time, yet a year ago the implicit punt/sterling rate was 1.14 and in 2009 was briefly up at 1.24. The weakness of sterling in recent years has been a significant and perhaps understated negative for the Irish economy and so the euro’s recent fall is a positive development, even though the effective punt/sterling rate is still around parity. A weaker currency is not a panacea for the woes besetting the euro area as some countries are chronically uncompetitive but it may well help – a currency depreciation is part of the solution rather than the problem”, concluded Dr. Dan McLaughlin.
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