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At the height of the financial crisis, Michael Noonan stated that “Ireland is not Iceland”. Rather than stating the obvious, at a symbolic level Noonan was making clear that he didn’t intend Ireland to follow the same route as Iceland in terms of burning bank bondholders. So what happened in Iceland, and what lessons, if any, can our closest northwestern neighbour offer us?

… In Ireland we deployed €65bn of state funds to prevent our banks going bust. Much of that money ended up paying foreign creditors of our banks. This was done after the European Central Bank president Jean-Claude Trichet phoned Michael Noonan from Frankfurt and warned that if foreign creditors were burnt “a bomb will go off, and it won’t be here, it will be in Dublin”. Let the record show no bomb went off in Reykjavik when it successfully burnt foreign creditors.

Moreover Ireland is not Iceland, as Iceland retained currency and monetary sovereignty. A halving in the value of its currency restored international competitiveness. Ireland pooled its currency and monetary sovereignty with its eurozone partners. Following the outbreak of crisis, the euro rose against those of our main trading partners, especially sterling. That strengthened deflationary forces here and contributed significantly to Ireland’s economic woes.

Despite having a population of only a third of a million, Iceland asserted its independence by retaining its own currency and aggressively promoting its national interest in the banking crisis. Ireland submerged its independence in a continental currency and had to meekly follow the Nuremberg doctrine in obeying orders from Frankfurt.

Read more: http://cormaclucey.blogspot.com/2017/03/independent-iceland-teaches-great-deal.html

The following linked paper, co-authored by Peter Nyberg (“the same Finnish former civil servant picked by the Irish government  to report on how the banking system here collapsed”), was referred to in the second (postscript) piece in Cormac Lucey’s column, in the above-mentioned Sunday Times (Irish edition) Business Section.

Malinen, Nyberg, Koskenkylä, Berghäll, Mellin, Miettinen, Ala-Peijari, Törnqvist, How to Abandon the Common Currency in Exchange for a New National Currency (October 4, 2016). Available at SSRN: https://ssrn.com/abstract=2847507 or http://dx.doi.org/10.2139/ssrn.2847507http://dx.doi.org/10.2139/ssrn.2847507

Abstract

The question of how to leave a monetary union has become an important economic issue during the last few years. Uncertainty relating to its costs tends to discourage political leaders from taking decisive steps towards an exit. This article provides thoughts on what the necessary steps are, what are the associated pitfalls, how they can be overcome, and how can an exit from a currency union be effectively managed to control associated risks and costs. Uninterrupted functioning of the payments system, political response and the solvency of the private and public institutions are shown to be the major determinants of the costs of an exit. Issues of public governance, such as legality of the exit, can become an issue only if political and public support for the exit is lacking.

Read more: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2847507

Filed under: Bank Bailouts, Euro / Monetary Union, Irexit, Irish Economy, Link | External Article, national currency | Tagged: cormac lucey, leaving the euro, Peter Nyberg |