Fisher Investments Editorial Staff
Developed Markets

Ireland Schools France

By, 02/08/2013

French President Francois Hollande is a man of many opinions, quite a few of which he's unveiled in just his short time in office. His latest nugget? Hollande believes he has ideas regarding central banking that could be superior to the ECB's current mandate. In his view, the ECB should be doing more to counter the recently rising euro exchange rate.

Firing the latest the (2013 buzzword watch) “currency war” some think is brewing, he urged other euro policy makers to help do what the ECB won’t—keeping the euro cheap. The ECB, like many developed world central banks, has a sole mandate to keep inflation in check. (The Fed, by contrast, has a dual mandate to manage inflation and keep unemployment low.)

What’s so great about a cheap euro? If your home currency is relatively weak, that makes your exports more attractive to trading partners. If you’re a large exporter (like Germany), that may, on its surface, seem like a grand plan.

However, there’s no evidence a weak currency is a net positive—it also makes imports more expensive. Among those imports are often intermediary goods—making input prices higher, raising production costs for domestic firms. That makes prices higher than they’d be otherwise for consumers—domestic and foreign.

Then, too, the tactics used to effect monetary policy and to dampen a currency can often be at odds. If the ECB is trying to fight inflation by reducing money supply (raising rates, selling bonds), that naturally puts upward pressure on the euro (Hollande’s gripe). But then, should the ECB not mitigate inflation in favor of a cheaper euro? Which end game is more important? Who decides? And if efforts to cheapen the euro are ineffective (as currency manipulation often is—nothing happens in a vacuum), what then?

And, Hollande’s desire for a cheap euro doesn’t explain what’s going on in Ireland (a nation which shares a currency with France). It seems Ireland is making another big stride toward freeing itself from bailout dependency. The ECB-approved plan will replace shorter-term, higher-rate promissory notes averaging 8% with longer-term bonds averaging 3%. The rate difference drops Ireland’s deficit but should also help wean Ireland’s biggest banks off Bank of Ireland.

Ireland didn’t need a weak euro to right its (relatively short-lived) fiscal woes. Rather, Ireland needed a bailout in 2010, not because all was rotten in Dublin, but because its relatively big Financials sector was hit hard by the global credit crisis and the aftermath. Ireland bailed out its banks, ballooning its deficit and necessitating a bailout of its own.

However, unique among the PIIGS, it had then and has now a structurally competitive economy with the eurozone’s lowest corporate tax rate—a point of contention from other euro members (like France) who think Ireland ought to “harmonize” that rate higher. (Ireland has, thus far and wisely, ignored the complainers.) Similarly, it has a government relatively free of corruption. According to the World Bank’s 2013 Doing Business analysis, Ireland’s the 15th most business friendly nation globally. But more tellingly, it’s the highest-ranked eurozone nation. Compare that to P, I, G and S—all of which have varying degrees of bloated public sectors with politicians loathe to move too fast in making reforms lest they imperil their careers.

Enda Kenny’s government anticipates Ireland could fund itself entirely via bond markets as early as next year. (We’ll say it. Go Irish.) Now, funding itself via bond markets doesn’t mean the future is guaranteed to be economically vibrant. But that Ireland has managed so much progress on the self-same euro tells you what ails the eurozone likely isn’t its relative currency value. (Incidentally, this is why central banks are and should be independent.)

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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