Plan B: How leaving the euro can save Ireland

Financial expert Cormac Lucey argues that Ireland should leave the euro. He outlines his case in his best-selling book, ‘Plan B: How leaving the euro can save Ireland’, which is reviewed by Owen McQuade.

“Is the worst behind us?” asks Cormac Lucey in the opening chapter of his ‘tour de force’ on Ireland’s economic crisis. He argues that Ireland needs to leave the euro zone in order to manage its mountain of debt. Lucey, who teaches finance, gives a financier’s view on how Ireland needs to exit the euro zone and devalue its currency which will effectively reduce its debt level.

The start of the book looks at the boom years and highlights the underlying problems with an asset bubble economy. Lucey directly challenges the view that the crisis was a totally home-grown problem and argues that Ireland’s membership of the euro zone was at the root of the economic collapse as was the case, in his view, in the other euro zone peripheral countries: “The roots of the crisis lie in Europe and not in Ireland,” he contends.

Boom

Much has been written about Ireland’s economic boom but the book details it succinctly and it is backed up by well-chosen data. The only thing that grated with myself was some ‘false zeros’ on the y-axis of some graphs which over-emphasise some trends but overall the data in the book do give a true picture of the crisis and, importantly, the key drivers of the economic collapse.

In Lucey’s analysis, interest rates certainly played a central part in the boom period and “cheap credit was the single greatest cause of Ireland’s credit and property booms.” He says that this is not part of the official narrative of what went wrong: “We Irish were responsible for becoming debt junkies – the EU enablers who happily supplied us with debt bore little or no responsibility.”

Bust and Plan A

The boom times ended with the collapse in property prices, in wealth, in domestic demand and in public finances. The consequence of the bust had been a level of debt which, Lucey argues, is unsustainable.

A key consideration for Lucey is that the level of debt should not be measured against gross domestic product (GDP) but gross national product (GNP). Ireland’s GDP is 25 per cent higher than its GNP due the size of the asset base in Ireland owned by non-Irish multi-nationals. He highlights the debt figure at the end of 2012 of 117 per cent of GDP or 145 per cent of GNP. However, including “undeclared and unaccrued liabilities” such as shortfalls in public service pension funds and projected shortfalls in the Social Insurance Fund brings Ireland’s gross debt in 2012 to a staggering 482 per cent of GNP.

Lucey looks at the response to the crisis from the perspective of what economists and policy-makers have learnt from dealing with past recessions, quoting John Maynard Keynes, Milton Friedman and our own TK Whitaker. Looking at the monetary policy followed in the euro zone in the face of the crisis Lucey observes that last August M3 – the broadest measure of Irish money supply – was 20 per cent down from its August 2007 peak. Lucey makes the comparison with 1933 when four years into the Great Depression, US money supply dropped 17 per cent from the peak and turned the downturn into a depression of a much longer duration.

There is a particularly thorough discussion on the options regarding the bank guarantee: “The authorities persisted in believing that Ireland’s banks were suffering from a funding/liquidity problem rather than a solvency/negative equity problem.”

In summarising the approach to the response to the crisis Lucey says that the narrative from government is that there is no “viable and clear-cut” alternative to Plan A. The book then sets out such an alternative: Plan B.

Plan B

Lucey states that default would be a “grave” step, but says that “an Irish debt default or debt restructuring is, in my opinion, inevitable.”

He sees Ireland’s best option as an exit from the euro zone. Continued membership of the euro zone denies the Republic an aggressive monetary policy which is currently being followed by the US, Britain and Japan. The euro zone inflicts on Ireland a currency level and cost levels which are too high in international terms. Exit would coincide with a substantial currency devaluation.

Whilst Lucey doesn’t directly address the politics of an exit from the euro zone, he does make the observation that if another country was to exit – he cites possibly Italy or Cyprus – the markets will quickly ask whether Ireland is “in or out?” He quotes a July 2012 study by Bank of America Merrill Lynch which examined 11 euro zone members as to which had the greatest incentive to leave. Ireland was ranked first and Germany last in terms of advantage in leaving the euro.

There is an interesting section in the book in which he details a plan as to how any exit might be managed, giving an outline of the actions that need to be taken.

‘Plan B’ is a very well-structured thesis on the financial benefits to Ireland leaving the euro zone. It does not address the political consequences which are perhaps the biggest barriers to implementing such a plan.

An Irish default was something I had always dismissed as impractical, certainly from a political perspective, but Lucey has made me stop and think. Indeed from a purely financial engineering perspective what Lucey says does make sense but Ireland’s narrative is very much to the contrary and being based on the success of the austerity programme. We are not out of the woods yet, with some commentators warning of further trouble ahead over personal and SME debt levels.

The clear message from ‘Plan B’ is that the euro zone is far from ideal, if not truly unworkable, and the crisis was certainly not all ‘home grown’ as many would have us believe. “The feckless were to blame rather than pie-in-the-sky Europeans of questionable competence playing Lego with currency systems, the workings of which they didn’t understand.”

Lucey sets out in financial terms the benefits of Ireland leaving the euro zone. He does, however, acknowledge that “the final decision will come down to politics.” We can all be sure of a few turns in the road yet.

Cormac Lucey

Cormac Lucey teaches finance at the Irish Management Institute, University College Dublin and Chartered Accountants Ireland. He is a chartered accountant and has worked in various financial roles in banking and in industry in Ireland and in Germany. He is a frequent media commentator on Ireland’s economy and was a special advisor to Irish Justice Minister Michael McDowell during the 2002-2007 Government. He is one of the visiting speakers at this year’s Annual Northern Ireland Economic Conference.