Why the euro is (particularly) good for Ireland
Given the upheavals involved in the creation of the euro single currency on January 1st 2000, readers might be forgiven for imagining that the final euro changeover slotted for January 1st next is a relatively insignificant event. Not true, according to Bob Mundell, Nobel prize laureate, and intellectual father of the euro.
Sociologically it is huge, corporately it is huge (from a transactions and reporting viewpoint in particular), and even, from a forex market point of view, it is huge. Mundell explained the latter by referring to the 35 billion D marks in circulation outside of Germany and indeed the Euro zone, an unquantified portion of which rests in black economy hands, and which, when the time comes for conversion to euros, might be expected to prefer to change to some other currency than risk the paper trail that would be set up in converting. Not a bull point for the euro in late 2001, to early 2002, he thought.
The latter point was made in the course of a lecture delivered in Trinity College Dublin by Professor Mundell, part of which he devoted to continue his (welcome) support of the ‘Irish’ case for fiscal liberalism in the context of the great euro project, which he, as one of the leading advocates of ‘optimum currency areas’ over a 40 year period, will always be associated.
Mundell reminded his Irish audience of a nostrum of international trade theory that the gains from trade are proportionately greater for smaller countries than larger countries. This follows, he believed, for the gains from international trade in financial services - hence his proposition that the euro favours the smaller participating countries (he mentioned Ireland and Luxembourg as examples) in that they stand to gain more from the single capital market than their larger neighbours.
This is easy for any Finance reader to imagine, as one need only contemplate the sea change in moving from the small Irish pound capital market to the euro capital market, which is larger in size and volume even than the US dollar market, previously history’s largest capital market. (Incidentally, Mundell’s point on the proportionate gain for Ireland from free trade also goes a long way towards explaining the roots of the Celtic Tiger economy - a high growth rate relative to other countries).
The practical manifestations of Mundell’s analysis are reflected in many of the articles in this month’s issue as well.
This month’s M&A survey carries many references to the benefits of a widening capital market, - underlined by the point emerging from the survey from one respondent that an international dimension existed in his estimation in that over 90 per cent of all M&A deals involving Irish companies last year were cross border transactions.
It is interesting to reflect too, on how closely equity markets (and M&A market multiples, private and public) are moving in tandem with Wall Street - a chart of Irish M&A transaction values would closely mirror US equity market movements over the past year, as the figures reported on page 1 would indicate.
Also we report on the conference on European pensions developments held in Dublin this month to compare and contrast practices locally in Ireland with other European markets - all with the huge implications of the single European market in the pensions sphere in mind.
These linkages indicate too, perhaps, that global markets to some degree are already sensing the logic (and inevitability) of another proposition of Mundell’s in Dublin - that, following the successful completion of the euro changeover next year, the next item up on the agenda should be the linking together again of the three great currency ‘islands of stability’, the dollar, euro and yen, to restore world currency stability - something that has not been seen for decades.
Also this issue contains a number of articles on aspects of the practicalities of the euro changeover - the months to come of course will see more, as Finance charts, from a practical perspective, the great historical leap that is about to take place at the end of the year. |
