Magill Business - The Punt in the Euro Basket

Some devaluation of the punt is now seen as a real possibility by monetary strategists within the EEC commission. Such a devaluation is, however, likely to be small - probably not greater than five per cent. It could come within weeks, or perhaps not for six months.

Such a move should be seen in the context of any new re-alignment of the EMS, which would probably innvolve a further devaluation of the French and Belgian francs. In the event of these currencies going down we would, if we did nothing, in pracctice be revalued upwards. And it is against that possibility that governnment action could be considered likely.

Not that a change in the value of the punt would come as any surprise to our EMS partners. There is evidence that they, perhaps not understanding our government's policy properly, have been expecting a punt devaluaation anyway.

On Saturday, February 20 of this year, for example, members of the EMS Monetary Committee met in Brussels to agree the latest re-alignment of currencies. They met on a Saturday because exchanges are by then closed all around the world.

The committee is composed of exxperts from finance ministries in the national capitals, and leading the team from Ireland was Mr. Maurice Horgan. second secretary in the Department of Finance.

We suffered from what was "basically the O'Donoghue period" after we joined the E.M.S.

In the course of the meeting Mr. Horgan is alleged to have pointed out that the Irish government had no parrliamentary mandate at that moment, and only for that he might have been seeking a devaluation on its behalf.

This interesting piece of news evenntually found its way to the press via the Luxembourg ambassador to the EEC Mr. Dondelinger, who is thought to have heard it second-hand. Journaalists set about checking it out, and eventually got what they thought was confirmation from Italian sources that Mr. Horgan had indeed said what was reported.

On Sunday, however, Ministers for Finance including Mr. John Bruton. gathered in Brussels to finish the work of the re-alignment. The outgoing Minister duly denied that Mr. Horgan had ever made a statement of the type attributed to him. The government had decided "before Christmas" against a devaluation of the punt, said the Minister. The second secretary was present during the Minister's denials and endorsed what his political master had to say. One journalist present deescribes Mr. Horgan as having looked "bemused and slightly sheepish".

Nevertheless the false impression about Ireland's plans seems to have hung on in financial circles in spite of the denials.

On March 15, what looked like an intriguing leak came from Copenhagen. A prominent expert with a line to offiicial thinking predicted a new rement "this spring" in which the Deutschmark and Dutch Gilder would rise in value by 3% against the Danish Crown and the Belgian Franc, and by 6% against the French Franc and the Irish pound.

When this report went around Europe on agency wires it was taken seriously enough to cause a serious wobble in the French Franc. It did not bring any particular run on the punt, but this caused little surprise in Brusssels. The reason is simple and is agreed by both commercial bankers and EEC officials ... it is virtually impossible to speculate against the punt.

One of the chief suppliers of punts to the continental business community is Mr. Liam Doyle of the Allied Irish Banks branch in Brussels. He says there is a steady demand from interrnational firms doing local business in Ireland, where people for convenience deal in punts.

He says: "It is possible to get punts only on production of an invoice for goods, showing what the punts are to be used for. This is quite simply a reesult of the Irish government's exxchange controls."

A senior EEC official who monitors currency affairs took the same view: "I think you know what happened when people tried to take money to Cheltennham. It is really quite difficult to move punts out of the country.

"The only important market in the currency is Dublin, and if punts are left without a buyer there then the Central Bank steps in and purchases them. What you are getting is the Cenntral Bank paying for the trading defiicit. It is constantly in the market place, and there is no technical way anyone can sell the country short."

If the exchange controls makes it easier to hold the punt rate, the converse is also the case. All observers in Brussels agree that without the conntrols the Central Bank would not have a snowball's chance in hell of holding our position in the EMS.

This douche of cold water will do nothing for the macho satisfaction we seem to have been developing about our EMS stability. In his recent New York speech the Taoiseach, Charles Haughey, declared that the external value of the punt was of crucial cenntral importance to the country's deevelopment strategy. "For this reason," he said, "it has

been the firm policy of the Irish government to maintain value of the currency within that (EMS) system."

This assurance of stability bordered on the absurd before an audience of US bankers who would, if they were at all interested, have been aware of the punt's headlong fall against their own dollar over the previous year.

More than that, if they were invollved in the matter at all, they would have known that it had also fallen 25% against the £ sterling over a somewhat longer period.

The people who manage the EMS are not such dumbells as not to see this for themselves. While they are not willing to be quoted by name, they

maintain that a steady position within the EMS does not mean stability.

One source went this far: "I would describe the Irish pound as a rather heavily devalued currency." The EEC has even made an effort to assess how much of a leg-up our industry has' reeceived from the fact that we have deepreciated against markets taking around 70% of our trade.

The figure, which is confidential and has not been revealed before, takes into account various factors in-

eluding higher raw material costs. The figure is known as the "cornpetitivity index", and it shows that from 1979 until the third quarter of 1981 our competitivity in foreign markets for industrial goods has risen by 7.5%.

One person involved in the commputation of the index said that it had been higher in the previous year or more, but was now shrinking. The same person felt that, with reasonable assumptions about future trends, it could take "two to three years" for the remainder of the advantage to evaaporate.

What annoys officials in the EEC's economics directorate is that the deepreciation of the past 2Yz years has not been accompanied by strict measures to maintain the advantages it brings.

Economics commissioner Francois Xavier Ortoli has been advising the Irish government to take such meaasures ever since the start of the EMS in 1979. The latest piece of advice he piloted through the commission was only some weeks ago. He lumped Ireeland into a group of countries on which he advised: "Action to turn the trend in extremely high inflation rates and extremely high public deficits is now urgently required."

Such restrained public words connceal much more strongly held feelings within the commission. One adviser on the commission staff told me that we suffered from what was "basically the O'Donoghue period" immediately after we joined the EMS in the spring of1979.

The gap between Irish and Euroopean inflation has grown steadily since then. In 1979 our rate of 13.2'10 was 3.0% above the community average. In 1980 our 18.2% rate was 4.1% above the average, and last year's 19.7% was 7.1% above. The latest published commparative figures are for last November when our 23.3% rate was a handsome 10.8% above the average in the EEC.

Our rake's progress is regarded by officials in Brussels with nothing short of alarm. As to remedial action it is known that no one, from Mr. Ortoli down. sees any virtue per se in holding the punt at its present parity. But one senior sourse in the commission said:

"There is little point in devaluing unnless you also take stringent moves to make sure the benefits stay with you. You have had two severe budgets within a year, last July and this March, and they have hardly dented your problem. Your borrowing requirement is more or less unchanged at nearly £ 1,700 million. '

"I do not believe that Mr. Haughey's govern ment has the political strength to enforce the kind of very severe measures that would be needed for a major devaluation."

The restrained concern in the Ortoli department is not repeated in other areas of the commission, where a devaluation is treated with much greater equanimity.

The agriculture, commissioner Poul Dalsager has been arguing semi-pu bblicly that the Irish government should think about devaluation if it wants to solve the problems of its farmers.

Really quite indiscreetly Mr. Dallsager told Irish journalists during March: "Devaluation would help your farmers but it is up to the Irish governnment." He said that Ireland's inflation rate was about double that of Belgium and Denmark which had recently oppted for devaluation,

There is some indication that Mr. Dalsager thought his remarks were off the record, but they were published, and they are' said to have made the minister for finance Ray McSharry "very angry". An approach was made through diplomatic channels to indiicate the Minister's disapproval.

The two conflicting themes of commmission thinking came face to face during the lengthy preparation this spring of a report on inflation in agriiculture. This celebrated report was the brainchild of some who thought it might just put a gloss of respectability on extra help for farmers in places where inflation is high - like Ireland.

As it turned out it did no such thing. But along the way, the meetings apparently turned up some interesting views on devaluation. The meetings were attended by MichaelO'Kennedy's farm aide John Cohalan, who says Dallsager's staff were clearly in favour of devaluation.

He also alleges that the "purchasing power parity theory", seemed to be accepted round the table, even in large measure by Mr. Ortoli's chef de cabinet Mr. Pierre de Boissieu . This theory holds that the value of a currrency will in large measure change to relfect how far its inflation is out of line with its trading partners. The acceptance of this theory has been denied on the Ortoli side on the grounds that "we are constantly tryying to break the vicious circle of currrency and inflation.