Thank god we did not join the Euro
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Dear Nick Clegg,
As no-one in the media is really bothered what you are up to right now, I thought I would take you back 12 months to an article that you wrote for the Independent explaining why you thought that Britain should consider joining the Euro as it makes for fascinating and embarrassing reading in hindsight.
“I have no illusion regarding how unpopular the euro is. The euro should never be introduced in Britain without public consent confirmed in a referendum. But its unpopularity is heavily based on a perception of its inferiority. It was easy to dismiss the fledgling euro as a “toilet currency” before we realised our own economic growth was built on sand. How different will things look if the recession is shorter and shallower in France and Germany? How different will Europe seem once millions of British holiday makers struggle to pay for European holidays? And once the immediate benefits of the sterling collapse wear off for British exporters, will they start asking questions about the value of such a volatile currency? The deeply held view that Britain’s economy is a cut above Europe’s is about to take a terrible battering. The shrill, ideological debates between pro and anti Europeans will increasingly give way to a more sober, pragmatic assessment of the economic needs of millions of anxious British families. Of course, the euro is no panacea to all our problems. The eurozone will be hit hard by this crisis too, and some of the smaller, weaker eurozone countries are especially vulnerable. But given the gravity of the economic crisis in Britain, and our unique exposure to international financial markets, silence about the euro must end. The future has never been more uncertain. People are increasingly desperate for stability in our economic affairs. We must be ready to think anew.”
The idea that Britain was best placed to enter the recession has indeed taken a terrible battering, and France and Germany did emerge out of recession faster than us. However, your point about the smaller Eurozone countries really has come to the fore as the meltdown across the continent becomes apparent.
Ireland has been an utter catastrophe. Their economy was built on confidence and construction, both of which evaporated - leaving them with an economic nightmare the likes of which they may never have seen before. Debt soaring, the loss of their AAA credit rating and massive unemployment are impossible to ignore. Over recent weeks, it has become clear that Greece is also grappling with its worst economic crisis in years, if not decades. Their budget deficit has rocketed to over 12%, much like the UK, and despite being one of the smaller economies in the EU it is sending shockwaves across Europe. Many politicians and commentators are unconvinced they can rein in such a terrible financial mess. Prime Minister George Papandreou has urged the public to support his programme of tough austerity measures, which includes increases on fuel duty and a public sector pay freeze. However, public sector workers are planning a strike next week. Greece will face the most stringent monitoring of any EU country as it attempts to balance its finances over the next few years. EU economic commissioner Joaquín Almunia also launched an infringement procedure to ensure Greek authorities report reliable budgetary statistics, particularly as Greece’s deficit is more than four times higher than eurozone rules allow. Ooops.
As the BBC graphic above pointed out yesterday, there are other bigger economies in the Eurozone that face the same deficit problems and the fear of contagion is high. While insisting that the single currency was stable and successful, Joaquín Almunia singled out Portugal, Spain and Greece, as well as “some other countries”, as weak links in the Eurozone. For example, Spain has crippling levels of unemployment and there appears to be little respite on the horizon. In addition, it was just announced that its budget deficit for the next three years will be higher than forecast. Fellow Eurozone weakling Portugual cut a planned treasury bill issue in the last few days as yields rocketed to almost 50% higher than January, demonstrating the market’s lack of confidence in their economy. Eurozone countries have been adamant that the EU can handle the matter without IMF intervention, but looking at these figures I remain to be convinced that the IMF will not be needed at some point.
All in all Nick, your desire to “think anew” about the Euro is looking pretty disastrous right now. Naturally, you have gone very quiet on this issue since writing the article as you know that it is a very weak position right now. In fact, I doubt that we have heard the last of the Eurozone’s troubles because at some point, a national bailout may well be necessary. Ironically, in your article a year ago you accused Gordon Brown of “short-sighted arrogance” (no pun intended, I’m sure) but it is you who has ultimately been made to look a short-termist fool. Obviously the British economy has suffered enormously thanks to Brown’s shocking mismanagement of our national finances, but when you peer across the Channel at our European neighbours, it is clear that ’stability’ and ‘growth’ are not exactly flourishing for the countries that joined the Euro either.
Yours sincerely,
A.Tory
I don’t know much about budget deficits and debts as a percentage of GDP. That’s not some sort of inverted snobbery comment, I really don’t.
But am I right in assuming that because our 13% deficit figure is higher than the others shown here, Gordon Brown has, at least, taken us to number 1 in something?
Our deficit is indeed stunningly high. Our debt as a % of GDP might not be at the top of the pile, but it has increased from just over 40% to well over 60% in a matter of months, hence the very scary prospect of our economy faltering again over the next 12-24 months.
A large amount of the debate surrounding the Euro entirely misses the point of its creation. It is a political construct, not an economic one, and one that was forseen by the original idealists behind the treaty of Rome as the largest single move toward a unified state in Europe.
Such political ideals always bypass realistic economics, and are always expensive. Ireland, even before the crash, was at a huge disadvantage to its EU neighbours in as much as the Euro bought less there than anywhere else in the Euro zone. How can that be when there is one currency? Simply because all economies are different and there are still active borders between economic ’states’ despite their use of one currency. Different emplyment costs, different taxation, the nations are still competing with each other but constrained inside one communal straight jacket. As the crash gathered pace the diferences are exacerbated by the emergency and therefore countries with poor domestic economic positions are destroyed by the needs of their larger partners – mainly France & Germany.
Monet’s plans were hatched with the best of intentions – but out of fear, not of hope or realism – hence the requirement to push the people little by little, unaware of the final destination. The Euro was the lever to prise all the participating countries into Lisbon, and the superstate is created. However – remove the Euro or expose it as the burden that it has become and eventually the pressure becomes too much. Either all economies have to fall into line, or the system fragments.
It has yet to be seen whether this is the emergency that will break the EU or destroy true national sovereign government permenantly – one will have to give sooner or later, if not in this crisis then in then next. While both exist in their current state there can never be stability – they are incompatible.
“It is a political construct, not an economic one”
Quite. This also explains why the desperation to ensure that Portugal, Spain and Greece don’t drag the currency down is palpable.
The good news for holidaymakers is the weakling Euro countries are helping our devalued £ creep up 10% or so.
riviera looking a little more likely at the moment.
Ha, I suppose that’s a bonus!
http://order-order.com/2010/02/04/gilts-plunge-on-end-of-q-e/
Don’t thank anyone yet. Though a non-existent sky fairy is as good a god of the market as any other!
Of course things can change, and we’ll have to see how the UK economy plays out, but I think it is bloody lucky we’ve had control over our own financial levers during this economic crisis or things could have been even worse. Yes, even worse.
Dunno, LFAT. Our financial services industry had liabilities larger than our national GDP which is why we are now buggered. Our Financial industries would not have had the same influence in terms of the consequence of their collapse, had they been grafted onto the Euro in 2000. We would, however, now be looking at a different set of problems as we see Greece, Spain and Italy manifest the problems consequent to fiddling their figures to join the Euro in the first place.
Correction – thank God we haven’t joined it … yet. This is what AA is fighting.
I would be interested to see the reasoning behind this statement, surely financial services would have been much the same in scale, diversity of business and interdependence but the levers available much reduced hence the likelihood our problems would be even worse.
Can you explain to me how Greece and Portugal’s mismanagement of their economy has got anything to do with the Euro?
Europe doesn’t manage their economies, neither can it take responsibility for Greece fudging the statistics that meant it was able to enter the Eurozone.
Are you trying to suggest that being a member of the Euro means economies can’t be run badly?
In short you’ve failed to prove the causal link between a poor performing economy and membership of the Euro. Perhaps if you’d analysed exchange rates you’d notice that throughout the economic downturn the Euro has strengthened against the GBP…
“Europe doesn’t manage their economies”
Hmmm. So the ECB doesn’t centrally their interest rates and the rules on deficits just appeared out of thin air?…. Your suggestion that it cannot take responsibility for someone fudging their statistics also seems to suggest that the Eurozone is a flawed concept from the start – which I agree with. There isn’t a causal link and I never said there was – my point was that the Eurozone is having an extremely difficult time (and indeed always has done) applying one set of rules, regulations and financial levers to almost an entire continent.