Predictable Euro-mess casts lengthening shadow over UK economy
Friday 15th July 2011
Back in 1998 I wrote an article for the newsletter entitled “Addressing the Euro”. I was sceptical then that a single currency could replace the Drachma, Peseta, Mark and the rest while preserving the balance that allowed one economy to compete with another.
Among other things I quoted a professor from my time as a student economist who said “if Scotland, Wales and Ireland had had their own currencies, they could have devalued them against the Pound and made their labour cheaper, so making themselves more attractive for inward investment. This would have halted the great exodus of population to the South and East”.
As we know, what has happened instead is that private enterprise and labour has continued to move into England, and the UK’s regions have become increasingly dependent on government employment or assistance.
In the same way, the peripheral European nations of Ireland, Portugal, Greece, Italy and Spain have been suffering but cannot use devaluation or a change in interest rates to do anything about it.
At a conference in Berlin a couple of years ago, one of the German civil servants responsible for his country’s negotiations for entry into the Euro explained why they did it. Germany was the second largest exporter in the world and had one of the best technology-driven manufacturing sectors, he said. Once the other Euro recruits had locked their exchange rates in with theirs, how could they compete with the likes of Volkswagen, Bosch and Krupp ever again?
Of course, he was right.
So where does Europe go now? J.K. Galbraith once said that the only function of economic forecasting is to make astrology look respectable. But even economists seem more than usually uncertain about the future.
Europhiles argue that Europe must integrate more, to become one state rather than separate states. That way, political decisions could be taken centrally, and money and resources distributed from the centre ignoring market forces.
An alternative line is that some of the peripheral countries leave the Euro. Painful though it would be to begin with, it would come to be seen as a blessed release – rather as happened when we in Britain were forced off the Gold Standard in 1930.
Will the Greeks keep marching in the streets and force the other Euro members into concessions? I think they will. Their government is elected. If they can see no way out of the current mess why would they continue to support it? If you were asked to collapse your standard of living and accept lower wages just so you could compete with the power-houses of France and Germany (or even Britain), would you vote for it? I can’t see that happening.
How will we be affected in the UK? Greece and Ireland are not the largest of economies, but if Italy, or Spain with its massive youth unemployment, also needs to be bailed out it will mean the sums involved become exponential. Too many international banks have too much to lose if matters really get out of hand.
The likelihood is that a predictable and predicted misjudgement, which allowed unviable members to join the Euro in the first place, will continue to have damaging effects upon the UK economy and leave uncertainty to influence the markets for some time to come.
Anthony de Lacey