Saturday, 6 December 2008

The idiocy of the euro

Peter Obourne tells it like it is over the euro. No, of course Britain shouldn't join it, it's a laughable idea.

The truth is that the euro has failed as a currency. Its supporters are talking nonsense when they say it will soon emerge as a major world currency capable of rivalling the dollar. In fact, the single currency is likely to fall apart during the recession.

Back in 1999, the British public was told by Tony Blair and others that we would suffer economically if we stayed out of the euro. As we now know, these warnings were mendacious. Instead, Britain's growth rate has increased by 26 per cent in real terms since 1999. Meanwhile, the eurozone countries have seen a figure of just 21 per cent.

There is a structural reason for this. While the euro has certainly created some benefits for member countries, such as the abolition of currency transactions, these have been outweighed by one fundamental flaw: nations in the eurozone are forced to have the same interest rate regardless of their individual economic circumstances.

Over the past decade, these rates have tended to be too low. This is because they were set in order to help the German economy recover from the recession into which it fell as a result of the massive costs of incorporating East Germany after the fall of the Berlin Wall.

While these low rates benefited Germany, they fuelled a disastrous inflationary boom in Spain, Ireland and a number of other countries.

Conversely, the German economy then started to improve - leading to the European Central Bank raising interest rates.

Once again, this policy suited Germany at a time when it needed to hold back inflation. But it has proved disastrous to economies such as those in Ireland, France, Italy and Greece because it suffocated their growth and created a period of prolonged recession from which some will struggle to emerge.

Britain alone, among major European economies, remains outside the euro. This has proved a fantastic piece of good fortune.

Indeed, our economic fate scarcely bears thinking about had we joined the single currency, as all those so- called 'experts' wanted, ten years ago.

With the same, low interest rates as the rest of Europe in the early years, Gordon Brown's credit boom would have been even more reckless. Subsequently, as rates were raised steeply, Britain would have plunged into an even deeper recession because our industry would have found borrowing costs too high.

As it is, sterling has benefited greatly by being outside the eurozone. Having fallen in value by 30 per cent against the single currency during the past 12 months, exporters have seen a growth in business while the cost of imports have soared.

Without the pound being able to find its own natural level outside the euro, unemployment would have been considerably higher.

Those are very much the same arguments that I make myself. Indeed, I would go further: there has to be flexibility in an economy. The world isn't stable, technology isn't stable, markets and relative prices aren't stable. So the economy is a continual balancing act. And to do that balancing we need to have flexibility in the economy. There's a number of different ways we can get that too.

The first and most obvious is that with a floating currency we're able to change the external value of our exports and the internal value of our imports. This is exactly what he decline of sterling in the recent months has done for us. Our exports are now cheaper for the rest of the world to buy, imports are more expensive. This will increase the demand doubly for goods and services produced in Britain and thus boost the economy and employment.

A second source of flexibility is in interest rates. We've the power and ability to set them to suit the needs of our economy.

Neither of those sources of flexibility exist inside the euro. However, there are two more sources of possible flexibility. The first is the number of unemployed. If we can't change interest rates or the exchange rate then we can still change the number in employment. But does anyone really want recessions to be marked by even higher unemployment than we are already going to get?

The second is in prices. The general price level could fall (or real wages as has been happening in Germany) but that's something we call deflation. And that's something we really really don't want as it causes the entire economy to collapse in on itself as happened in the 1930s.

There's a truism from economics, that there are no solutions, only tradeoffs.

Stay out of the euro and control our own interest rates and exchange rate to provide the flexibility the economy requires. Or join and lose those two tools and leave ourselves only with unemployment or deflation as the tools available.

Given that the social effects, the results in terms of human suffering, are much greater from those latter two than the first pair this leads us to the inevitable answer.

Stay out of the euro.

No comments: