Back in the early part of the past decade, the Guardian held an internal debate about whether Britain should join the euro, then a live issue. Various senior left and centre-left British politicians and a number of other experts came along to brief us. The debates were polite and no formal votes were taken. Suffice to say that there was a strong consensus in favour of the United Kingdom joining the monetary union, with only a handful of people against.
Those in favour had different reasons for supporting the idea. Some said it was Britain’s ineluctable destiny to be part of the single currency and that it would be swimming against the tide of history to remain on the shore as the euro ship set sail. Others said the only way Britain could survive in a global age was as part of a bigger economic unit.
Europe’s social chapter also encouraged the belief that Britain could be part of a “workers’ Europe”, which would be in stark contrast to the deregulated, liberalised labour market that Margaret Thatcher had created on this side of the channel. For quite a few people the argument was not about whether Britain would be more economically successful inside the single currency — though they said this would be the case — but about brand identity. The people who supported the euro were trendy and progressive; those who opposed it were Little Englanders.
Support for the euro is no longer trendy, but in two important respects those who campaigned for Britain to join the single currency were right. They warned that life outside the single currency would be no bed of roses, and it is entirely legitimate for them to point out that, even with the luxury of an independent monetary policy, Britain has just been through its worst post-war recession and has yet to recover from it.
The second relevant point made by the pro-euro camp a decade ago was that, in or out, Britain would be affected by what happened inside the monetary union bloc. Prime Minister David Cameron and Chancellor of the Exchequer George Osborne are trying to pull a fast one by blaming the eurozone for the looming double-dip recession in Britain, but the economy has been flatlining for the past year, in part because of their domestic policy blunders. An unhealthily large chunk of Britain’s exports go to the eurozone, which will clearly hinder the necessary rebalancing of the economy towards external demand.
All that said, if the Guardian repeated its policy forum today, there would probably be fewer members of staff prepared to claim that a failure to join the monetary union would be disastrous for jobs, and that choosing to be on the outside was a failure of statesmanship as serious as the refusal to be part of the original Common Market in the 1950s.
Those who argued against British membership of the euro never pretended that staying out would make for an easy life. Instead, they argued that a one-size-fits-all monetary policy would lead to instability and not stability; there would be growing divergence rather than convergence among the members; economic failure would give rise to widespread austerity; what was being created was not a workers’ Europe but a bankers’ Europe; and what was being proposed would turn out to be both profoundly undemocratic and unprogressive. They said that a common monetary policy would be too loose for an economy prone to asset price bubbles and would create the conditions for a colossal boom-bust. All these predications have been borne out.
What happened was this: countries on the periphery of the eurozone tended to have higher costs and be less productive than those at the core. But a common low-interest rate allowed them to disguise their weaknesses with asset price booms. The absence of any controls on capital — removed as part of the process of setting up the monetary union — meant the trade surpluses generated by the stronger economies were recycled into Mediterranean property speculation. The inevitable bust led to enormous financial difficulties, not just for the banks that had lent the money but also for the governments that stood behind them.
The lack of real labour-market mobility and the inadequacy of Europe’s mechanism for shifting resources from rich to poor parts of the eurozone have ensured that the cost of economic failure has been high. Youth unemployment is approaching 50% in Spain and above 40% in Greece. Bail-outs have been put together on an ad hoc basis for those countries in which the financial pressures have become intolerable, yet the conditions placed on this support have made the underlying problem worse, not better.
The fixed exchange rate means struggling countries cannot boost their exports by devaluation, so instead they are told to make their economies more competitive by squeezing domestic costs through wage cuts and less generous benefit payments. Governments are being told they have to sell state assets to balance the books. Those that refuse to do what Europe’s paymasters tell them are unceremoniously removed to be replaced by more reliable figures. A former vice-president of the European Central Bank is the new prime minister of Greece; a former European Union commissioner is running Italy.
The bankruptcy of this strategy was highlighted by the new economic forecasts released by the European Commission in Brussels last week. The eurozone will sink back into recession as the banks stop lending, exports dry up, confidence shrivels, unemployment rises and public spending cuts bite.
So much political capital has been invested in the euro project that it is perfectly understandable that policymakers have been desperately trying to buy time until they can piece together a fiscal union to buttress the monetary union. There are a number of problems with this idea: it would take time Europe does not have to organise, it would involve the weaker countries being dictated to by the strong in an even more direct way than they are at present, it would involve not just years but decades of austerity, and it would mean ignoring the seemingly obvious conclusion that monetary union is rotten economics.
The alternative to integration is disintegration and, despite the immense turmoil and pain this would create in the short term, it is actually a better long-term solution.
Interestingly, Berlin and Paris now appear to be talking privately about the creation of a two-speed Europe, with a hard core based around Germany and an outer core of countries that will only be allowed back into the monetary union when they are fit to do so.
Resorting to national currencies would be hard to do. Countries would have to nationalise their banks and reimpose capital controls to prevent currency flight, and would need to be acutely aware that the inflationary potential of a sharply devalued currency could wipe out any gains in competitiveness.
But it would restore to governments a degree of control over their own destiny and provide an alternative to permanent austerity. It certainly looks a lot more attractive than the current approach that, by mingling the conservative economics of Herbert Hoover with the strategic inflexibility of Field Marshal Douglas Haig, threatens to create the mass unemployment, immiseration and deep social unrest that create the perfect breeding conditions for xenophobia and extremism. —