/ 12 October 2012

Time to ditch the euro

Spanish anti-austerity protesters hold a banner with the words 'inspiring confidence’ and photos of German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy.
Spanish anti-austerity protesters hold a banner with the words 'inspiring confidence’ and photos of German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy.

When he was leader of the British Conservative Party, William Hague once likened membership of the euro to being trapped in a burning building with no fire exit. It was an apt description, as young people in Greece would testify: in an economy that has already contracted by more than Germany's did during the Great Depression, the jobless rate for Greeks under 25 is 55%.

Little wonder then that Antonis Samaras, prime minister of Greece, is warning his country has been pushed to the limit and that there is, as had been with Weimar Germany, the risk of democracy collapsing.

Little wonder, either, that Spain, only just behind Greece in the youth unemployment misery stakes, is wary of seeking the help offered by the European Central Bank. Unlimited buying of Spanish bonds by the bank will come at a heavy price: more austerity for people already buckling under the strain.

A study of hundreds of recessions dating from the 19th century shows that most are short, sharp affairs. They are like heavy colds – nasty but over quickly. Every now and then, however, the cold turns into something much more serious and the longer it lasts the worse it gets.

It becomes more like a pandemic, affecting the immune systems of economies and spreading from one country to another. This is the situation in the eurozone today.

Activity is collapsing in Italy, weakening fast in France and has started to falter in Germany. Unemployment in the eurozone is at record levels as the recession starts to feed on itself. Collapsing demand leads to company failures, adding to the bad-debt problems of already weak banks. They, in turn, call in loans and make credit harder to find. Government finances suffer, increasing pressure on finance ministries to find additional savings. Another chunk is taken out of demand, making it more difficult to cut budget deficits and the national debt.

Slower growth

Europe's malaise is affecting the entire global economy. It is hampering an already tentative United States economy and may result in Mitt Romney becoming president. It is leading to slower growth in China and heightened trade tensions.

The eurozone has experienced weaker growth in the past decade than Japan did in its lost decade of the 1990s. The gap between rich and poor countries has widened. Before long, one in eight working-age people will be on the dole. Flows of inward investment to what is increasingly seen as an economic backwater are starting to dry up. The failure of monetary union has been complete and abject.

In business this would not matter that much. Enterprises fail all the time. The commercial world – with the egregious exception of the "too big to fail" banks – is run on empirical principles: companies that work tend to survive, whereas those that do not fall by the wayside.

The single currency does not operate on empirical principles. If it did, the plug would already have been pulled on it. It is a top-down project with a lineage stretching back to the Enlightenment, in which technocrats come up with what they see as a blueprint for happiness: clear, rational and beautiful. When the blueprint does not deliver the expected results, it is not the fault of the plan.

The International Monetary Fund's World Economic Outlook survey tells the cautionary tale of British economic policy after World War I, which was similar in many respects to the way the eurozone manages affairs today. As the IMF study notes: "The combination of tight monetary and tight fiscal policy, aimed at significantly reducing the price level and returning to the prewar parity, had disastrous outcomes."

In some respects, the policy regime in the eurozone today is far less draconian than in 1920s Britain. Short-term interest rates have been cut, the European Central Bank has flooded the financial system with cash and it will buy sovereign bonds, albeit with strings attached.

The gold standard collapsed in the 1930s amid great economic pressure and Britain was the first country to leave. For those who view the euro with almost religious reverence, the idea that monetary union could go the same way is inconceivable.

Let us hope they are wrong. The best thing for Europe would be if the euro is smashed to smithereens, allowing countries to devalue and impose capital controls. They would then have the ability to boost their economies and pay down debts more slowly. The alternative is to sit and watch the flames lick higher. – © Guardian News & Media 2012