I was at Sheffield University yesterday as a guest of Speri, the Sheffield Political Economy Research Institute, at an event hosted with the Institute of Economic Affairs. The panel on which I was sitting was chaired by Ad Van Riet, of the European Central Bank, and the other members were Pedro Schwartz of the Universidad CEU San Pablo in Spain, Stephen Davies, of the IEA, and Raoul Ruperal of the Open Europe research and campaign group.
We were asked to speak for ten minutes each on whether the euro had been a mistake, did it have a future and could the eurozone return to growth? There was then a stimulating question and answer session, followed by an equally stimulating continuation of the discussion by one or two of us panel members in what is probably the best railway-station bar in the country, The Sheffield Tap, as we awaited our London train.
Here are my remarks.
Good afternoon and thank you for inviting me. It is good to be in Yorkshire this afternoon, the land of my fathers. Well, father, at any rate.
Was the euro a mistake and does it have a future? This is to be discussed within the context of trying to answer the question ‘can Europe grow again?’ Even with my rudimentary arithmetic I make that three questions, all of which have to be answered in relation to one another. That is certainly challenging, to use an expression I tend to avoid.
These three questions, these three moving parts, could be seen to connect in different ways. Thus the euro may have been a mistake but it may have a future and Europe can grow again. Or the euro may have been a splendid idea with no future while Europe cannot grow again. Or can grow again.
Perm any two from three, as the football-pool operators used to say – and may still say, for all I know.
As a simple sort of person, I’d like to answer each question within itself and then try to fit the answers together. A plan? Certainly. A workable plan? We shall see.
Was the euro a mistake? I believe it was, and furthermore that it was so in large part because it was based on another mistake, the notion that national currencies were barriers to trade and to other fruitful exchanges between different countries rather than being, which they are, the mechanism through which different countries can have friendly and profitable dealings with each other without trying to run each other’s affairs.
This in turn sprang from what may be the fundamental, flawed premise of the whole European idea, which is that national frontiers are the cause of difference and that the erasure of the borders will lead to the erasure of the difference. That frontiers may simply describe existing differences rather than create them was never considered.
Thus the euro-zone was to be a sea of tranquility in which bad things such as currency volatility and the accompanying see-sawing interest rates would not happen. Some of us warned that the expression of differences would merely move elsewhere, such as to national and municipal bond markets. We were told rates on such sovereign debt would converge permanently, the thinking seeming to be that bond markets would be guided by the currency in which the debt was denominated rather than by the creditworthiness of the issuing jurisdiction.
And indeed, for a while, this seemed to be the way things were working out. As we know now, the convergence of borrowing costs allowed weaker economies to piggy-back on the creditworthiness of the stronger ones. For as long as the world economic boom rolled on, it was possible to believe that converging borrowing costs reflected the fact that the weaker members of the European Union were catching up with the stronger ones.
We now know that the boom was disguising the fact that they were not.
It has since become modish to claim that the euro was always a flawed project because a currency needs a government complete with full fiscal powers to stand behind it.
Perhaps, although I am not sure that the monetary union equals political union argument is borne out by experience. Not in our neighbourhood anyway, given Britain and Ireland shared a fairly successful currency union from 1922 to 1978 and I am sure both countries would have been surprised to have learned they were politically united.
Regardless, where was this political union, this European government, to come from in 1992, the year of the Maastricht Treaty, or in 1999, the year of the euro’s launch – or indeed where is it to come from now?
The idea that fiscal and political union was a vital bit of kit without which the whole thing wouldn’t work, rather like a starter-motor in a car, absent-mindedly left off the original design and now ready to be slotted into the mechanism, is utterly fanciful. You have only to try to visualise the debut press conference of this ‘European government’ or the ‘eurozone chancellor of the exchequer’, to give up on the whole idea.
Which brings us to our second question – can, will the euro survive?
Quite possibly yes. A lot of bad ideas went on for a long time. Just think of pre-1994 South Africa, or the Warsaw Pact. You may object that these were the creations of non-democratic regimes. Had the good common sense of the people been allowed to express itself, the curtain would have come down long before it did, assuming, of course, that it was raised in the first place.
Quite apart from the supposition here that the governance of the European Union or the eurozone is democratic in any meaningful sense, I do not think anyone would have too much trouble in recalling some terrible ideas that lasted for years despite the impeccably democratic nature of the responsible regimes.
Here are a few from our own country, some fairly trivial, some much more serious, solemnly defended for decades and now regarded as potty at best and sinister at worst: the pre-1988 licensing laws, the pre-1967 law on homosexual relationships, the granting of ‘Crown immunity’ to NHS hospitals with regard to food hygiene and health and safety legislation, theatre censorship, the trade-union closed shop, the monopoly on the job of Government bill broker enjoyed by one firm, Mullens, and the ban on personal ownership of functioning telephones and answering machines (they had to be rented from the Post Office).
So there is plenty of evidence for the durability of bad ideas. All that is needed is an interest powerful enough to defend the bad idea in question, an entrenched interest that genuinely believes, against all the evidence, that the bad idea is fundamentally sound and that its difficulties arise from one or more of three things: temporary crises that will blow over, other, unrelated problems that are being unfairly blamed on the bad idea and, finally, the machinations of ill-intentioned people.
Both the entrenched interest – the EU’s own powerful secretariat allied with the European Central Bank and eurozone politicians in denial about the failure of the single currency – and the three varieties of delusion are strongly on display in the eurozone today. That is a near-impregnable alliance to break, especially when it is hard to identify any outside interest that actually wishes to break it.
Britain certainly doesn’t. George Osborne is forever speaking of the need to save the eurozone. If the supposedly euro-hating UK wants the single currency rescued, then the prospects for it to totter on indefinitely are fairly good, I should have thought.
Indeed, the line of argument being pursued by Mr Osborne, David Cameron and others reinforces what may be thought of as a fourth delusion entertained by the eurozone’s elites, a variant on something I touched on earlier, namely that the other shoe has to drop, that monetary union has to be accompanied by fiscal union, that the absence of the other half of this happy couple explains entirely the current eurozone crisis and that once they are united there will be no more crisis.
This takes us to the boundary of the third and final question – can the eurozone grow? Because if the proponents of the ‘other shoe’ argument are correct, and monetary-fiscal union, political union for short, will end the crisis, then by definition it will restart the eurozone’s growth motor, the lack of growth being a key component of the crisis.
Are they right?
I doubt we shall ever find out. Monetary and fiscal union may be two sides of the same coin, but the former, despite the enormous difficulties of its establishment and even greater difficulties of making it work, is very much easier to arrange than the latter.
Sharing a currency is one thing, in terms of potential flashpoints among the nations involved. Sharing fiscal policy is something again. Fiscal policy – taxing and spending – go to the heart of what a particular society, a particular nation, is. It is hugely sensitive.
I happen to think monetary policy ought to be under democratic control, but there is no hard and fast rule here – look at post-war Germany. But fiscal policy must always be under democratic control in a free society, or the society has ceased to be free.
It is the difference between sharing a bank account and sharing not only a bank account but also a shopping list.
So if political union, by failing actually to happen, is not going to launch the single-currency bloc on the path to economic expansion, can the eurozone grow?
If by that question is meant ‘can the eurozone as a whole avoid the fate of permanent stagnation or even permanent recession?’, then yes. The euro may be exacerbating lack of competitiveness among some eurozone members, but the actual economic actors inside the eurozone – companies, banks, partnerships, state-owned enterprises – include premier-league world-beating entities. If, collectively, they cannot help the single-currency bloc to register growth from time to time, when the world economy is strong, then we are all in trouble.
But is the question rather can it grow at or near its potential? That has to be much more doubtful, and I believe the euro is only part of the reason why.
The single currency did not come out of a blue sky. It is merely the grandest and most visible expression of the EU elite’s belief that it knows better than those whom it was supposedly serving and that its own will-power could overcome the laws of economics and the wisdom of the ages.
But it is far from being the only such expression.
We are currently told that, in the wake of the eurozone crisis, a humbled Brussels will be ‘doing less and doing it better’.
Really?
Let’s look at the agenda for the most recent six-monthly presidency of the EU, the one that has just ended. It happens that Ireland held the presidency, but these agendas tend to look pretty similar.
By my count, the EU has more than 60 ‘priorities’. These include sport, taking in ‘the issue of dual careers for sportspeople’, youth, including a ‘structured dialogue process with young people’ (lucky them), equality, including trying to get more women on the boards of major companies, and space, as in Dan Dare, Captain Kirk and so forth.
If this is the EU’s slimmed-down agenda after three years of crisis, we must be thankful that the euro was not a roaring success.
But, of course, a success is, as I said earlier, what, deep down, the eurozone’s leaders believe it has been. To admit anything else would, for them, be unthinkable.
Thank you.