If I were of a conspiratorial nature I might think that the Government is wasting everybody’s time with pointless and unpopular House of Lords’ reform proposals and other minor issues as a smokescreen to support normality when we are facing the economic maelstrom of a potentially messy breakup of the Euro.
Self-evidently, there is a struggle to the death between the strong political will in Europe to retain the Euro and the fundamental economic and market forces requiring its breakup. I was somewhat surprised to learn that the Treasury view is that the political forces will win out, where the main lessons of economic history are that powerful economic and market forces eventually drive the course of events. Maybe this is a necessary official Treasury position to avoid any subsequent charge that Britain and the City of London were responsible for undermining the Euro?
There is little new to be said on the Euro crisis. The simple point is that the economies of southern Europe, and particularly Greece, have become materially uncompetitive against Germany and its satellite economies – to the extent of some 35%; the German ‘medicine’ of forcing internal devaluation cannot work, as the extent of devaluation required is too great, grinding the economies of these countries into the dirt and causing major political upheaval. Germany is unwilling to finance the transfer payments which would be required to retain a common EU currency as these would amount to some 35% of German GDP, p.a. The position is analogous to the Gold Standard crisis in the early 1930s – virtually a religion until economic and financial pressures forced it to be abandoned; and then everyone wondered why it had commanded such support.
The issue is as to whether a breakup of the Euro, starting with Greece, will be chaotic or can be managed in an orderly fashion. As I have advocated for two years, the easiest solution would be to split Europe into two currency zones – a soft currency for southern Europe plus Ireland, and a hard currency for northern Europe – where the only problem economy is France, which, logically, ought to be the leader of the soft currency block. It is to be hoped that the Central Banks of Europe are working flat out, in confidence, on an orderly breakup plan, although this does not look to be the position in the case of Greece, the first candidate.
A chaotic breakup of the Euro would be extremely painful in the short term, precipitating major banking crises and bank collapses with a large loss of GDP, although once exiting economies have established their own currencies and Central Banks, and returned to economic competitiveness following the required devaluations, their economies could be restored to growth within two years.
M. Hollande is emerging as the enigma. If he is serious about an economic growth agenda he must realise that this would not be possible without a breakup of the Euro, restoring the required competitiveness via devaluation, to the “dead in the water” uncompetitive southern Europe economies.
If Greece is obliged to leave the Euro, which looks more than likely, it is conceivable that Germany may do a volte face and permit the ECB to buy the government bonds of southern European governments as a necessary part of the “firewall” defence; but this would not, of itself, address the economic problems facing Spain, Portugal and Italy and would, therefore, be likely to be yet another stop gap before economic reality is faced.
The Chancellor of the Exchequer is correct to say that the uncertainty of the Euro crisis is damaging all European economies including the UK, and this is arguably a diplomatic line to take: but I hope the Treasury understands that the Eurozone has become economically and politically untenable and it is only a matter of when and how the ill-fated Euro eventually breaks up.