By David Davis MP
Standard and Poor’s writing down of France and Austria's credit rating, the reduction of Portugal’s debt to junk status, the downgrading of half a dozen others, and the intractable problems facing the Greek government should all serve as a wake-up call to the economic disaster that still faces us. The cold calculation of the ratings agency is on this occasion more insightful than all the desperate rationalisations of Europe's political leaders. In fact, the analysis behind the downgrading goes right to the heart of the problem.
In a damning report, they say the Eurozone is straining under the weight of tightening credit conditions, higher interest rates on sovereign debt, lower spending by both governments and households, forecasts of a double dip recession and policymakers paralysed by indecision. The reason for this is simple. Europe's leadership, and that of France and Germany in particular, views the preservation of the European political project as justifying any economic price that has to be paid. That is why Eurozone finance ministers always shoot the messenger when credit rating agencies report the inconvenient facts. For them, the breakup of the euro cannot be countenanced, so they refuse to face up to the economic reality that the Euro is not a currency beset by problems; the Euro is the problem.
But if we allow the Euro to continue in its current form we risk not just ongoing European recession but worldwide depression. Last Monday the IMF warned of exactly that outcome, saying that if Europe entered a downward spiral of collapsing confidence, low growth and rising unemployment, “no country and no region would be immune from that catastrophe.” So what can be done to avert disaster
The first lesson Eurozone leaders need to learn is that austerity alone will not work. Eurozone countries need to rebalance their economies and rein in public spending, but hairshirt budgets do not hold all the answers.
Take Greece, for example. Even if by some miracle its tax rises and spending cuts mean Greece is able to meet its ambitious deficit reduction targets, it will still be saddled with hundreds of billions of pounds of debt which will take generations to pay off, and which it may never pay off at all. No wonder one leading economist has described Eurozone austerity plans as a “mutual suicide pact”.
Deficit reduction plans on this scale are difficult to implement at the best of times. For Eurozone nations with a trade deficit to add to their massive fiscal deficits, such plans are destined to fail. The result will be a decade of Eurozone austerity and, for Britain, a decade of falling exports and concomitant job losses.
The second lesson for Eurozone leaders is to put down the “Big Bazooka”. All the talk at Eurozone summits of a trillion euro bailout fund and whether this is sufficiently massive to calm the markets is misguided. The Eurozone crisis is not going to be solved by lending, spending or printing more money. It is not just a crisis of debt; it is a crisis of competitiveness.
This is Britain’s problem too. We might be outside the Eurozone, but the potential consequences for Britain of this crisis are extremely serious. Germany, France, Ireland, Italy, Spain and Belgium are amongst our main trading partners. If this crisis continues and their economies continue to weaken, so will the demand for British exports. If we continue on this course, historians will look back with astonishment at the mechanisms Eurozone leaders are using to try and solve this crisis in the same way that 21st century surgeons look back at medieval doctors arguing over which sort of leeches were the best to use. So what should be done instead?
It is time for drastic action. The intelligent route would be to disassemble the Eurozone into two separate entities. If we do this before the crisis escalates even further we could ensure an orderly break-up of the Eurozone now rather than risk another decade of stagnation followed, potentially, by collapse. Of course the Prime Minister and Chancellor of the Exchequer cannot go around offering such bold opinions willy-nilly. If they did so they would risk creating havoc on the markets (or at least upsetting President Sarkozy).
But it is an idea that EU governments have already been forced to consider as the Eurozone crisis has worsened. The French and German governments first discussed the idea of a two-tier Eurozone almost two years ago. Under this plan, the Eurozone would be split into two sections; a ‘super euro’ group of economically stable countries like Germany, Finland, the Netherlands and possibly France, and a second group made up of the five “periphery” countries with the most severe economic difficulties – Portugal, Ireland, Greece, Italy and Spain. This would allow the periphery countries to break free from the “one size fits all” Eurozone, devalue their currencies and boost economic growth. Only with this growth can Portugal, Ireland, Greece, Spain and Italy make their deficit reduction programmes both fiscally achievable and politically acceptable.
The current plans to save the Eurozone will not address the fundamental problems it faces. A two tier Euro would not only be good for the Eurozone’s periphery, it would help the UK too. The government should recognise that our best interests will be served by an orderly disassembly now, not chaotic disintegration after a decade of austerity.