In 1999 I was actively involved in the Business for Sterling and NO campaigns, working and campaigning against Britain’s adoption of the Euro. Like many businessmen and women and who understood economics, I could see that the Euro was a political project that was destined to fail as so many divergent economies fail to converge.
Indeed we could see that the “one size fits all” interest rate for the Eurozone, which could also be described as a “one size fits no one” interest rate, would actually drive the economies of the Eurozone countries apart rather than converging them. Unless that is, huge sums of money were transferred from countries doing well in the Eurozone to those performing poorly. The latter condition was essential for the Euro project to work in the medium term but would have been politically unacceptable (and probably still is) to the majority of citizens and therefore taxpayers in the countries required to act so altruistically to their neighbours, but the project went ahead anyway.
The Euro project was always doomed to failure, but the global economic crisis has accelerated this and brought into sharp focus the fundamental flaws in the Euro currency model. Instead of the drip feeding of large sums of cash to the underperforming economies of the Eurozone, they now need it in a lump sum, which is being called a bailout.
The phrase “bailout” brings thoughts of a rescue at sea, saving a sinking ship and its passengers and seeing its prow rise and it sail off happily once more. The problem with the Eurozone bailouts are that they might stop the ship sinking for a while, but they don’t fix the holes in the hulls of the economies receiving our cash or address the fundamental flaws in the Eurozone currency model.
Without the measures set out above, the whole cycle will repeat itself over time or at the next economic shock. As it stands, the stronger economies of Europe and not just the Eurozone have been forced to bail out Greece, Ireland and potentially now Portugal.
I take little pleasure in watching this political experiment slowly disintegrate as financial reality takes hold. What is not in doubt is that Britain called it right. Had we been in the Euro with the wrong interest rate over the past ten years, who knows what further economic damage could have been done to our economy? So with bailouts coming along like London buses, surely it is the provocateurs of the Euro who should bare the greatest brunt of its failure.
This is why I cannot comprehend why this country is signed up to the European Financial Stabilisation Mechanism. This was of course agreed to and signed by the Chancellor at the time, Alistair Darling, in the last dying days of the Labour Government and is another example of them unfairly binding their successors.
This economic death warrant is akin to adding an unlimited liability to your mortgage by signing up as a guarantor to your next door neighbour’s mortgage after they have been refused credit by your bank.
And in the case of Portugal, which has had a socialist party government for much of the last two decades, we are signing up as a guarantor to someone who has a history of poor economic and financial management; in effect, we will be betting that Nick Leeson will get it right this time.
There are very real dangers to the agreement George Osborne has been left by his predecessor. Since the Conservative-led Coalition took office, the UK has put its house in order in a way that is being replicated across the world. The sovereign debt markets have been assured that we can sustainably continue to pay down our debt.
That is our debt, however; it is not the debt of Greece, Ireland, Portugal, Spain or whichever domino is next to fall amongst those economies that remain shackled to the millstone that is the Euro. Once we start taking on their liabilities, the good work George Osborne has done to reassure the markets risks going up in smoke.
Let us be under no illusion, the bailouts are just a stop-gap and in performing them we are borrowing money to lend it to the governments of countries which the people we are borrowing from would not be willing to lend – and certainly not on the terms and rates we will offer. I would maintain that this is not a proposition that any competent banking institution would or should consider.
And what evidence is there that these Eurozone countries will put their house in order or that they can within the strictures of the Eurozone. They are certainly not getting a lead from the European Commission with its astonishing request for a 4.9% increase in its budget together with the suggestion of a tax on financial transactions and rumours that they want to increase our rate of VAT and take the money directly as a Eurotax.
How do they explain this? The Budget Commissioner's reasoning is that projects must be honoured. Well, from my experience in business (and I am sure most other people's), I have always made sure that the finance has been agreed before committing to a project. This sort of arrogance from the top makes me fearful that the many struggling Eurozone countries will be able to deal with their budget deficits. The European Commission realise that they need huge sums of money to fill the gaping cracks in the Euro project and who better to get it from than countries in Europe not hamstrung by Euro membership?
The real answer to Greece, Ireland and Portugal’s problems is that they should have withdrawn from the Euro and refloated their own currencies. Without these countries – and probably several others – taking this step, the cycle will just repeat itself, unless that is the European Commission can prop them up with even more cash in the meantime. I wonder where they are thinking of getting that from?
The total contribution from the UK to a Portuguese bailout is widely expected to be £4.2 billion – which equates to 10% of all projected corporation tax receipts for the UK this financial year and more than 10% of the current defence budget.
We helped to bail out Ireland because of considerable national self-interest, given our proximity and huge economic exposure. However, the bailout of other Eurozone economies could be described, using a good phrase which was popular with a generation of well-grounded bank managers now unfortunately long retired, as a case of “good money after bad”.
So this request should be brought before Parliament for urgent debate.
Interestingly, and as an aside, I now find myself fronting another vital NO campaign in the Midlands, opposing the adoption of the Alternative Vote as a method of election of our Members of Parliament. Almost to a man and woman those supporting the Yes vote most vocally are also those who were until recently calling on us to join the Euro!!!