Liam Fox is the MP for North Somerset and a former Defence Secretary.
The Prime Minister deserves credit for pointing out the inherent weakness of the Eurozone at the G20 in Australia. The poor economic performance is not, however, the problem, but a symptom of the problem. The real problem is the euro itself – intellectually flawed, economically incoherent and politically dangerous.
The euro crisis continues to be the most important issue in European politics, and this is unlikely to change any time soon. Despite all evidence to the contrary, European leaders continue to treat the problem as a fiscal issue when, in reality, it is the fiscal symptom of economic and cultural differences. The underlying truth is that the economies inside the Eurozone are no closer to convergence today than when the currency was created. There is as much chance of realizing the alchemist’s dream of turning base metals into gold as there is of turning an economy like that of Greece into one that resembles Germany’s.
Of course it is true that the euro did not create the deficits and debt that so bedevil the economies of Europe – we can see how many countries outside the system have the same difficulties – but the fact remains that certain fiscal and economic policies were permitted which widened rather than narrowed the gaps between the member states, ensuring that an unstable structure became even more unsafe.
This matters to all of us, whether we are part of the Eurozone project or not. It is my view that that the euro and the Eurozone represent the single biggest risk to global economic stability. The Prime Minister should make it the top issue of any EU leaders’ meeting.
The contradictions and high risks currently being run in the Eurozone need to be dealt with. The Euro project needs to be de-risked before it creates even greater economic problems. I recently spoke at an event in Bruges where Mario Monti was the preceding speaker. He said that the people of Europe should be grateful to their political leaders for the creation of the Euro and the fact that it was such a strong currency. But look at the reality.
As David Cameron, pointed out last week, Britain now gets more inward investment than the rest of the EU combined. This is neither an accident nor a coincidence.
In 2013, unemployment in the Eurozone states was 12.1 per cent – in fact, it was 14.4 per cent if Germany’s low unemployment rate is excluded. Unemployment in the non-Eurozone EU states was only 8.9 per cent. These positions have widened as British unemployment has fallen dramatically with the creation of 1.5 million private sector jobs in an economy which is growing at almost three per cent this year, in stark contrast to the stagnation and possible recession of the Eurozone.
If you look at the growth rates of the non-Eurozone countries with floating currencies, they have far higher average rates of growth than their Eurozone counterparts. This cannot be an accident. The fact that 58 per cent of young Spaniards are unemployed will not cause them to celebrate the strength of the euro. Rather, in the longer term, it is a recipe for political and social strife.
It seems to me that there are four potential ways in which the euro can be de-risked. The first is for the Eurozone countries to enter into complete economic, monetary and political union, so that there can be the free fiscal transfers required without the impediments of sovereign governments. Again, this is analogous to the United States after the civil war. If this is regarded as politically impossible, then one of two other possible solutions need to be implemented.
The second is the exit of those countries whose domestic economic circumstances require a lower exchange rate to allow them to take advantages of global trading opportunities so that their peoples might enjoy the fruits of the global economy. This will mainly apply to southern European Eurozone members.
The third, possibly more logical, but politically impossible alternative, would be a German exit from the Euro, allowing Germany to have a currency more in keeping with its global economic strength and allowing the other Eurozone members to see a depreciation in line with their economic needs.
The fourth is a complete abandonment of the project and the return to the pre-euro national currencies. This will not happen as it would represent a complete and absolute failure of the whole “ever closer union” act of faith.
I do not, for a moment, doubt the difficulties that any of these options would present, but the alternative is that countries inside and outside Europe who have nothing to do with the Euro will be afflicted by the continuing weakness and uncertainty of the Eurozone project. In Britain’s case, the EU is an important trading partner, though somewhat less so than it has been in the past.
It is the first option, the movement of the Eurozone 18 (or most of them) towards economic, monetary and political union, that opens up real possibilities for the UK. It is true, as some would argue, that Britain’s traditional foreign policy has been to stop the emergence of a united continental state, but the era of globalisation requires new thinking. The advantage is that this would require treaty change that the UK and others could use to advantage in developing a new, looser dynamic. It would not be so much Britain leaving the EU as the EU leaving Britain.
The issue that has brought the parlous state of the European economy into focus recently in Britain has been the demand for a huge extra payment into EU funds.
Leaving aside the dubious accounting practices used in the determination of the sum and the outrageous timetable applied for its handover, there is another issue – in many ways a more fundamental one – at stake here.
With the Eurozone economically flat at best, and facing recession or even stagflation at worst, there is a strong and growing view in the United Kingdom that Britain, having taken painful efforts to improve its economic efficiency and seen the reward in terms of higher growth, should not be asked to pay for the failures of the Eurozone by the backdoor.
For what will this mean in the future? There is no guarantee that this will be a one-off bill. It is not beyond the realm of possibility that Eurostat might question again the way in which Britain calculates its GNI.
It is also worth pointing out that the European system of Accounts, 2010 (ESA2010) is being introduced this year. This will once again revise how we calculate GNI and will include research and development and expenditure on weapons. Given the pathetic level of spending on defence by many of our European allies, with Britain being one of only four countries in NATO to meet the two per cent GDP spending requirements, the idea that British taxpayers will tolerate carrying a disproportionate burden of European defence and then being asked to pay a surcharge to the EU for doing so is preposterous beyond belief.
If those in the European bureaucracy and our fellow European political leaders are looking to create the conditions for a British exit from the EU then they are certainly going the right way about it.