Best to leave the euro to its own (de)vices
Joining the single currency would make our situation worse, says Ambrose Evans-Pritchard.
By Ambrose Evans-Pritchard
Last Updated: 10:19PM GMT 01 Dec 2008
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The euro is on a roll. Icelanders are clamouring to join, as soon as they can get into the EU. The Danes seem ready to abandon their long rebellion and sign meekly on the line. A Danish referendum is pencilled in for March.
Eastern Europe's states are trying to engineer entry as fast they can to escape the hell of semi-fixed currencies. It was not such a good idea after all to take out euro mortgages in Budapest, Warsaw and Sofia – or Swiss franc mortgages, heaven forbid.
Everybody wants a safe port in this Force 10 storm. No matter if it is full of undetonated mines. No matter, too, that Denmark's travails stem from membership of the ERM, a half-way house that has forced them to raise rates twice – into the Copenhagen property crash.
José Manuel Barroso, the Commission's chief, was a little too honest telling French TV that the people who count in Britain hanker for monetary union. What a slip of language. Is this a reversion to his Maoist youth in Portugal, or has he been drinking the EU waters for too long?
The people who count in British democracy are the voters. But let us not quibble. Mr Barroso is right to sense a shift in the undercurrents of British politics. This is a tricky moment for those who fear that total loss of control over our monetary policy would lead to even more destructive cycles of booms and busts than those we have already.
"I don't want to break the confidentiality of certain conversations," said Mr Barroso. "But British political leaders have told me that: if we'd had the euro, we'd be better off."
How, exactly, would we have been better off? Our current mess is caused by over-reliance on bankers (7·8 per cent of GDP), six years of incontinent spending by Gordon Brown and a housing/credit bubble that has pushed personal debt to 103 per cent of GDP.
Joining the euro would not have prevented any of this. It would have made matters worse. The European Central Bank held rates at 2 per cent for part of this decade to help Germany out of the doldrums. Imagine what such rates – or anything near – would have done to Britain's property boom. You might as well have poured petrol on the fire, as Ireland and Spain can attest.
Events since the crunch began last year – and reached volcanic fury in September – entirely vindicate our refusal to give up control over our economy. Sterling has come down from silly levels, falling 30 per cent against the dollar and 21 per cent against the euro. Perfect. The economy has suffered an asymmetric shock: the currency has acted as the shock absorber. Our sympathies to well-heeled Britons in Aquitaine or Umbria living off sterling rents, but policy is not set for their needs.
The Bank of England botched the crisis at first, but it is now responding to emergency with stunning boldness. The 1·5 point cut in November – and what follows this week and beyond as rates fall to the lowest level since the Bank's creation in 1694 – may make the difference between recession and depression. Others that gave up their currency may not be so lucky.
Would you really want Frankfurt to decide your fate? The "people who count" in global finance – investors, economists and hedge funds – are increasingly in despair about the conduct of the ECB. It has misread events at every turn over the past year. It panicked in July when it raised rates to offset an oil and food price spike. By then, Germany and Italy were already in deep recession, and Spain faced a housing crash.
The "Shadow ECB", a panel of private economists from across Europe, last week called for immediate and drastic rate cuts, demanding to know what the ECB's strategy now is – if it has any at all. It would be going too far to describe the ECB's policy utterings as primitive gibberish – as two Nobel Laureates put it – but the bank is bent on a course of action that is at best very different from the reflation strategies of the Anglo-sphere, China and Switzerland, and risks repeating the errors of 1931 to 1933.
These are early days in this long, winding crisis. We cannot yet judge whether the euro is a force for stability, or whether it is workable at all – given the lack of an EU treasury and debt union to back it up. Monetary unions can create an illusion of calm for a while. They shield sinners from market discipline, but in doing so they let problems fester.
Locking the currencies together was the easy part of EMU. Once the euro was off the ground, it was unlikely to face an existential test for at least a full credit cycle. But then it gets harder. The Latin bloc has allowed costs to creep up, while Germany has squeezed wages with relentless discipline. The gap has grown wider every year.
This is starting to matter. Investors are no longer willing to treat Greek, Italian, Irish or Spanish debt as interchangeable with German debt.
Nothing is pre-ordained in the euro drama. The chief reason for launching the single currency – before economies had properly converged – was to force the pace of political union. It may have to deliver on this agenda. Either the EU creates the machinery to needed cushion the bust on Europe's fringes, or EMU will drift into crisis. The ball is in the court of very reluctant paymasters in Germany.
Whichever of these two paths its chooses, there is no earthly reason for us to follow.
Re: Is it time for the UK to join the euro?
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