We all know what the problem is: Europe has a single currency but no central treasury – no overall financial supremo who can collect revenues and disburse them across the 17 eurozone countries on the basis of need and fiscal responsibility. As they head inexorably toward default, the Greek people are quite rightly furious at being blamed for the financial crisis. Ok – their public sector was bloated and pensions were extravagant – but they aren’t alone in that. And yes, the Greeks aren’t particularly fond of paying taxes. But this was hardly a secret – and the European banks who lent £400bn to the former Greek government were fully aware that Greece was a fiscal basket case. So why did they give them the money? What about due diligence? Why didn’t someone notice that the government was cooking the books? The lender has a responsibility too.
But it’s not just the irresponsible behaviour of French, German and British banks. When the single currency was introduced, without any safeguards, it played havoc with the less advanced economies like Greece. How could they compete with the Germans, who suddenly found that they were able to sell their cars and engineering plant at an artificially low price. Yes, an artificially low ‘rate of exchange’. Just as the Greek euro was ‘overvalued’ , so the German euro was ‘undervalued’ – it got a massive trading advantage. This should have been recognised by the authorities and appropriate action taken. That’s what happens in Britain with the Barnett Formula for Scottish spending, which transfers some wealth north to compensate for the fact that all economic activity tends to be attracted to the south east of England.
Ok, let’s not bring up Barnett with all its baggage. The point is that there is a mutual interest between Germany and Greece in getting some equitable solution to the absence of fiscal union. . Punitive austerity clearly is disastrous – for Germany as well as Greece. German economic growth has come to an abrupt halt as Europe prepares for “D” day – default day.. To get all the countries of the euro going again there is going to have to be a central political and economic authority. And it has to happen now. And there really is no alternative.
I have a confession to make. I am one of the “guilty men” who supported the euro and now stand condemned in the eyes of history, according to the overwrought Telegraph columnist Peter Oborne, who has been gracing the television studios all week. He has penned a ‘j’accuse’ pamphlet, “Guilty Men”, exposing the “leftist clique” that supported European economic integration,. We should be strung up – only hanging’s too good for us.
Mind you, it’s an odd left wing clique that included the Financial Times, Tony Blair, the US State Department, Tory politicians like Kenneth Clarke and Lord Patten, and business leaders like the former boss of BP, Lord Browne, and the chairman of BT, Sir Mike Rake. Actually, left wingers have always tended to be highly suspicious of the EU and the euro because they regarded it as “a banker’s Europe” with no democratic accountability and dominated by a conservative European Central Bank. One of the main aims of the single currency was to lower labour costs by making it easier for workers from poorer regions to work in wealthier ones – so trades unions didn’t much like the euro either. The idea that it was a left wing plot is utterly ridiculous. Almost as ridiculous as blaming the current economic crisis on the euro, instead of on the really guilty men: the bankers, whose reckless greed destroyed the financial system.
The sovereign debt crisis in Europe arose because European governments, including ours, unwisely sought to bail out the banks with trillions of taxpayers money. They thought this would bring stability, but it did not. By taking on the huge losses of the banks, the governments of Europe only risked making themselves bankrupt. This wasn’t the fault of the euro, any more than the British banking crisis was the fault of the pound sterling. The purpose of the single currency was merely to remove barriers to trade and investment. The purpose of the single currency was to remove barriers to trade and investment, to complete the single market. Transaction costs alone – that’s changing money every time you crossed a border – were equivalent to 1% of GDP before the single currency was introduced ten years ago. Mistakes were made, certainly: failing to stick to the EU borrowing rules among them. But this was a great civilising project, laying to rest the grim history of economic nationalism
And even now, reports of the euro’s demise are premature. Listening to europhobes like Mr Oborne you’d think that countries who’ve been flirting with sovereign bankruptcy, like Ireland, would be desperate to leave the eurozone and restore their old currencies. Not so. Go to Dublin – as I have – and you’ll find that most Irish politicians and civil servants have no desire to restore the punt, despite three years of heartbreaking austerity. Iceland, the worst victim of the banking crash, is lining up to join the euro. So are most of the countries of central europe. What do they know that we don’t? Well, Iceland discovered the hard way that having a unique currency in the treacherous global financial environment is like being a chicken without a hen-coop: you may be free, but you’re liable to get eaten for breakfast.
But if Oborne is right, and the euro is finished, what might Europe look like in ten years time? A happy collection of sovereign states living in peace and security under thier own precious currencies? Hardly More likely a collection of embittered, impoverished and fractious nations engaged in destructive protectionism and other forms of economic warfare. Take Greece. If it abandons the euro and restores the drachma, it will immediately default on all its debts, causing a banking collapse. ATMs will have to close indefinitely. Greek families will discover that their savings and pensions are suddenly worth a fraction of their old value – as happened in Argentina when it defaulted in 2001.
Greek sovereign debt, still denominated in euros, will continue to increase as the “new drachma” devalues. Taxes will continue to rise, as will interest rates, because no one will want to risk lending to the Greek government except on usurious terms. Yes, Greek exports will be cheaper. But Greece doesn’t actually do a lot of exporting, and any trading advantage from a depreciated drachma will be small consolation for the loss of around half of the nation’s wealth. Greece will be looking to tourism to restore its fortunes, but it may find that – with the rest of Europe in deep recession – no one has money to spend on holidays.
A Greek default will lead to a wave of shocks across the Mediterranean states and the former Eastern bloc countries. There will also be banking crashes in France, Germany and Britain because our banks, who lent irresponsible amounts to Greece, Spain etc, will be insolvent. If the euro breaks apart, it will be devil take the hindmost, as the ex-eurozone countries try to export their economic troubles by devaluing their newly restored currencies. This is what Britain sought to do after 2008 by allowing the pound to fall by 25% in the hope of gaining a competitive advantage. It hasn’t worked, here, and it certainly won’t work when every country in Europe is trying to devalue simultaneously. Trade will grind to a halt as countries erect tariff barriers to protect jobs in vulnerable industries. The social tensions unleashed across the Mediterranean and central Europe will lead to internal conflict as immigrants are scape-goated, and external conflict as countries blame each other for their misfortunes. Me? I’d stick with the euro for all its faults.
I don’t apologise for a second for supporting the European Union and the single currency it created. Not only has it fuelled unprecedented prosperity in Europe, it has been a major force for peace and human rights in the world. Look at the progress that has been made in countries like Spain – a fascist dictatorship as recently as the 1970s. Or all those former communist dictatorships in the east who have been lining up to join Europe. Look at Ireland today, compared with the backward, essentially agrarian economy of thirty years ago.
The architects of the European Union wanted to create a community of nations, united in prosperity, who subscribed to the values of liberal capitalism tempered by strong welfare policies. It was never a left wing project. And it isn’t going to go away. Restore all the old currencies and all that will happen is that Europe – and the world – will be plunged into an economic dark age. It has fallen to the euro to save the global financial syste