Thursday, March 19, 2009

Sloppy thinking in Bruges

Last night I went to a meeting of the Bruges Group at the Foreign Press Association which is housed in Gladstone's old house in Carlton House Gardens. In the very room where the Grand Old Man once conducted occasional cabinet meetings, Professor Tim Congdon and John Redwood were scheduled to speak on the place of the Euro in the current economic crisis.

Well, except they did no such thing. All Tim Congdon did was point out that different countries in the Euro zone have different interest rates from Germany and that the UK was very lucky not to be involved. As to actual thought or justification for this "luck", well none came.

John Redwood, hotfoot from the House of Commons, was next up and made a competent attack on the polices of the current government, with which it was impossible to disagree. Yet on the subject of the Euro- the supposed theme of the evening- he said virtually nothing except that, again, we were very "lucky" not to be in the system.

Naturally the two speakers were playing to their audience, but I was actually pretty shocked that there was no organised or coherent argument at all- simply an assumption that the Euro would fail and that it was "bad" in some inchoate, nebulous way.

For goodness sakes, Gilts have been trading at big spreads over German Bunds for years! British monetary costs are still far higher than the majority of the Euro zone- and no one even mentioned it. Sterling has devalued by 40% against the Euro in the past year, and this was not even mentioned either. Despite this gigantic devaluation, The UK is still likely to be in recession for longer than the Euro zone and in the past quarter we have had a 10% fall in manufacturing output.

All the Bruges Group audience clapped when Congdon advocated withdrawal from the European Union- but frankly I think they have delusions of adequacy as far as the British economy is concerned. For decades, when faced with crisis, the UK has taken the soft option and devalued its currency- and as a policy it simply diminishes investor appetite for British assets over the long term and reduces British buying power in the global economy. Continuing devaluation, in the end, only impoverishes the UK- but the Bruges Group audience would rather take the soft option than actually force the UK to address its long term structural weakness, which membership of the Eurozone would certainly force us to do.

Even Tim Congdon does not believe, despite his woolly denunciations, that the Euro will break up or collapse- though his audience clearly did. The idea, as he said, that the UK "should not be a member of a club that would have us" is arrogance of a pretty high order. The fact is that the UK can not be a member of the Eurozone at the present, and still less so as the result of the massive bank bailouts that have just been undertaken.

Relative to the Eurozone, the UK has just lost 40% of its wealth- and the largely elderly audience were still predicting disaster in the Euro. Had they not noticed that disaster has already struck the Pound!

It seems to me wise to take the beam out of your own eye before mentioning the mote in the eye of another.

If that is the intellectual quality of the Europhobic argument, then it should not prove difficult to change people's minds. Although it will be several years before the issue of membership of the Eurozone even comes up for the UK, the fact is that this is not a position of strength, but of extraordinary weakness.

8 comments:

Newmania said...

You seriously think it would have been good idea to be in the Euro ?
I dread to think I must say I am confused by the resilience of the Euro it appears to be reaching crisis

Pol-e-tics said...

The meeting certainly focused on the current crisis, but it would be untrue to say that Tim Congdon, in his alloted 20 minutes, didn't address the perils for Britain if we were in the euro now - and the perils for others that are in the euro.

You will have noted Congdon made the point that quantitative easing is the best possible solution to Britain's crisis and no doubt could be so for others too. That being his view he pointed out that QE is impossible within the eurozone because the ECB cannot pick national Treasury bonds to support.

Cicero said...

Gosh, Pol-e-tics, was that an early start or a late finish?

Well, even assuming that printing money is a good idea, and I think the jury is still out on that one, there is nothing that actually prevents the ECB from doing so, simply the technical issue of the proportion of which bonds to buy- I certainly agree that it is more complicated, but by no means impossible if it were considered to be a desirable policy, which -as I say- could well be questionable.

I think, on reflection what disappointed me most about Wednesday was that there is certainly a discussion to be had about the value and direction of the Euro and the wider EU, but the visceral hatred that most "Euro-sceptics" have for the institutions tends to make the debate a very sterile one.

Suppose, just for a second, that the Euro does not collapse, and that it ultimately is considered to be a success. It seems to me that this is at least as likely an outcome as the predictions of break-up echoing around Carlton House Gardens this week, but there is no discussion about what that means for the UK. All we are getting is "I told you so" even while the single currency has NOT broken up, and is in fact in a better state than Sterling.

I live most of my life in Tallinn these days, and am very aware of the price of the Euro (the Estonian Crown is pegged to it), but there has been a massive cost of living in the continually devaluing world of Sterling too. I think that there could be a net benefit of toughening up our economy so that we can survive without debauching our money, but the borderline irrationality of the Eurosceptics means that if you put forward that as an intellectual idea, then they label you a "traitor". I don't think that kind of fanaticism is very healthy.

Indeed I think it is against the national interest.

Helen said...

I think it might have been helpful if you had realized that the meeting was about the EU and the credit crunch, not just about the euro. It was clearly described as such in all the promotion material.

There certainly is a discussion to be had on this and many other matters but calling people you disagree with europhobes, a meaningless but insulting by intention term, is not necessarily the way to do it.

Cicero said...

Hello Helen, Well I think that the Euro is a central part of the discussion on the EU, so make no apology for the focus. As for "Europhobe", well if you find it offensive, I withdraw t, though I may say that being called a "Federast" is the least of the insults usually directed at me from the anti-EU camp.

Dave B said...

Constantin Gurdgiev, commenting on a recent interview by Jean-Claude Trichet found the arguments suggesting that Euro-zone membership brought benefits unconvincing.

"EU's growth rates since the early 1990s on have been sluggish (lagging behind the US and UK and only notching above a recessionary Japan). Euro area's unemployment remained well above the US, UK and almost all of the rest of the OECD. Eurozone's employment growth has been better than Japan's, but worse than any other OECD economy. So while the euro did enhance price transparency marginally, it did have very little real benefit in improving the quality of life for an average European."

Cicero said...

DaveB- I am not claiming the Euro as a great panacea, and I am not cheerleading for it. I am simply pointing out that despite the relentless hostility in the UK, the debate about the Euro ought to recognise that there are indeed some benefits and from the point of view of the UK I think we chould be considering the issue in a far more open minded way.

I think that even the Conservative front bench is pursuaded of the benefits of membership of the EU, and in my view we should be making the most of our membership instead of carping and whinging.

pol-e-tics said...

Cicero,
I agree I should have said difficult not impossible for ECB to engage in QE.

As for your disappointment there's no open debate on the merits of the euro: this may seem like an appropriate time for such a debate but the point is the debate has been had before in UK and conclusions reached.

I believe that debate, through the 90s, was wide ranging and included the impact of both exogenous and endogenous shocks.

Of course, managing a national currency is no protection from the disaster some governments can make of it. But our national democracy does allow for change. Which, as you know, is one of the principle reasons why eurosceptics prefer to be out of the euro and semi-distant at best from the EU.