Friday, July 23, 2010

Estonia enters the Euro- and the UK doesn't

This is an Estonian Euro coin.

It does not exist yet, but on January 1st 2011, when Estonia will enter the Euro zone, it will join the designs of the other 16 members that circulate across the Euro area.

Many- especially in the UK- are astonished that any country would want to join the Euro zone- so successful have right-wing Euro sceptics have been in persuading British public opinion that the single currency is a catastrophe that will either lead to an undemocratic European super state or- more likely- will break apart as the contradictions inherent in such a large currency zone finally reassert themselves.

The reality, as Estonia's entry into the zone may begin to show, is perhaps rather different from the anti-Euro polemic masquerading as objective analysis that is pretty universal in the British media. The fact is that, despite the tensions and problems within the Euro system, the benefits of currency stability have been far greater than any possible benefits from the much praised "flexibility" of Sterling: i.e. the continuing policy of attempting to devalue Sterling in order to try to maintain a competitive advantage against other trade partners.

Despite a near 30% devaluation of the Pound against the Euro, the United Kingdom has yet to see the implied benefits from that policy. Indeed in the second quarter of 2010 the nascent recovery of the UK manufacturing sector seemed already to be stalling, as export levels fell well below expectations. So, even though British goods are selling at a roughly 30% discount to where they were a couple of years ago, the fact is that the British economy has barely managed to make any progress at all.

Worse numbers seem set to come, as the Bank of England chief economist suggests that growth will continue to stagnate. Indeed a nasty cocktail of lower growth and increased unemployment as the result of necessary government spending cuts is being joined by the continued curse of the British economy since the 1970s: stubbornly high inflation. This so-called triple whammy merely underlines the fact that the UK still faces serious structural problems, which it has continued to put off addressing.

The fact is that, despite the problems caused for Greece by false accounting, the position of the UK government debt mountain is still worse than in Athens. Furthermore, the Greek government is now seriously addressing the problems that they face, and at this point they appear to be winning the political battle at home and are facing down the radical opponents of the government's austerity programme. The UK too is addressing its problems, but the fact is that with inflation remaining stubbornly high, the UK continues to see its competitiveness eroded still further.

The ability to devalue has simply allowed Britain to put off the kind of structural reforms that Germany has been enacting successfully over the past decade. Too much intrusive regulation and micro management by the last Labour government has had dramatically bad effects on the whole UK economy. Entrepreneurship in the UK has continued to decline- new businesses are being created in Asia and meanwhile old established British brand names from MG to Cadbury are no longer under British control. The UK controls an ever diminishing amount of intellectual property- and yet it also no longer has the industrial capacity to manufacture for any one else.

The UK is simply not educating itself fast enough or well enough to be able to face the competitive threat from both Asia and indeed its European partners, neither is the business environment so attractive as to gain new overseas investors in the way that helped to transform the country in the 1980s. All that devaluation has allowed us is a breathing space- yet we are still failing to take advantage of this brief window in order to make the structural changes to the Labour market and the business environment that can actually provide a more sustainable economic future for the country.

Meanwhile Estonia has transformed itself from the totally closed Soviet system into one of the most open economies, not just in Europe, but in the world. Its competitive advantage of highly sophisticated technology and simple regulation is creating a situation where the country will overtake several of its European partners in per capita GDP over the course of the next five years. and possibly even the UK itself within the next ten years.

Estonia is a genuinely flexible market- and the UK is not. Estonia, with relatively low levels of total debt and extremely low levels of government debt- less than 9% of GDP- is not carrying the burden of unfunded pension liabilities that is crippling the UK.

The coalition government has started well: they have admitted the scale of the problem and have set out a credible road map to reduce the deficit. This is necessary, but not sufficient. It is critical that a credible programme of restructuring is put into place- not just a programme of austerity or cuts- depending upon your political brand- but a complete remodelling of the state that permanently shrinks the crippling burdens of debt and pension liabilities.

The failure of Labour to even acknowledge the disastrous mistakes they have made in office should render them disqualified from office, preferably forever. Now it is up to the Coalition to make the case for the the kinds of sacrifices that will ultimately create a more sustainable and more prosperous country.

By that time, Estonia will probably have redesigned their Euro coins several times.


AGilinsky said...

"Worse numbers seem set to come, as the Bank of England chief economist suggests that growth will continue to stagnate."

I love how this is written on the same day the GDP growth figures have come out; showing differently.

Cicero said...

The GDP numbers are quite likely to be a flash in the pan- and by increasing the upward pressure on interest rates, may end up being both unsustained and unsustainable.