There has been much crowing amongst the Anti-Euro brigade in the UK over the past year. The structural problems of the single currency were said to be terminal, and there was much self-congratulation that the UK had managed to avoid such troubles by maintaining the independence of the Pound.
Now, however, the swagger has gone out of the Euro sceptics. The reason is not hard to find: British economic performance and monetary management on almost any conceivable measure has turned out far worse than our real comparable states in Europe. For all the gloating over the travails of Greece, Ireland or Iberia, the fact is that Germany, France and even Italy have weathered the economic down turn far better than the UK.
In Britain our inflation rate is peaking above 4%, and the direction of travel would be the same, even without the increase in VAT. Meanwhile unemployment is also rising strongly. Despite the recovery on manufacturing, the evaporation of large parts of the British banking system continues to have strongly negative effects. Meanwhile the huge increase in public sector debt has necessitated a severe programme of public sector cuts. So on inflation, growth, unemployment and on the deficit, the UK stands at the bottom of the class of the larger EU member states.
The whole point of maintaining an independent currency was so that interest rates could be adjusted to suit British economic circumstances. The problem is that the failure to intervene when the going was good has left the Bank of England with no room for manoeuvre in the downswing. The result is that despite the fact that inflation now rising strongly (now above 4%), the base rate remains at 0.5%- a record low. The fact is that with negative interest rates of -3.5% the Bank of England is debauching the currency and destroying the savings that will be necessary to pay for retirement. Instead of being a model of monetary probity, to off set the fiscal incompetence of Labour, they chose in the past to collude in the policy mistakes of Brown and Balls. Now, the fear is that any move upwards in rates would lead to a meltdown in UK growth. Yet despite this, growth is slowing sharply anyway.
The result is that Sterling has devalued by about 30% over two and a half years. Yet despite this boost, the country does not have the productive capacity to take advantage of export lead growth. So the fall in the currency is actually also feeding inflation because the UK imports so much. Meanwhile, even a rise in rates may not diffuse the housing bubble, while so many are forecasting that prices should rise again. The stage is set for a thoroughly poisonous mixture of low or negative growth, high inflation and increasing unemployment.
Meanwhile in the Euro zone, the structural changes that are also needed in the UK will now come through, even in the weakest five Euro states. At a time when the media and voters of Britain still seem inclined to listen to the siren songs of Labour promises of growth funded on the never never, it is worth noting that some countries, including even Greece, have begun to tackle the structural problems. We seem to be throwing away the breathing space that devaluation might have brought us.
The question then is: when does the UK stop devaluing?
At this point, it is not inconceivable that the Pound falls close to or even below parity with the Euro within a few months.
If that happens, then that will be the day that I will be asking those Anti Europeans who have been so quick to ridicule both me and indeed the very idea of the single currency for something of an apology. You had a chance to use the flexibility of a floating currency to address the structural problems of the UK: so far you have failed. When do you recognize the problem is not the currency, it is a fundamental failure of the economic structure of the UK ?
Comments
"Instead of being a model of monetary probity, to off set the fiscal incompetence of Labour, they chose in the past to collude in the policy mistakes of Brown and Balls."
Osborne's whole economic strategy is based on the need to keep interest rates lower for longer. The BoE raising rates any more than a symbolic amount would flush his plan down the toilet.
"At a time when the media and voters of Britain still seem inclined to listen to the siren songs of Labour promises of growth funded on the never never, it is worth noting that some countries, including even Greece, have begun to tackle the structural problems."
What the hell are you talking about? Greece is totally f*cked, they're still deep in recession. For Greece to even pay it's interest charges it will have to run a 5.5% surplus, the only way Greece is coming out of recession is by way of a massive German check or debt restructuring.
"it is not inconceivable that the Pound falls close to or even below parity with the Euro within a few months."
Parity wouldn't prove anything, the £ has been over valued for years. The Euro isn't a bad idea but it doesn't work without much greater political union as unless you make somebody dependent on the votes of both the Germans and the millions of people thrown on the scrap heap by the euro there will never be the political will to do anything for the scrap heap people.
Oh what a give away... Greece is likely to see a major repayment of debt since the ECB has been buying at 60% discount- if that is retired, even with a substantial profit to the ECB, Greece just cut its debt in half. The fact is that playing with the currency is a stupid and short sighted way to run your economy. Of course if you won't fix your structural problems, then it is time to short Sterling as low as it will go... 80 cents anyone? Then you really will have massive inflation.
Like I said the only way Greece is coming out of recession is a massive German check. The ECB is buying Greek debt at a massive discount however will this carry on is the question.
"The fact is that playing with the currency is a stupid and short sighted way to run your economy."
No it isn't. Its standard economic practice, devaluing makes your exports more competitive allowing you to export your way to growth. Why do you think manufacturing is having a boom? The devalued £ is making our exports cheaper and imports more expensive allowing UK manufacturers to compete with imported goods.
"oh and as for "thrown on the scrap heap": have a look at today's appalling unemployment numbers.."
Yep, they are terrible but that is what your party signed up for in the coalition agreement. Politically motivated over the top cuts to public spending are going to increase unemployment at the very least in the short term. But in reality a lot of unemployment will become structural, it took 21 years for unemployment to fall below the level Thatcher started with in 1979. The youth unemployment number, 20%, is especially mad but with cuts to youth services, ema and increased tuition fees this will only get worse. For eurozone countries other than the Germans it is even worse: Spain - 40% youth unemployment, Ireland - 36.4%, Greece - 35%.
Locked into the euro those countries can't devalue to become more competitive so instead they're locked into depression.
"Eurosceptics such as myself and Dan Hannan have long argued that the current policy is too inflationary and that rates should be increased. The bad policy is not an argument to give up independence - it's an argument to sack Mervyn King!"
The only thing keeping the economy going is ultra low interest rates. If we followed Hannan's advice and jacked up interest rates we'd have another recession.
Aashish @ Nepali Songs