Thursday 18 November 2010

If I ask nicely, could we rethink the euro?

A decade or so ago, when we were all very exercised about the euro, there were two kinds of people who were against it.  One was nationalist head-bangers; the other was the people - including Liberals - who were afraid that fluctuating exchange rates played an important role. 

I was in the second category (definitely not the first), and felt somewhat alone in the Lib Dems.

Those in favour of the euro at the time, though otherwise charming and sane, took on a kind of Napoleonic certainty when it came to discussing currencies.  Which is a way of saying that they didn't engage much with the exchange rate argument.

There seemed to me to be a danger that one interest rate could not possibly suit the whole of Western Europe.  It was bound to suit the cities at the heart of Europe, but prevent those peripheral places and nations from devaluing when they needed to. It would trap those poorer cities and nations in a currency which was too valuable to suit them, and would usher in fierce populist right-wingers in their devastated cities.

Unfortunately, that is what seems to be happening - and, sure enough, in the outlying nations like Portugal and Ireland.  Before the euro, Ireland could devalue and balance their economy by doing so.  Now they have to cling to the mast, cut everything in sight and hope - like Phineas Fogg, chopping up the train to feed the fire that drove it - that there will be something left at the end.

That is an illiberal disaster and it should not have happened.  None of which suggests that the euro should be abolished.  We need more international currencies.  But we can't survive without other currencies that serve our needs alongside them.

There is still a Napoleonic tendency that doesn't really believe in economics.  I'm hoping maybe, maybe, if I approach them very delicately, we might have a rethink on the euro...


Anonymous said...

Noooooooo. Britain's spent its entire post war history trying the 'devalue at the first sign of trouble trick' which is all that this stuff about 'us' needing a special currency amounts to.

We'd be massively better off in the euro. Just avoiding conversion costs would be a huge weight off most business's minds and then you have the great advantage that government couldn't keep messing with the interest rate.

The euro works and we should have been in at the start.

Adam Bell said...

While I can see the sense in your arguments - and recently blogged in a similar vein - I can't help but feel that removing currency risk is still a strong argument in favour. This argument would be greatly strengthened with a weaker ECB, of course.

David Boyle said...

I'm not saying that we should get rid of the euro. The euro is about dealing with currency risk, but it needs to circulate alongside the pound - not instead of it.

Gordon said...

I recall going to a meeting to discuss the pros and cons of joining held at Stockport Football Club with Chris Davies MEP speaking for and someone for UKIP against.

In questions, I asked how the currency union could possibly accommodate strains arising from some countries doing better/being more competitive than others. In a nation state this is handled by transfer payments to or migration from rustbelt to sunbelt zones but these options are unlikely to be available or politically doable on a sufficient scale in Europe.

The UKIP guy's comment was it was a good point which he hadn't thought of (doh!).

Chris Davies' response was that economic growth would be so rapid that it wouldn't matter.

This is wishful thinking of a very dangerous sort. It's not about absolute rates of growth (which, as I expected, never materialised). It's about differential rates of growth - and also competitiveness - which is exactly what has undone the Euro.

So, yes. You are right; we need to rethink our entire approach to the EU. See for example,

We need the EU but we need it to be based on reality not fantasy.

Gordon said...

@ Adam Bell

Risk doesn't go away because the currency risk has been removed. It just morphs into solvency risk.

As of now Brussels if doing its level best to kick the can down the road and pray because if Ireland goes then so do many major UK and European banks that have foolishley lend to a Ponzi scheme.

This policy will eventually fail and my guess is that the likely outcome will be a collapse of the Euro, at best a massive restructuring.

Joe Otten said...

I agree there is some merit to you main point, but I am a little concerned that you are offering devaluation as an alternative to austerity. It isn't. Devaluation is a kind of austerity whereby everybody's wages get cut and the country gets poorer. By stealth perhaps, but this is what happens.

Yet your main point has some merit. Northern Europe has a history of sounder fiscal and monetary policy, and does not expect to devalue. Southern Europe has the opposite. Without a convergence of policy, there ought to be two Euros.

Gordon said...

As Joe says, deflation is a stealth way of making everyone poorer when the object of policy should be to make people richer.

We need to dig deep into workings of the economy to find out what really makes it tick and why it's not delivering the goods.

This is perfectly possible - provided we ask the questions.