The UK and the Euro
I’m glad that the UK didn’t join the Euro. It would not have been accepted by the majority of Britons, it would have made the process we are now undergoing to leave the EU even more painful, and in any case it has not been a huge success. But I have never understood why so many people in Britain are so confident and outspoken that the Euro has been a catastrophe.
This isn’t for lack of trying. I have read extensively on both sides of the debate and tried to reproduce many of the arguments. I am fascinated by how currencies work and what that means for the nations and regions that form the British Isles. Has Ireland thrived because of or despite of the Euro? Has Yorkshire struggled because of or despite of the Pound? What currency should Scotland use if it becomes independent? These questions really interest me.
So when people tell me that the Euro has been a disaster I ask them for their top three reasons so that I can try and be convinced of their viewpoint. These are the top three I hear and where I am currently in understanding them.
1. The Euro has caused huge unemployment
The Euro came into being slowly between 1992 and 2002, when banknotes replaced those of each national currency. But the effective birthplace of the Euro was January 1999 when exchange rates between the euro and all of the currencies that it replaced were fixed.
In January 1999, at the birth of the Euro, unemployment in the Eurozone was 10.1%. In November 2018, the unemployment in the Eurozone was 7.9%.
In the same period unemployment in the UK has fallen from 6.2% to 4.1%.
So the Eurozone has done slight better than the UK on unemployment. It’s not been a success, but I don’t see evidence here that it’s been a huge failure either.
Of course the overall picture always hides local variations and in the Eurozone they are large and important. In Spain, unemployment has risen from about 16% in 1999 to 19% today. In Greece, from 12% to 23% and in Portugal from 5% to 11%. All of these countries have significantly higher unemployment than the worst performing region of the UK, North East England, where unemployment has fallen from around 10% in 1999 to below 8% today.
Localised unemployment in mostly Southern EU states is a serious problem. It seems to be caused by a mixture of factors that combine to lock-in unrealistically high labour costs. These factors include some mix of inflexible labour markets that prefer older workers and the inflexibility of a fixed exchange rate with other countries that use the Euro. Many of these factors seem to be chosen by the people of those countries and I will return to this issue in point three.
2. The Euro has reduced standards of living
Whether its expressed as “the greatest bonfire of wealth since WWII” or “you should visit Greece and see the poverty that the Euro has caused” it’s clear that many people think that the Euro has destroyed wealth and prosperity across the Eurozone. And yet when I’ve looked at the data I struggle to see that.
The Eurozone has grown at almost exactly the same rate since 2000 as the UK. The Northern members of the Eurozone, which the UK most closely resembles, have grown quicker than the UK. I don’t see the evidence behind claims of catastrophe.
The Eurozone and UK economies seem to have grown at similar rates.
As with unemployment, this picture masks large local variations. Since 2000 the economy of the West Midlands, where I live, has seen a greater relative decline in its economy than Greece, despite being outside the Eurozone.
The economy of South Yorkshire has almost exactly mirrored Greece’s decline despite also being outside the Eurozone. Complicating matters further still the Central European country of Slovakia, which has long had a euro-pegged currency and is now part of the Euro, has caught up and overtaken both Greece and South Yorkshire.
http://imactivate.com/regionexplorer/indexedeu/?options=true&columns=0,1,103,370,361,322
The picture is again complicated. The Euro has not led to great prosperity in the Eurozone but at the same time I don’t see the “bonfire of wealth” that others assert. There are clearly problems with the Eurozone. For example, it is a much weaker transfer union than the UK. Whereas the NHS in the West Midlands is paid for by London, public services in Greece are barely subsidised by wealthier states within the European Union. Furthermore, the transfer arrangements that exist in the EU are extremely unresponsive. ERDF funding works in seven-year cycles that cannot respond to shocks in the same way that transfer unions in individual nations can.
So, the Euro has some clear flaws, and yet has performed okay overall. Other currency unions including the UK Pound clearly have similar flaws and, as more mature currencies, have better systems for dealing with them. The Euro is young, it can improve, and in any case I still don’t see a catastrophe here.
3. The Euro has reduced national sovereignty
I’ve heard this argument a few times but I heard the best example by far from Philip Davies MP in a pub in Bradford. “The Greek people voted against austerity but look at how it’s being forced on them by the European Union” he said, to prove that the EU and the Eurozone are inherently undemocratic institutions. Hearing this line in a city that continually votes against austerity and yet has austerity imposed on it was striking.
Is the UK inherently undemocratic? No, I don’t think so. And yet it imposes austerity on Bradford, against Bradford’s wishes, for the simple reason that Bradford is reliant on the UK’s money to fund its public services.
Outside of the UK, Bradford could run a deficit budget, print money, devalue its currency, and import inflation. Within the UK its ambitions are stopped at step one of this process because local deficit budgets are illegal within the UK. Bradford has no desire to leave either the UK or the UK’s currency union.
Before the Euro, Greece could have run a deficit budget, printed money, devalued its currency, imported inflation, and thus reduced its over-generous pensions and public-sector salaries. My understanding is that this is what it used to do.
Within the Euro it can’t do that, the only option it has to lower its costs is via the protracted, inefficient, and painful method of democracy. Some Euro countries, such as Ireland, Estonia, and Portugal, managed to cut public salaries, pensions, and labour protections through a democratic process and thus reduce their labour costs without devaluing their currency. They achieved this with different degrees of ruthlessness and speed. Germany has been doing the same for decades. It is clearly not impossible to do this within the Euro.
So rather than reducing national sovereignty and democracy I keep seeing that the Euro is increasing it. Greece must now democratically decide to lower its labour costs, rather than having that decision taken for it by external forces. Indeed, many of the problems that Greece faces are a result of currency markets no longer being able to reduce the Greek people’s wealth. Instead the Greek people must make that decision democratically and they are finding it very difficult. It is democratic decisions, not the Euro, that leave Greece with extremely high unemployment and a shrinking economy. If the Euro has an inherent flaw it is that it gives too much power to the people.
For me this is the most compelling argument against the Euro and the strongest reason why I am glad that the UK did not join. Following the EU referendum our currency dropped in value compared to the Euro by over 10%. In international terms much of our property lost value and our pensions and salaries reduced overnight. This happened immediately, at the will of the markets, and with no input from our democracy.
My support for the British Pound is that it replaces democracy with the market. It sacrifices sovereignty for efficiency. It replaces the need for national discipline, with an incorruptible referee; the market. I hear that argument extremely infrequently.
So what am I missing?
As a Briton I look at the Euro and I don’t see much worth joining. But then I look at countries like Slovakia, Estonia, and Lithuania, who joined recently and don’t seem to have too many regrets. I see countries like Croatia and Denmark who peg their currencies to the Euro and seem happy with that arrangement. And I see countries like Ireland and Greece who went through huge pain because of the Euro, looked at the alternatives, and decided against them.
Last, I’d like to be clear that I’m not an economist. If I’m wrong I’m really happy to be corrected. If there’s something that I’ve missed off my list that shows how awful the Euro has been then I’d love to hear about it. But if you think that I’m silly or missing self-evident truths and you don’t have time to explain yourself then please direct your anger at my moronic opinions away from me.