Currency union used to be very fashionable. There was a time when the Euro was the future – it led to increased growth, lower unemployment, and greater prosperity. Opposing it – and opposing the Exchange Rate Mechanism that was intended as its precursor – could only derive from some atavistic nationalism. How times have changed.
The ERM crashed the British Economy in 1992 and the Eurozone is not prospering today, instead it is going through a deep economic depression. This can be seen most clearly in Southern Europe – by which I mean Greece, Spain, Portugal, and Italy – where youth unemployment ranges from 25 to 50%, economic growth is either near non-existent or negative and political instability is growing. The Euro did not merely fail to prevent this crisis: it actively helped to cause it, and it is making it worse.
While times were good, participation in the Euro allowed nations with weaker economies – like those of Southern Europe – to borrow at low interest rates that reflected trust in the ECB, not in the national governments it represented. This allowed them to pursue wasteful policies, to cripplingly restrict their labour markets and make themselves less competitive, all without having to borrow at higher rates like other countries would.
On top of this the EU did not enforce the laws intended to keep Eurozone countries solvent, enabling economic mismanagement. The international bond markets did not punish economic mismanagement as they would with normal countries – these nations were allowed to become more and more uncompetitive until the financial crisis brought the house of cards crashing down.
All of that cannot be undone, only recovered from, but the Euro makes such recovery far harder. As the Euro is a very strong currency – thanks in the main to the economic success of Germany – it crushes the export markets of weaker economies, while the benefits to imports that a strong currency brings aren’t much use to countries in economic free-fall. The USA began its recovery when Roosevelt devalued the dollar. Argentina dug its way out of its depression in the 90s by unpegging from the dollar and allowing its currency to devalue. Greece, Portugal, Spain, Italy and France cannot devalue their currencies because they are in the monetary straitjacket of the Euro.
Any reasonable attempt to help those economies would have at least allowed them to unpeg from the euro until they returned to economic health, as even Wolfgang Schäuble once suggested. That though, would be a blow to federalism, which ensures that the dogmatically federalist EU will not be reasonable.
This is not to say that structural reforms aren’t needed. They are, and they are being slowly made, but without devaluation to kick-start a recovery it could be decades before Southern Europe returns to economic health. That time will see millions of vibrant young people across Southern Europe unemployed and becoming unemployable, birthing a veritable lost generation. It will mean more bailout dramas, brinkmanship and radicalism. It will mean poverty, desperation and resentment. Southern Europe is on its knees, and the Euro is throttling it.
The only hope for a more pragmatic policy in Brussels is the foreclosure of the federalist dream. We in Britain have a chance to bring about just that. We have a chance to make Brussels rethink its dogmatic federalism – to be reasonable and to give South Europe the monetary flexibility it desperately needs. That chance comes on June 23rd.