Hardly a day goes by at the moment without the news being filled with predictions of economic disaster. The reason, of course, is that Greece is technically bankrupt and everyone is worrying that if it actually does go bankrup, it will take the rest of us with it. But is that really the case and what are the implications for companies and jobs in Britain.
The trouble is that what started as a good idea - the ‘Common Market’, has ended with what former Chancellor Lord Lawson described as the “greatest act of political folly seen in Europe since the Second World War” - the Euro. The fact is that as any A-level economics student could tell you, joining a single currency means that exchange rates between member countries can no longer fluctuate to allow for differences in productivity and that something else will therefore have to give instead.
As a person with a degree in economics, I had assumed that the removal of exchange rates would result in growing unemployment rates in the less efficient economies as jobs shifted to the more efficient countries and companies. What I had not accounted for was the willingness of both countries and banks to turn a blind eye to the fact that the weaker economies such as Greece, Portugal, Italy, Ireland and Spain were spending more than they could afford.
Far be it for me to suggest that high levels of government expenditure are bad, indeed arguably it is better to pay someone to work than to pay them to be unemployed, but what I am arguing is that to pretend that the various European economies are sufficiently similar to share a single currency is ludicrous. As Lord Lawson stated in the same interview referred to earlier, the reason Greece was admitted to the single currency in the first place was because the information submitted was false.
Moreover, history suggests that a single currency arrangement like the Euro is doomed to failure: Alexander the Great attempted to impose a single currency across the Mediterranean countries - it failed. In 1944 the Bretton Woods Conference sought to achieve monetary stability in the years after the war by seeking to eliminate exchange rate fluctuations - it failed. In 1979 the EU established the European Exchange Rate Mechanism in another attempt to remove exchange rate fluctuations - it also failed. And now, in 2011, we are witnessing the Euro go through the same painful demise as all of its predecessors.
Unfortunately, rather than facing up to the inevitable, Europe’s political leaders are spending all their time denying the inevitable in a bid to justify why they are throwing vast amounts of good money after bad in a bid to shore up a defunct system. Much better that they instead devote their time to addressing the consequences of country defaults and currency collapse.
In Britain we are also being advised that the collapse of the Euro would be disastrous for us because of the huge proportion of our international trade that is with Europe. But are the figures to be trusted? A Global Britain report in 2008 showed that the EU accounted for something in the range of 47-52% of all UK trade in the years 1999-2007, but those statics simply record details of the first country goods are shipped to, not the final destination. This is known as the ‘Rotterdam effect’ because of the importance of Rotterdam as a transit port. In other words, because goods being shipped to the rest of the world go via Rotterdam, they are recorded in the UK as having been shipped to Europe. According to the same Global Britain report, if the Rotterdam Effect is taken into consideration “the real adjusted proportion is likely to be below 40%”.
Moreover, as Mark Baimbridge and Philip Whyman point out in their book Britain, the Euro and Beyond: “a detailed analysis reveals that only 48 per cent of the UK’s current account relates to the EU… Indeed, just as much trade takes place with the USA as France and Germany combined. Thus although the UK is deeply involved in trading to EU member states, it remains a minority of total trade.”
With the Chinese and Indian economies continuing to grow at almost 10% per year the fact is that Europe is of diminishing importance to the UK as both a customer and trading partner.
But what would the consequences be of a collapse of the Euro? The honest answer is that no one really knows as global markets have never before been so interdependent. What is certain is that it would be painful; UK exports would decline, unemployment would rise, UK banks would be forced to write off even more bad debt and there would be a second global credit crunch. But on a more positive note, the ‘real economy’ will carry on; farms will still produce food, plumbers will still fix water leaks and drivers will still buy petrol. In short, all that will really happen is that the fool’s paradise of the ‘false economy’, where people and countries spend more than they earn will come to an end. And, since this is a fool’s paradise, perhaps the sooner it happens the better.