I distinctly remember the day I decided the UK should never join the European single currency. I couldn’t tell you the precise date, and am not absolutely sure what year it was – probably 1990. But I vividly remember sitting in my student digs – jostick burning, posters on the wall – surrounded by books and articles. It was one of those moments when, after intensive reading, the penny almost audibly dropped.
As an economics undergraduate, I had to study a lot of complex mathematical modeling. Rebelling against the arid pointlessness of pretending economics is a science, I immersed myself in economic history too. It was while learning about the failed monetary unions of the past – particularly those of the mid- and late-nineteenth century, in Latin America, Scandinavia and the nascent United States – that I instinctively realized the euro, still then not a reality but almost certainly coming, was in for a bumpy ride.
“These global economic problems have their roots in the fools’ paradise we all used to live in,” observed Peter Mandelson on Friday, to a packed seminar at the St Petersburg International Economic Forum.
“Pretty much everyone borrowed and spent beyond their means and that’s now catching up with us,” continued the former Cabinet Minister. “And it’s the inter-twining of the sovereign debt and banking crises that makes any eurozone resolution extremely difficult”.
This euro crisis is now getting extremely serious. Events are happening quickly, closing-in on policy makers and threatening to engulf us. Across the single currency zone, fears are rising and, even in the most moderate nations, populations are becoming more restive. History is locked on fast-forward. Some say that seemingly arcane economic policy debate doesn’t matter. In the UK, in particular, but across much of the rest of Western Europe too, the political and media classes have long displayed a tendency to roll their eyes whenever anybody with even a smattering of economic insight has had the audacity to show it.
For the bien pensants, ignorance of financial issues has been a badge of honor. Economics has been dismissed as a “trade”. To hold well-researched views about commerce and asset markets has been to be a suspect arriviste “striver”. Such is the prejudice of those cosseted from economic reality, their minds dulled by generations of inherited wealth. Well, such minds created the euro and what a disaster the euro has been. And the greatest disaster could yet be to come.
Angela Merkel “vows to build fiscal union,” we were told on Friday, after the German Chancellor’s speech to the Bundestag. I just don’t buy it. Market denizens are desperate for “fiscal union” before the end of the year. The phrase is code for the mighty Germany agreeing to stand behind the liabilities of the more profligate single currency members – something that frazzled debt markets crave.
Berlin will only allow the European Central Bank to let rip, the argument goes, firing up the “virtual” printing press like the US Federal Reserve and the Bank of England, if Germany exerts more control over the spending of other eurozone governments. So “fiscal union”, while under-pinning bond prices, would also spark the mother of all equity market rallies, as the ECB sprayed-out QE funny money. Shares would surge across the globe – which would be nice, just in time for Christmas.
The Anglo-Saxon world is feeling smug this weekend. UK and US policymakers are counting their blessings they’re not directly embroiled in the historic debacle that is the single currency. This euro-crisis is obviously very seriously undermining global investor sentiment. The negative impact on growth, both in Britain and the States, is clear. It is axiomatic that the financial chaos stemming from a fully-blown, market-induced “euroquake” would cause deep aftershocks everywhere, not least across the rest of the Western world.
There is palpable relief, though, in London and Washington, that attention is now squarely on the eurozone’s woes. That makes life easier for the deeply-indebted Anglo-Saxon governments – which is particularly welcome for Chancellor George Osborne, given that he’s about to give his Autumn Statement. Osborne’s speech writers will, no doubt, make much of the fact that UK government bond yields last week went below those of their German counterparts. That happened, though, not because the coalition’s debt-reduction plan became more credible. On the contrary, the upending of the UK’s growth assumptions has made it even less likely that Britain’s fiscal numbers will add up.
“There’s no such thing as an orderly break-up”, argued my friend, a perceptive and highly-educated man, as we discussed the eurozone over dinner. His argument was that a down-sizing of the single currency should be resisted at all costs.
“The prospect of one or more countries leaving, or being forcefully ejected, is now very real, whether you like it or not,” I replied. “So we should face reality, take the decision, prepare for it now, and do what we can to manage the transition, rather than enduring the horrendous consequences of a market-imposed outcome”.