Euroland and the Euro

In 1999 a Euro was worth 71p. Between 2000 and 2002 it was around 60p. From 2003 to 2008 it fluctuated around 65-70p, just a bit below its first issue price.

From 2008 the Euro took off against a falling pound, going above 90p. Since March 10th 2010 the Euro has been in freefall, and has devalued by 8% against sterling.

The Uk devaluation by more than 20% was helpful to UK competitiveness. By the same argument the recent 8% devaluation of the Euro has blunted that advantage.

The Euro was a scheme designed to let Germany export her manufactures to the Euroland area countries at a fixed exchange rate. The other members either had to improve their productivity and control their costs, or live with a perpetual German balance of payments surplus. When the Credit Crunch hit Germany suffered badly, as many countries in Euroland and beyond reined in their purchases of German product, leading to a sharp fall in German output. This reminded the Germans that their manufacturing superiority was a weakness as well as a strength, as it left them vulnerable to larger swings in output and employment given their heavy reliance on exports.

The German government decided to cushion the blow by introducing the Kurzarbiet scheme. This scheme allowed companies to keep employees on who were temporarily surplus to requirements, with the state picking up a large amount of the bill. At one point around 1.5million workers were covered by this scheme. The German government has just decided to continue with it into 2012, even though the economy is now in recovery phase.

The costs of this scheme are part of the cause of the German budget deficit, and further background to why Germany is reluctant to pick up the bills for other countries around Euroland who have had to lay off people in the name of curbing costs and trying to compete with Germany. Earlier this year when the Euro was high against the ppound it was generally quite high, making it even more difficult for the weaker Euroland economies to export their way to prosperity.

Germany has her own keepwork or work share scheme to deal with troubled times, but the rest of Euroland still lacks such a comprehensive scheme. The price of a relatively high Euro, and of German competitiveness, is the high and rising rates of unemployment in Ireland. Spain, Portugal and Greece.

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30 Comments

  1. Posted June 5, 2010 at 8:49 am | Permalink

    Thank you for putting the matter so succinctly.
    What do we do about it, though?
    If there are real incentives to get the manufacturing/management part of the British economy going, then perhaps we ought to be looking outside Europe for our main thrust of exports?
    How about Africa – Ghana, Sierra Leone, maybe Uganda? Or the Ukraine (farming – we are jolly good at that). We did some really good work, too, in South America in the past.
    What a shame that President Obama is using British Petrol (actually Amoco) as a stick to beat us wicked imperialists with!

    • Posted June 5, 2010 at 12:44 pm | Permalink

      Interesting, therefore, that in an article in today's Times, George Osborne is making the case for increasing British trade with India, China and Brazil.

      Maybe (hopefully) this is the first step towards detaching the UK from the nightmare in Brussels.
      http://www.timesonline.co.uk/tol/comment/columnis

  2. Posted June 5, 2010 at 10:49 am | Permalink

    The reason for the Euro was also to lower transaction costs for business between countries within the trade bloc, and that must be happening. The certainty of a German Company receiving enough money to pay its workers from its sales to, say, Spain, rather than ending up with a sicker Peseta-DM rate than it envisaged when it did the deal. I know they could forward cover, but that is where the risk and transaction costs come in.

    At the same time your argument holds water. Fixed rates totally different countries, languages and cultures was never going to work without problems.

    An idea put forward by John Major, but which never gained traction, was for competing currencies. Let the Euro run alongside the Pound, DM, Peseta etc. as legal tender in the EU. Those say Spanish producers only selling in their local markets would be likely to only be able to trade in the local currency, whilst those exporting to the Euro core would be getting Euros with which they could pay their workers. This would really encourage competition in the Euro bloc whilst decreasing transaction costs and risks for exporters. Equally governments would be obliged to set their budgets and taxes in the local currency, making public sector service and living off benefits less-good options than exporting (except in Germany which could cope with that). There would of course be transaction costs at the lower level when, say, a German-made washing machine was sold to the Spanish consumer in either Euros or Ptas, with the Pta price being inflated up to take account of the transaction cost (a la M & S Euro prices). Well, frankly the Spaniard just has to pay the higher Pta price or go earn some Euros!

    So perhaps the next step is for the re-introduction of local currencies at a floating rate whilst the Euro continues as a currency for international trade across the Zone.

    • Posted June 5, 2010 at 10:49 pm | Permalink

      When I buy stuff in Euros on the Continent its Euros I pay in. So if the Euro was a floating currency the other national currencies would appreciate and depreciate against the "gold standard" , and then our German exporter would not know whether he was paying his workers because it would only be converted to DM when the bill was paid at whatever rate. You may have become a bit confused here.

      The Germans have benefited from the Euro because the other weaker countries currencies have held the price of Euros down, allowing more competitive exports to countries outside the union ( like the UK ). The presence of Germany has allowed the other countries to buy goods from outside the union at more favourable prices because without German exports their weaker currencies would have floated down against the currencies of external providers. The different members will have had benefits and disadvantages from the single currency, but I doubt it is as simple as just the Germans getting to dominate industry. Much of German exports have gone to consumers in the USA and to tool up factories in China – rather like they did in the 1800's when German industrial machinery entered British textile mills.

      Rather than seeing a German plot perhaps we could see the more (typical ) French plot where their Banks are selling off the bonds in the PIIGS collecting German Euros in return before the balloon goes up and those bonds are junk. The (worrying? ed) Europeans speak French, not German.
      http://freeinternetpress.com/story.php?sid=25916

  3. Posted June 5, 2010 at 10:49 am | Permalink

    EU countries benefit from the structural and cohesion funds which counter some of this.

    These are EU not EURO area funds so the UK is included in these.

    In particular, the European Social Fund (ESF) …will focus on four key areas: increasing adaptability of workers and enterprises, enhancing access to employment and participation in the labour market, reinforcing social inclusion by combating discrimination and facilitating access to the labour market for disadvantaged people, and promoting partnership for reform in the fields of employment and inclusion.

    Sounds like we could be paying for some of their "keepwork or work share scheme to deal with troubled times".

    If you look at the figures it looks like France manages to do quite nicely out of this arrangement (10 billion euro vs 6 billion for the UK).

    • Posted June 5, 2010 at 10:53 am | Permalink

      Ireland for one has benefitted greatly from Europe which allowed their to economy to boom. I was surprised to find that Ireland has a higher GDP per head than the USA.

      Now the boom is over I'm guessing that Ireland has a long way to drop in terms of quality of life over the coming years.

      • Posted June 5, 2010 at 12:38 pm | Permalink

        The reasons for Ireland's success were set out in a speech to the HoC by our host.
        "[W]hat one cannot take away from Ireland is its phenomenal success in turning a country well below the European average in terms of income per head and general prosperity into one well ahead of the European average.

        The prime reason for that was not EU subsidies—those were quite small and mainly went into agriculture, which did not do that well—but the low tax rates that the Irish bravely set. By setting very low rates on income and corporate profits, they issued a huge invitation. Many Irish people who had gone abroad to seek their living because they did not like the high tax rates decided to go back to their home country, and many businesses decided that Ireland was the right place to set up business within the European Union as a whole. Because the Irish had the courage to set those low rates, there was an explosion in tax revenues, which meant that they could spend more on public services, and an explosion in jobs and profitability." http://www.publications.parliament.uk/pa/cm200809

        • Posted June 7, 2010 at 10:48 am | Permalink

          Thanks for the link.

          As usual I found the words of our host thought provoking, although I do think he left out one reason for Irelands success, which was the inward investment due in part to it's position as a country that spoke English that was also inside the Euro area (not that I'm suggesting the UK should join the Euro).

          I'm one of the English who went abroad to seek their living and I'm considering returning and starting a new business. Besides the cost of living issues, my concerns are:
          – access to affordable, educated employees (which is why I particularly like the Conservative proposals on NI exemptions for small business startups)
          – access to startup capital

          Oh, and the weather, but I dont expect the Government to do much about that one.

  4. Posted June 5, 2010 at 10:51 am | Permalink

    You will remember this JR. Maggie T had sussed what was going to happen if we let German re-unification go ahead back in 1990. Alas, the French sold out in exchange for Kohl committing to economic and monetary union.

    … In January 1990, Mitterand told Thatcher that a unified Germany could "make more ground than even Hitler had".

    Now we are all one big happy family; give or take a Euro/Pound swap option 😉

    Link is short history lesson from Wiki:-
    http://en.wikipedia.org/wiki/German_reunification

  5. Posted June 5, 2010 at 11:10 am | Permalink

    It amazes me how someone can conclude it is right to tax a successful company to subsidise another to employ people to do nothing!

  6. Posted June 5, 2010 at 11:35 am | Permalink

    Bugger Germany, our own silliness is more important. How crass we still believe that we can improve competetiveness with our exports by devaluing. We gain a temporary advantage at most whilst increasing the cost of imports and thus the cost of living to our poorest citizens.

    Politicians will however always go for the quick fix no matter who else it might hurt because the sensible options take time and that is something the politicians think they have little of.

    Devaluations, quantative easing and zero interest rates are all plasters to be stuck over a failed economy and are as nothing compared to sound government and sound money.

    • Posted June 5, 2010 at 1:11 pm | Permalink

      Spot on.What we have is political failure across Europe masquerading as a banking crisis.

  7. Posted June 5, 2010 at 12:57 pm | Permalink

    John, yet again you are a voice of reason and I cannot understand why you are not on the front benches. Can I add to your article that Germany's subsidy crazed obsessions distort the market, and there is inevitably a price to pay. Greece's problems have distracted the markets from the real fragility of both Germany and France – not a single country in Euroland seems to be living in reality. The subsidies, taxes, state interference, directives and obligations issued from Europe make us all poorer and less likely to recover from the coming depression. Not only this, but Britain, having awakened, belatedly, to its unaffordable public sector commitments is already struggling to make the necessary steps. Europe is heading for bankruptcy, because it is at least as badly managed as Britain.
    A falling currency helps in the short run, but Britain cannot benefit when European and US currencies are falling too.
    Our only hope is to wrest ourselves from the clutches of Europe and compete economically, as we used to, on a worldwide basis. Don't worry about EU membership. Europe, being a net exporter to Britain will still want to trade with us, even as associate members, and yes, even after we have stopped giving them our money.

    • Posted June 6, 2010 at 12:18 am | Permalink

      "John, yet again you are a voice of reason and I cannot understand why you are not on the front benches"

      Ike knew Patton to be a better army commander than himself. He thus appointed George to command an army in Western Europe who was hugely successful. So as supreme commander Ike was successful overall.

      This is one of the absolute marks of a great leader ~ the willingness to appoint someone better than himself in certain roles. Lesser men appoint non-entities for fear of being over shadowed.

      As our American friends might say "Do the maths"

  8. Posted June 5, 2010 at 1:03 pm | Permalink

    The reality is that the EU is now the DWR – the Deutsches Wirtschafts Reich. German industrial dominance creates unsustainable trade imbalances. Rescue demands that other countries rapidly improve their industrial performance to compete better and balance flows of trade, strategic changes made near impossible by the single currency. If the euro is not withdrawn by planned and civilised means, it will be destroyed by predators exploiting its contradictions and weaknesses.

  9. Posted June 5, 2010 at 1:05 pm | Permalink

    This is a criticism of the lack of competitiveness of the PIGS rather than of the concept of the Euro. The PIGS have had a subsidy from (in particular) German taxpayers by being able to borrow and spend at rates & volumes they would not otherwise have been able to afford. A credit boom has generated asset price bubbles creating an illusion of prosperity. The only way out for the PIGS is improved productivity. What Germany and other Euro advocates in the competitive North did not consider also is the unlimited contingent liability for bail-outs, since politicians, supported by many economists, believe that it is always better to bail out a state or a bank than to force it to restructure debts. This error will go on compounding until there is at some future point a grand reckoning.

  10. Posted June 5, 2010 at 1:28 pm | Permalink

    I seem to recall that before the advent of the EUro, the Deutchmark was a strong currency for many years but they still had a strong export market. I worked for a company buying equipment from them. Many people expressed surprise at this but it kept on running.

  11. Posted June 5, 2010 at 2:46 pm | Permalink

    Does anybody think a similar analysis could be applied to the US dollar Zone (with the Chinese currency fixed to the Dollar)?

    China runs up huge trade surpluses and the USA borrows loads of money to pay them. If the Germany-Greece situation was unstable then what is the China-USA situation?

    • Posted June 6, 2010 at 12:20 am | Permalink

      Dominant financial imperialism

  12. Posted June 5, 2010 at 3:04 pm | Permalink

    …and it was ever thus.

    Germany was always setting the pace in europe for exporting manufactured goods long before the advent of the euro, and probably previous to the whole setting up of the EEC

    Was it late 19th century policy which allowed the emergence of this economic power house?

    The whole saga of the day, however, does cast the light upon those countries who actually believed that by attaching themselves to the coat tails of Germany that the economic success would rub off on them. Clearly the economic success has continued for Germany, for the benefit of Germany, and the stable euro has enabled (effectively) a closed market for German companies to operate within whilst stabilising the risk of currency fluctuations

    Where are those people now, who promised so much from economic union, but have left the result in the hands of their successors.

    Will we have to rewrite history to make those people accountable for the failures that they all built into the system? Thus it could stand as a warning to future pro-ponents of federalist states without democratic accountability.

  13. Posted June 5, 2010 at 4:46 pm | Permalink

    Isn't the German government's picking up the tab for German workforces a subsidy, in all but name? And isn't the subsidising of commercial organisations illegal under EU law?

    If the Germans can get away with that, then why can't the Royal Mail et al do the same?

    • Posted June 6, 2010 at 10:29 am | Permalink

      Isn't that what UK tax credits are?

  14. Posted June 5, 2010 at 5:03 pm | Permalink

    Ah John
    Shocking news, the Guardian & i AGREE:- http://www.guardian.co.uk/money/blog/2010/jun/05/

    I remember Sir John Harvey-Jones on BBC2 in his program "Trouble Shooter" back in the 80's. He went back to a toy factory in the Mid-lands he given advice to.

    When he got there they gone & the factory was waste ground:-

    "Where's the Bloody factory?" He asked
    "They going to build houses here" said the driver
    "But where are the people going to work to pay for the houses?"

    I think we are about to have that question answered………No i don't back you on CGT on 2nd or more homes……we need productive capacty, not people owning 5+ houses which the goverment pay the loans back for him!

    Nice areas outside Liverpool have been overrun by Scumbags/Drug dealers Etc living in BTl Subed by the Tax payer….A crime wave swept in with it…………..let the BTL die & people can afford to buy homes at real not silly prices & without going into MEGA debt!

    Mike

    • Posted June 6, 2010 at 12:36 pm | Permalink

      funny i agree with that guardian article too

  15. Posted June 5, 2010 at 9:47 pm | Permalink

    Surely the outgoing Labour government introduced a similar scheme here? They created non-existent jobs in the Civil Service, Local Government and quangos to provide "employment" Hardly very different for the German Kurzarbiet scheme!

    And just as the costs of the Kurzarbiet scheme are part of the cause of the German budget deficit, these non-existent jobs are part of the cause of the UK deficit. Presumably it was only their dislike of capitalism which stopped Labour from introducing the German scheme in the UK.

  16. Posted June 6, 2010 at 12:45 am | Permalink

    "The Euro was a scheme designed to let Germany export her manufactures to the Euroland area countries at a fixed exchange rate."

    To be honest I never thought of the Euro in that terms. I'm sure you're right but I bet very little people think of the Euro in terms of imports / exports. If you ask the average man in the street I imagine most of us would say the Euro is so that we don't need to exchange currency for our hols.

    Just shows how big decisions can be made when I really understand little of the reason why.

    My stand is to be against everyting Euro / Brussels on principle and you can hardly go wrong as far as I can see.

  17. Posted June 6, 2010 at 10:14 am | Permalink

    I’ve said this before but I don’t think folk are paying enough attention
    The UK is a leader in knowledge based economy, our intellectual property (IP) is our real crown jewels, and it’s what allows us to pay our way in the world
    The analysis on this site of how money is moving around the world is one perspective on what’s going on
    We should pay more attention to how IP moves around the world, how leading inventions, techniques, designs and so on get moved around the world.
    The UK has leaked some of the most profitable IP to other nations at way below their value to us as a nation in recent years

  18. Posted June 6, 2010 at 5:39 pm | Permalink

    What I think really spooked the currency markets on Friday was the fact that now Hungary is in serious risk of default.

    Although Hungary is not in the Euro there are no plans for it to join in fact they are not in ERM II nearly all of its support come from the EU and the EU would have to bail Hungary out either with or without IMF support.

    The Hungarian forint is like the Euro free falling.

    Viktor Orban's Government has alleged that his countries mess was caused by his predecessor's government falsifying key economic data which is more or less what the Greek Government are saying about their problems.

    Although the Hungarian State secretary Mihaly Varga has said yesterday (05.06.10) that he will have to take additional measures to make sure that they will meet the 3.8% target of repayments that was agreed with lenders and that there is no debt crisis this also too sounds to familiar to me.

  19. Posted June 7, 2010 at 1:12 pm | Permalink

    Since many of you don't seem to know what Kurzarbeit is, I shall explain. I live in Germany, in the South, where there is a great deal of high tech industry. My husband's employer, for example, who make gearboxes for building machinery, saw their orders halved in 2008. They knew that business would pick up again; they knew that if they sacked their highly qualified employees they would go somewhere else; and lastly, they do indeed care about the welfare of their employees. So the obvious thing was to arrange to have them work part-time for a while, as this has worked nicely in the past. Most people will go along with this. My husband's company were admirable; the whole firm, including the board, worked 10% less. This meant every second Friday free.

    Though there was some help from the unemployment office, people were receiving less pay, and in 2009 did without their holidays or postponed large investments.

    Now business has indeed picked up again, most people are working full time, and they all still have their jobs.

    The reason Germany is so good at technology? Education, education, education.

  20. Posted June 15, 2010 at 10:59 am | Permalink

    I am sure I will be unpopular for saying this but I for one am glad we are in Europe. I think it would be madness to try to tackle the problems as a small island. Gone are the days of Britain ruling the world we now have to work with our European partners in sharing the highs and the lows of the economy etc. As a business we have to work with a number of partners and so does the new government, we may not like all the suggestions they have but we have to take everything into consideration and try not to concentrate on the bad things. Europe has many partners with different perspectives as the UK we need to accept those perspective and realise that what is good for Germany is not good for us but try not to criticise.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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