Why the Euro was bound to be trouble

        In 2001 I published “Just Say No:  100 arguments against the Euro”. It is timely to revisit some of  them, to see why the Euro is causing such trouble to economies like Ireland, Greece, Portugal and Spain.

         I pointed out that the Euro was an “Exhange Rate Mechanism you could not get out of”. As so many countries had found it difficult to sustain their currency levels against the DM in the ERM, why did anyone think they could do so from within a single currency? It was locking the door and throwing the key away. That could prove painful if the building caught fire.  The two central arguments were “You cannot make currencies behave in line unless you first bring the economies in line” and “History shows that rigged exchange rates do not work”. Economies would find it more painful to make the adjustments they needed to make against each other if the exchange rates no longer took most of the strain.

               In the chapter on their failure to create a single economic policy that could work for the whole currency zone, I explained that there isn’t one interest rate that is right for Manchester and Marseilles, nor is there one exchange rate that is right for Lisbon and London. “You cannot have a single economic policy without a single budget”. “There will be endless disagreements about how much European government should  spend and where.” “The poorer and richer regions are different. The poorer ones will lose out”. “There is no single political system to take decisions and explain them to electors”.

               I forecast  that there would be pressure to increase taxes, to “harmonise them” in an upwards direction.

               The main analogy I used said that joining a single currency was like sharing a bank account with the neighbours. More people are now beginning to see the force of that comparison. The richer and more prudent neighbours are now being asked to subsidise the overdraft of the poorer or more spendthrift, because they do share a bank account at the European Central Bank.

              Having helped keep the UK out of the Euro by arguing the case and setting out in detail the costs, risks and problems, I see no reason why the UK should now be expected to pick up some of the bills for the predictable stresses within the scheme. If you want a successful single currency first create a successful single country. The Euroland members do need more central economic management and control, but none of that should apply to the UK.  The Euro has for a decade been a single currency in search of a country to love it. The Euro needs a country called Europe if it is to succeed. The Uk should not  be part of that centralising venture.

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35 Comments

  1. Stuart Fairney
    Posted November 19, 2010 at 6:33 am | Permalink

    All true enough. The cynic in me sees this as all part of the plan to ‘harmonise’ EU govermental structures by allowing, indeed forcing profligacy (since the poor Irish couldn’t raise their interest rates when it was obvioulsy necessary), then watching the disaster unfold. Then the ECB can simply electronically print the means to survival and all debtor nations need do is cede economic independence.

    Awful and ghastly. I’m not sure whether this was an actual plan, or just ineptitude followed by opportunism. Either way, utterly vile and anyone who has ever advocated Euro membership should now be (metaphoricallly) tarred and feathered. If ever anyone needed to apologise for anything, this is it.

  2. lifelogic
    Posted November 19, 2010 at 6:56 am | Permalink

    Surely all this above is obvious to everyone who can think.

    The EU super tanker is however unstoppable in its desire to steal all power to the centre and suffocate any remaining democracy. The idea that Cameron should assist in these aims by helping pay for the Irish bailout (only a temporary sticking plaster anyway for the system) is mad but then most things he does are.

    He is a PR man not someone with a sense of direction and however good you are at PR you will still fall if the cliff if you head the wrong way as Heath, Major, Blair and Brown all clearly demonstrated.

    If you want recovery encourage business to stay and come in – with fewer regulations, lower taxes, free trade, banks that work, no rigged markets such as the EU farming or energy markets and small government. In fact no EU at all other than free trade.

    • lifelogic
      Posted November 19, 2010 at 9:08 am | Permalink

      So the UK is to give about £3,500 to each Irish household because the government claim “it is in our interests as we trade with them”. Then how much to Greece, Italy, Spain, Portugal and the rest?

      Surely we should also give vast sums of borrowed money to all the rest of the world as we trade with them too. Such a brilliant command of logic from Cameron and Clegg could they use their own money please and let me use mine rather more sensibly.

      • alan jutson
        Posted November 19, 2010 at 7:53 pm | Permalink

        Lifelogic

        I am waiting for my share when it comes to the turn of the UK, but by then It will probably have cost me 26 x £3,500 to bail out all of the others, and with my luck, there will be none left when its our turn.

        I know money has to circulate to get an economy moving, but this constant bailout, and underwriting debts nonesense is just simply stupid when the organisations we bail out are continually spending more than they earn.

        When are some heads of Government going to wake up from this dreamworld, and realise its really a bloody nightmare.

  3. davidb
    Posted November 19, 2010 at 8:11 am | Permalink

    A good argument for Scottish independence there Mr Redwood.

  4. Nick
    Posted November 19, 2010 at 8:41 am | Permalink

    So why don’t I need Nick pounds, and you need John pounds?

    Perhaps I should start printing my own notes.

    • libertarian
      Posted November 19, 2010 at 8:42 pm | Permalink

      Nick

      Because sensible people don’t assume that the answer to a failed system is just to do exactly the opposite. Currencies don’t work as homogenised one size fits all and they don’t work as an anarchic free for all either.

      It’s called common sense

  5. electro-kevin
    Posted November 19, 2010 at 8:49 am | Permalink

    The EU is not about making the people happy. It is not essential would merely be a bonus if it did. Dependancy is the main thing.

    The primary function of the EU is to satisfy its politicians.

  6. Brian Tomkinson
    Posted November 19, 2010 at 9:32 am | Permalink

    The whole ‘European Project’ has been a fraud. Thankfully, we never joined the Euro despite the efforts of many who are still in high office today. Regrettably, we are still members of an anti-democratic organisation which is intent on removing sovereignty from its member states and transferring it to the centre. Too many British politicians have been prepared to betray the British people and give away powers with which they were temporarily entrusted without even seeking permission from those from whom they had received those powers.

  7. Mike Stallard
    Posted November 19, 2010 at 9:42 am | Permalink

    As ever your analysis makes a lot of sense.
    Now ask yourself this: If you were a member of the “Top Table” at the EU, being wined and dined and treated as an honoured friend by the other “Top Table” members, would you risk unpopularity by saying what you have just said?
    Wouldn’t it be a lot easier to smile and accept another compliment on your sagacity?

    Reply: I attended 21 Council of Ministers meetings as a Minister, and regularly told them of the need for less government, fewer regulations and more member state independence. The problem was by the time I got to the table we were already on qmv for a lot of the issues.

  8. JEREMY WALLIS
    Posted November 19, 2010 at 9:44 am | Permalink

    Dear John,
    I enjoyed reading your 2001 book.
    It is very sad – and for many disastrous – that your warnings were ridiculed at the time.
    I look forward to reading your next publication.
    With kind regards,
    Jeremy Wallis
    Conservative Party Member (Beckenham)

  9. lifelogic
    Posted November 19, 2010 at 9:52 am | Permalink

    Lord Young thinks we have “never had it so good”. There speaks someone who has now become totally out of touch with the private sector and the real economy. Perhaps he just meant to say “I or the state sector, Quango’s, BBC have never had it so good and at the direct expense of the wealth creators and tax payers who have all left or are leaving”.

    • lifelogic
      Posted November 19, 2010 at 2:32 pm | Permalink

      I suppose the £300 tax fee daily allowance at the house of Lords might help giving you that “never had it so good” feeling or perhaps a huge state sector index linked pension perhaps. In the private sector however peoples already tiny pensions have been further “tax mugged” and are likely to find their jobs exported due to the uncompetitive tax, mad employment regulations, over regulation of almost everything and mad rigged energy and other markets to boot.

      Not every one has a secure over paid state state job/pension and a low variable mortgage indeed the vast majority do not.

    • Mark
      Posted November 19, 2010 at 6:01 pm | Permalink

      I think Lord Young was simply pointing out that there is a group of people who has benefited from the subsidised interest rates that have been used to bail out the bankers and (temporarily) the housing market. Of course, it is highly embarrassing if you do the sums to see just how much that has been worth – albeit it was instigated by the previous government.

  10. lola
    Posted November 19, 2010 at 9:55 am | Permalink

    If anyone in the ‘God help us’ coalition had any guts we could solve the Irish debt problem for them. We could offer them membership of the Sterling area. We could do this in a manner that reinforces Irish sovereignty and allows them to continue with the success of their low tax growth economy. This membership could easily be temporary and last as long as it was required for Ireland to rebuild its economy, sort out its banks by forcing debt for equity swaps, and reduce its own debts all facilitated bya competitive cuency.

    The EU is manufacturing this crisis to create an Empire of Bureaucracy.

  11. Alan Wheatley
    Posted November 19, 2010 at 10:04 am | Permalink

    Remember the “Stability Pact”? This EU invention seemed to me from the outset to be a fundamentally flawed concept. The idea was to fine countries who borrow too much. The reason you borrow is because you are short of money, so to take more money from a country that is already short would seem to be to make the problem worse.

    Of course, none of this came to matter as when the advocates of the Pact found that it was having an inconvenient impact upon themselves it was quietly put to one side.

    Other approaches are being tried, but as JR rightly points out the Euro is built on the wrong foundations. Changing the foundations is unlikely to be acceptable to EU citizens. It can only end in tears.

  12. StrongholdBarricades
    Posted November 19, 2010 at 10:22 am | Permalink

    I would hazard a guess that the main benefactor from the Euro was actually Germany.

    It would be much more interesting to analyse the “actual” growth rates of the member states during this period and factoring in the debt laden boom, and obviously the downsides.

    Whilst Euroland hangs onto the premise that countries have to remain within the Euro, the contagion will spread across the rest of the PIIGS because the markets know that it is a one way bet

  13. GeraldM
    Posted November 19, 2010 at 10:26 am | Permalink

    “The Uk should not be part of that centralising venture.”

    And yet it will, as sure as night follows day, under the Conservative and EUnionist Party.

  14. Bill
    Posted November 19, 2010 at 10:28 am | Permalink

    Sometimes the same interest rate is strain enough between the north and the south of the UK.

    Applying the same rate Aberdeen to Athens seems ludicrous, where there is not a political economic union

    Seems that economic union ends up in political union – Germany in 19 century.

    You’ve pointed out the dangers of the single currency and its forerunner the ERM for as long as I can recall

  15. John Bracewell
    Posted November 19, 2010 at 11:02 am | Permalink

    An excellent article. It shows not only the folly of the Eurozone but of the whole EU project.

  16. Paul H
    Posted November 19, 2010 at 11:07 am | Permalink

    But even a single country, as you put it, may not work – it depends on what you mean by “country” . It is not enough simply to harmonise/centralise taxes, budgets, employment laws, etc. After all, we have such (more-or-less) within England, but arguably even that is too large and diverse region for one-size-fits-all. Anyone traded recently with a derivatives dealer in Darlington? There will be always be centres of gravity for economic activity and, the larger the area, the more scope for variation and the corresponding strains, subsidies, etc.

  17. Elizabeth Morely
    Posted November 19, 2010 at 11:39 am | Permalink

    So, Mr Redwood, you are arguing for us to leave the EU?
    That is surely the only way to keep us out of the centralising mania as that is the whole point of the EU.
    An excellent idea, get us out of the expensive, corrupt, over regulated and pointless mess. After all, what would the EU do if we left? Put up trade barriers? They’d lose more than us as we buy more than we sell.

  18. Vanessa
    Posted November 19, 2010 at 12:54 pm | Permalink

    We have been warned about the imminent demise of the euro for the last 2-3 years but nothing has happened! Our government in Brussels will do everything in its power to cling to this weak currency – don’t hold your breath!! The EU World government will lie, together with all its branches – Obama, Putin, etc. to make sure that IF the euro really does fail then the consequences will be felt by all of us but they will not tell us that it has failed.

  19. Derek Buxton
    Posted November 19, 2010 at 1:03 pm | Permalink

    Many of us have long known that the EU was after increasing it’s hold on the member states. I think that the Irish problem as far as they are concerned is a beneficial crisis, they will offer a bailout together with a contract to take over the running of the Irish economy. But do not think that we are safe, the Lisbon Treaty/Constitution clearly states that that is the aim, economic and monetary union. And Cameron is in favour, whatever he says.

    • lifelogic
      Posted November 19, 2010 at 4:53 pm | Permalink

      I agree – judged by his actions rather than his words (which is the only way to judge such people) Cameron will surely go for economic and monetary union and the end of UK democracy.

      In a similar manor I judge Prince Charles by the vast energy used in his several large houses, cars, helicopter and plane use for his numerous travel arrangements rather than his occasional Global Warming and green pronouncements and expensive green gimmicks. These I assume are directed at instructing commoners, or to court personal popularity from the gullible and sell more biscuits perhaps.

  20. Jonathan
    Posted November 19, 2010 at 2:44 pm | Permalink

    It’s so frustrating that most MPs are economically illiterate and don’t understand the basics; when it comes to our future we are going to be paying debts for generations to come because of the mistakes being made now.

  21. Andy
    Posted November 19, 2010 at 2:47 pm | Permalink

    I agree with you John, but I also disagree. I have lived a little in the United States and one has to say that the single currency their does create problems. The Mid West might be better with its own currency. But it is interesting to note that the Federal Reserve and the single currency were the last institutions to be created in the USA not the first !

    Living a bit of the year now in Greece I can see the huge damage this mad project has wrought on parts of Europe. The Greeks, like the Irish, needed an interest rate probably three times what they had. It has created a huge bubble and now an even larger bust. There is, in my view, no way that Greece and Ireland can sort out their problems while still within the Euro. But then again there seems to be no way they can leave either.

  22. edgeplate
    Posted November 19, 2010 at 2:51 pm | Permalink

    Were the nations of Europe united in a single state, they would indeed need a single currency. They are not and the EU is still an embryonic state. The purpose of the Euro was to speed the gestation and bring about a single country. So, the Euro isn’t searching for a country to love it, it’s part of an attempt to construct one.

    Note that little of this has been done properly by popular consent, it’s mainly done by diktat, machinations and trickery. The EU frequently breaks its own rules, which says a lot.

  23. David Malia
    Posted November 19, 2010 at 3:10 pm | Permalink

    Yes, Mr Redwood. You were every bit as right (Euro-wise) back then as you clearly are now. It was always blindingly obvious to some of us (including Mrs T) that it would never be possible to devise a single economic regime which equally suited such dissimilar nations as Greece and Portugal on the one hand and Germany and the UK on the other. Furthermore, member states would always be potentially vulnerable to wounds inflicted by economic folly on the part of their neighbours. Ireland – “Ouch!” Thank you.

  24. JimF
    Posted November 19, 2010 at 3:16 pm | Permalink

    And now the creditors demand that the Irish hike Corporation Tax, so that they will collect less of it but the French, Germans etc will collect more. The Irish are losing their democratic freedom, little by little, to the ECB paymaster.

  25. Neil Craig
    Posted November 19, 2010 at 4:07 pm | Permalink

    “subsidise the overdraft of the poorer or more spendthrift, because they do share a bank account at the European Central Bank”

    While this applies to the PIGS countries (Italy being the I) Ireland is more complex. Ireland was the richest of the ERU countries & is still well agead of us. It has not been spendthrify, indeed ithas been considerably better at rolling back public spending than us. The worst they can be accused of is letting German investors put as much money as they like in their bank account & then when the market falls not being able to return it all.

    My suspicion is that what has actually happened is that the EU have been talking down the Irish economy, hoping for a run on their account so that they could launch a takeover. This is supported by 2 facts. Firstly that they are talking Ireland down far more than the PIGS or indeed Britain (our deficit being 62%, Ireland’s 32%) which would normally be expected to go first. Secondly that the unofficial briefings are making it clear that a “bail out” will involve Irish corporation taxes rising. Their low CT rates are what allowed Ireland to grow to the richest & there is no economic argument whatsoever for raising them. However Irish 7% growth has been an indictment of the politicians running larger EU countries & the EU itself who clearly could have achieved the same & didn’t. Therefore the motivation for the “bail out” simply cannot be to assist.

    What we are seeing is a hostile takeover of a smaller rival who has a more effective business plan so that the competition can be eliminated.

  26. English Pensioner
    Posted November 19, 2010 at 5:59 pm | Permalink

    You need a single country (or at least common fiscal policies) before you can have a single currency. Even once the United States was formed, the individual states still had their own dollars for some time before the establishment of the “US dollar”. And of course, the states still have far more independence from central control than we do from Brussels

  27. Boudicca
    Posted November 19, 2010 at 7:01 pm | Permalink

    And today IMF head Dominique Strauss-Khan has announced that Eurozone nations should surrender more of their sovereignty to the EU and allow unelected officials to determine structural reform and fiscal discipline. In other words, no longer independent and/or in control of their own destinies.

    Mr Redwood you are to be applauded for fighting for the interests of the British nation and British people. I hope you are making your views entirely clear to our Prime Minister because I, for one, don’t trust him one inch when it comes to the EU. We were promised a Referendum on the LisbonCon and that never materialised. We have also been promised a Referendum if a British Government ever proposed to take us into the Euro. How ‘Cast Iron’ is that guarantee, I wonder.

    Whatever – we are NOT in the Eurozone and we should not be borrowing money in order to prop it up. Rather we should be offering to help Ireland find a way out of the mess it has got itself into – by joining the Sterling area if necessary.

  28. Lindsay McDougall
    Posted November 20, 2010 at 4:20 am | Permalink

    Can we in the United Kingdom afford to allow a country called Europe the size of the current Euro zone to emerge. I do not think that we can. For those that agree with me, it is in our interest to persuade those Member States that find being in the Euro zone uncomfortable to revert to having a national currency.

  29. John Doherty
    Posted November 21, 2010 at 11:49 pm | Permalink

    I have faith in John Redwood’s assertion that the Euro was an “Exhange Rate Mechanism you could not get out of”. As so many countries had found it difficult to sustain their currency levels against the DM. – Today news abounds that this coalition government wants to lend Ireland 7.5 billion pounds of support! With the U.K already borrowing 1 in 4 pounds spent I question where that money is coming from? Furthermore, what authority has Cameron and Osborne to sanction this loan without a parliamentary mandate? Last but not least – Why is this present conservative political party allowing hugely talented people like John Redwood to languish on the back benches at such a time of monetary crisis? We need Cameron to explain.

  • 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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