Once upon a time lots of European countries decided they wanted to be friends with each other.That was a very good idea.
They had a history of being enemies, and fighting. That was a very bad idea.
They formed a club. They did a few things together. They planned what to grow and farm together. They did a bit more trade with each other. They managed to stay friends for many years. Emboldened by their success, some of the ring leaders of these countries said, “let’s now become very special friends. It’s boring just being good neighbours. I know how to show we are the best of friends. We will share a bank account with each other.”
They asked some wise men (yes they were mostly men) how you could do that. They said it was all a bit complicated for countries to do that sort of thing. You first had to share a currency, and to do that you needed to bring all your different currencies closer together.
All the country ring leaders said they thought that sounded lovely. They would do just as the wise men told them. They would make their currencies stay at the same rate against each other for ever so long. Once they had done that, they could easily then swap all the currencies into their shiny new common currency. Hey presto they would be sharing a bank account together. It all sounded ever so modern. They said it would mean they would all show great solidarity. Some said they liked solidarity though they were not quite sure what it meant or entailed. It would be All for One, and One for All, they were told. Who could disagree with that?
So they told all the world that they now had a special relationship. They told all the nasty wolves in the financial markets that if they tried to mess them up, they would spend loads of money stopping the wolves. The wolves would be foolish to try to take them on.
The problem with wolves is they can’t help themselves. They often don’t believe nice people like government leaders. So when they were told what rates the currencies would trade at, they said “We don’t agree. We think you’ve got it wrong”.
So every time the wolves sold a currency, to try to get it down below the European prices, the countries spent billions of money stopping them. The trouble was, the more they bought, the more the wolves sold. The debts got bigger and bigger, as the governments tried harder and harder to keep their currencies up. The Germans, who had the best currency, got fed up with owning more and more of the weak currencies. They started asking themselevs why they had to do that.
Then one day the governments saw they had spent too much, but still the nasty wolves were selling. So they gave up. It turned out that though they really did want to show solidarity to each other, propping up the pound sterling was just too dear for them. Italy and the UK and other smaller countries were pushed out of the super friendly money club. The Germans were no longer prepared to spend loads of their money keeping it all going. There had to be some limits to solidarity after all.
Tomorrow we will learn how the doughty European governments were not to be beaten by the nasty wolves. They were going to have their common bank account after all.
PS Whilst I am writing the fairy tale (3 day serial) please write in with your issues and worries.