In the 1990s when I was making the case against the UK joining the Euro, I came up with the analogy that joining it would mean taking out a joint bank account with the neighbours.
I explained that I like my neighbours. We meet for drinks or social events. We would help each other out in an emergency. We have never felt ready to have a joint bank account. I would always worry that just when I wanted to spend I would find my neighbours had already used the money I had put in the account. All of us involved would be concerned in case one neighbour ran up a huge overdraft and left the rest of us to pay it off.
The government and other proponents of joining the Euro at the time claimed this analogy was not a fair one. They stumbled to find a soundbite that could put down my thought. They sensed my comment was a poor characterisation, but could not explain how or why.
As we watch the Euro scheme unfolding, it seems ever more apt to say joining a single currency entails taking out a joint bank account with the neighbouring countries. Each country or neighbour that has overspent does indeed expect the rest of the zone to pay its bills for it. We have seen Greece, Portugal and Ireland so far obtain extra money to keep them going. There has also been an even bigger transfer of money through the European central Bank, where the joint bank account is kept. Euro 3 trillion has been rooted into the weakest commercial banks around the zone. The German banking surplus is recycled in this way.
The case of Cyprus illustrates just how crucial the common bank account is to the functioning of the Euro. The unwillingness of the neighbours to send extra money to Cyprus meant people in Cyprus could no longer draw their money out of their banks. In practice they no longer belonged to the Eurozone during their crisis, as they no longer have freely convertible Euros in their bank accounts. In order to get their deposits out of their banks with each Euro having its normal value, the ECB has to restore Cyprus to sharing the joint bank account. If the ECB does not honour the Cyprus accounts in full, they no longer have full value Euros to withdraw.
The political battles in the Eurozone are all about the extent to which the richer neighbours can control the spending habits of the poorer neighbours, and the extent to which the richer neighbours will allow the poorer neighbours to use their money. So far, with a bad grace, the richer neighbours have come up with the money it takes to keep the higher spending neighbours going, except in Cyprus. For their part the poorer neighbours are putting themselves through big tax rises and spending cuts in an effort to curb their appetite for their neighbours cash. Some think this will prove self defeating.
It has produced plenty of ill feeling between the neighbours. It has damaged the Franco-German alliance at the core of the project. Joining the Euro is just like having a joint bank account with the neighbours. Anything short of a full happy marriage makes it very difficult for such financial closeness to work.
April 15, 2013
All this is clear and obvious so why are Major (Bliar, Brown and now Cameron) all so keen on this predictable ER2 type of disaster for the EURO members?
You say the EUphiles could not explain how or why. The EUphiles never do explain anything they just say it is in our interests but never say why. Then call you a xenophobe (or worse) should you disagree.
Cameron similarly never says why he does not want to be a great Switzerland/Norway nor why he will fight, with his heart and soul, to stay in the anti-democratic EU project. One has to conclude he simply does not have any reasons. He has had plenty of chance, after all, to come up with some – an aversion to yodelling perhaps?
April 15, 2013
Sorry greater Switzerland not “great” – The BBC line is also a very similar – “the EU is great, in our interests and if you disagree you are a xenophobe, little Englander or racist”. It has had this line since the dreadful Ted Heath. Cameron is perhaps too young to remember the disastrous Heath government very well. This is a great shame as he, like Major, is copying him and with similar predictable and disastrous results.
April 16, 2013
Germany, Switzerland and Norway are in general middle class societies based on high tax and spend with many regulations and complex tax systems with a religious belief in God and the cleanliness of the Earth and the environment. Often in truth absurd and claustrophobic to the outsider. How do you square this of with your right wing fantasy of minimal state interference? A fair question do you think? If you cannot come up with a ‘sensible’ reply your beliefs are ‘think’ and BBC nonsense except they are right wing think no state interference religious belief of the free market. No reply? Oh dear..
April 15, 2013
Interesting. Eurosceptics in my experience tell you it’s not in our interests and never explain why. I spent a good couple of weeks preparing lectures on the UK in the EU, hoping to find the clinching argument about why the EU is so bad and why the UK would be better off outside it, yet I couldn’t come across it.
The reality is that there’s a huge amount of grey area in what would happen in place of EU membership, and how that would work out. Into that grey area, beliefs enter. Those with strong ideological stances on either side of the debate take positions that they cannot defend. Those who don’t take such extremes don’t have such a hard job.
We just have to challenge you to come up with your alternative and why it will make the UK more prosperous. So far, what has been aired hasn’t been convincing.
Why would a 70m UK have stronger bargaining power in trade negotiations than a 500m strong EU? Why would EU politicians be any worse than UK ones? Why would EU bureaucrats be any worse than UK ones? Why would EU regulations be any worse than UK ones?
April 15, 2013
James its obvious. UK politicians are electable the EU is gradually becoming unelected. That is your answer.
April 22, 2013
No, that doesn’t answer the question.
China is growing very strongly at the moment and doesn’t have elected rulers.
I care about the economic impact, and I’m still yet to hear anything convincing.
April 15, 2013
@James
The UK ‘ones’ are just that, UK ! We can hold them to account. We can make them obey us (democracy) or change them. In a EU system, we would be small fry in a big pond.
Also, we would have a seat at major conferences, international committees etc. Currently, should we have a dispute with say Norway or Iceland over fish we would be able to deal with ourselves to ourselves. At the moment because of the Common Fisheries Policy this is handled by the EU – We effectively have no say.
http://www.telegraph.co.uk/comment/columnists/9813101/Norways-fax-democracy-is-nothing-for-Britain-to-fear.html
Further, regarding our energy. We currently have to get ‘permission’ from the Commission if we wish to build power stations and they have the power to shut them down, risking energy black-outs.
http://www.theconstructionindex.co.uk/news/view/brussels-clears-hinkley-point-c-for-take-off
April 22, 2013
And somehow it would be in the interests of the EU to impose blackouts on the UK? I’m not convinced.
I think you massively overplay the UK’s influence. As said, numbers and money matter, and 70m consumers vs 500m is big currency in trade negotiations.
April 15, 2013
“I spent a good couple of weeks preparing lectures on the UK in the EU, hoping to find the clinching argument about why the EU is so bad and why the UK would be better off outside it, yet I couldn’t come across it.”
It must be easy to explain how their failures to join the EU has left both Norway and Switzerland impoverished, with high and increasing levels of unemployment as well as continuous needs for bailouts. In particular, it must be much harder for Norway to regulate its husbandry and external trade in fish products than for the EU in dealing with its own fishing grounds on the Dogger Bank. The reason why Iceland was not able to take hard but rational decisions when confronted by a severe banking crisis, unlike the EU, was of course that it is a very small country with correspondingly limited intellectual resources, quite unlike the EU with its powerhouse of intellectual muscle in Brussels.
April 22, 2013
You see, the level of development currently in countries outside the EU isn’t a factor in whether the UK should leave or not – we can’t suddenly become a different country.
I do like the sarcasm at the end – but the bigger point is, of course, why should we believe that our bureaucrats, our politicians, are any less incompetent than those in Brussels?
April 15, 2013
Norway, Switzerland, Singapore, Hong Kong,Canada, USA, Australia are surely evidence enough, relative to the general and declining EU disaster area.
April 22, 2013
lifelogic – not really, since their membership or otherwise of the EU isn’t necessarily the biggest factor in their economic success or otherwise.
EU membership isn’t just a switch we can flick on or off if we feel like it, just as enjoying the kind of economic success of another country isn’t something we can just grab by leaving the EU.
It just isn’t that simple. Cherry picking examples of countries where multiple explanatory factors can be found for their development or lack of it is thoroughly unconvincing.
April 16, 2013
James, you ask “Why would a 70m UK have stronger bargaining power in trade negotiations than a 500m strong EU?”.
If the 430m don’t represent the same position as the UK then by being represented by the EU instead of representing itself the UK has not got what it wants from the trade negotiation before it’s even turned up for it.
April 22, 2013
Do you think the EU’s objectives in negotiating are sufficiently different then that our 70m suffer? I mean, if you’re negotiating on behalf of 500m people, you’re going to take into account what a proportion as large as 70m is into account. Do you have evidence that this doesn’t happen?
April 15, 2013
I suspect you will get answers to your deserved question when we learn who is pulling Cameron’s strings. I subscribe to a coalition of vested interests in the financial world that operates divorced from any democratic institution, and there are precious few of those. While there is a logic to a loose club of European countries trading and cooperating with each other, there is no logic in a financial or political union. The economies and cultures are too disparate for it to work. Those who press for it are political fantasists or those with vested interests. Perhaps we should look at whose money and under what guarantees of interest it is being used to prop up this political fantasy. When it comes to support for instance for the British victims of theft in Cyprus what do we hear from Cameron?
I have heard nothing, and yet he has the means to stop it dead with a deduction from the vast sums we pay daily into the coffers of the European dream. Dear departed Margaret Thatcher would have known how to deal with it and almost certainly would have done.
April 15, 2013
So why should John Bull with his (badly overdrawn) independent bank account be called upon also to prop up any part of the neighbours’ joint account? Why are those neighbours also allowed to dip into the contingency rescue fund (IMF), when their overall bank balance is still in the black? The joint account seems only to be joint when it suits the account-holder.
April 15, 2013
I rather like your comparison, as its simple to explain and understand.
Rather like government spending being related to a household budget (now who said that )
Indeed even in a good marriage some people still prefer to have their own accounts, as well as running a combined account for household expenditure.
A “One size fits all” (type of policy), often fails to fit anyone properly (unless they are all the same size, and the policy is designed to fit that size), but add in the additional trust needed for money management, and you can easily get an absolute disaster.
I see from press reports that Mr Cameron has lost his (Gay Marriage) advisor.
Has this policy now runs its course ?
April 15, 2013
“I see from press reports that Mr Cameron has lost his (Gay Marriage) advisor.
Has this policy now runs its course ?”
At hte time of his appointment, Tim Montgomerie ‘tweeted’:
“Andrew Cooper once described the Tory grassroots as “vile” to me. And now he’s head of strategy for David Cameron.”
April 15, 2013
Is it quite as simple as the “joint bank account” analogy? apparently there are some conditions for taking part, or one ends up like Greece, Cyprus etc. Should they ever have been allowed in? It shows the political trade-off in these matters, it isn’t pure economics, just like the euro was a political trade off involving the re-unification of Germany. Political considerations will also dictate that the UK, currently the bad neighbor with “no friends, only interests” will not leave the EU.
April 15, 2013
Peter,
What you mean is that it was a manoeuvre to lead to political union, which has always been the aim of what is now called the EU. However, your political considerations never seem to allow the people of the countries involved to have their say about whether they want their government to be taken over by others whom they will never be allowed to remove from office via the ballot box. Denying such basic democratic freedom leaves rather unpleasant alternatives for people and is more likely to cause conflict rather than the peace we are told was the raison d’être for this coup d’état.
April 15, 2013
As long as Europeans vote for pro-EU parties and elect pro-EU MEPs there’s clear evidence that their political considerations are being considered.
April 15, 2013
@Brian Tomkinson: For most of us in the Netherlands, the EU is something in which we take part, it is not some kind of “foreign” power, we are the EU, just as much as the French are the EU and the Spanish or Polish are the EU.
We don’t apply “direct democracy” but “representative paliamentary democracy” in which we have influence regularly (more often than the Britons). There has always been broad support for the EU in the Netherlands, check the statistics if you like.
April 15, 2013
It was never about Economics, the Euro was a pure political project, that’s the problem.
The reunification of Germany took place in 1990 and the Euro came into being nine years later.
While there is ample evidence that the two events were interlinked, specifically by the French insisting on the currency in exchange for agreement to reunification.
However, if the Germans had really wanted to scupper the single currency they had plenty of time to do so. The reason they didn’t was a combination of continued contrition over WW2 and their judgement that the currency would be good for German industry. In this they were overwhelmingly correct it’s just that it’s been a disaster for almost everyone else !
April 15, 2013
@Chris S: The EMU was being negotiated in 1990 and became part of the Maastricht Treaty. I don’t think that the Germans view the euro as a disaster, that is the prerogative of the global bastion of anti-euro propaganda, located in the UK.
April 15, 2013
Of course they shouldn’t have been allowed in, and in fact the Dutch government expressly objected to Italy being allowed into the first wave; it could have vetoed that, and said that it was not prepared to proceed until it was quite sure that all the participating countries would be fit to share a currency; but lacking the courage and patriotism to do that it instead allowed itself to be over-ruled by Kohl for his political purposes; so if the Dutch people now have to pay the price for that terrible mistake made by their elected politicians, so be it; just as with the German people you should accept your own responsibility as much as you expect the peoples of the distressed eurozone states to accept responsibility for the terrible mistakes made by their elected politicians and to pay the price whatever it may be, even if it means destitution; but don’t expect us to pay for your poor electoral choices.
April 16, 2013
@Denis Cooper: Whether it was a mistake to let certain countries in was “a terrible mistake” is far from sure if you consider all aspects, also the political ones. Instead of a new colonel’s regime in Greece, it is part of the EU and the EZ and there is some real leverage on it to make things better. Same for Italy, which was opposed by our minister of finance, who has never lacked courage, but as any Dutch, would be willing to listen to broader arguments. Patriotism is a weird word in this context as there is national but also European patriotism on the continent. For now, Britain is still profiting from all these efforts while not paying for it. In the end, not making any friends may still prove costly for Britain, time will tell.
April 16, 2013
Peter, if even at this point you can’t bring yourself to acknowledge that it was a terrible mistake then there’s little hope for you.
April 18, 2013
But we don’t seem to be profiting do we.
By the way I’d be interested in knowing at what convenient point in time you draw the line in terms of when the UK hasn’t been materialy supporting Europe?
April 18, 2013
@David Price: From the moment that the UK withdrew from any participation in any euro bail-out, at a time that Sweden and Denmark were still supportive. It was early in the Cameron government.
April 18, 2013
Yet you demand that as a Eurozone taxpayer you must not contribute to bailing out your fellow Eurozone citizens in Cyprus. How do you reconcile such a view with your other demands that UK citizens and taxpayers, who are net contributors to the EU anyway, must additionally bail out the Eurozone of which we are not a member?
April 15, 2013
Peter–Please put a sock in it about friendship, which in this context is emotional claptrap. You will never explain why it is not obvious that the way to go is for the UK to leave the EU, then for the Continent, unencumbered by the UK, to amalgamate quickly in to effectively a single new country (which the UK doesn’t want to be part of and never did) and then for the UK (with maybe, but not necessarily, one or two like-minded others) and that single new country (via Brussels) to form something like the relationship that Canada (and Mexico) has with America, ie NAFTA. And while we are at it, try and take on board the simple fact that although there might (repeat might) be some (small if any) advantages to the UK being in the EU, any such are by no means net advantages because of the enormous amounts of cash we have to pay in for the “privilege” of being where most of the UK do not want to be anyway. The UK could use that cash in many other ways.
April 16, 2013
@Leslie Singleton: I don’t object against the arrangement you’re suggesting here. The objections are more likely to come from others in the UK. You do realize that Mexico hasn’t got the kind of influence on USA matters that the UK might want to continue to have on EU matters?
April 16, 2013
Peter–I am glad to hear that you do not object, because it is a Win-Win situation and as I say the glaringly obvious way to go. I most certainly would not expect any shall we say undue influence over what the new and amalgamated country on the Continent does or does not do apart from of course the usual diplomacy and comity of nations–why on earth should I?
April 15, 2013
It seems that some neighbours are more equal than others. When one next door neighbour lends money to another, with approval or as required by the neighbourhood financial committee, the borrower is allowed to default and the lender is sent for a ‘haircut’. Then when the lenders other banks get nervous, the rug is pulled.
Peter, what do you think of your young finance committee chief’s new “template” to take the money from honest businesses, savers and people in the process of selling property, while still backing the bigger neighbours?
April 15, 2013
@stred:
Dijsselbloem never used “template” (didn’t know the word, but should of course have asked what the FT interviewer meant, beginner’s error). I like him, and the changing environment in which I, the tax-payer, don’t automatically had to pay for Russian (and British?) money launderers in Cyprus (a special case, where savers got several times as much interest on their deposits as in the Netherlands, very strange as it uses the same currency).
Deposits above €100,000 are never guaranteed and I see it as a good change that shareholders, bondholders, depositholders above €100,000 pay before I do. They take the calculated risk. Of course I’m also sorry for this couple in the process of selling property, if they were British, no doubt the UK government will rescue them as an exceptional case? Interestingly it now appears that “the Cypriots” are much more than 1.5 x as wealthy as the Dutch (themselves not the poorest Europeans).
April 16, 2013
Peter,
Just wait, they will come for your money too. As Mrs Thatcher said ” Eventually, Socialists run out of other people’s money to spend”.
April 16, 2013
@Brian Tomkinson: These aren’t socialist policies. In fact I have heard conservative politicians suggest these matters and avoid making the tax-payer bleed.
April 16, 2013
And of course neither the German government nor your own Dutch government had the faintest idea that all this money-laundering was going on in Cyprus when they agreed to it joining the euro. That’s only just been discovered as the Germans as a suitable propaganda pretext, which you are content to repeat.
April 16, 2013
@Denis Cooper: Of course the money laundering somewhat increased after Cyprus joined this enviable global currency. 🙂 Its banking sector more than doubled within a few years.
April 16, 2013
Peter. Thanks for this insight into the northern EU mind. The account holders are money launderers, taking advantage of the high interest rates? The rates were barely above inflation, or in other words did not create stealth theft like other EU and UK banks. The big boys, who may have been launderers or thieves got large amounts out before the official announcement.
I heard him use the word template. What if they do the same to the other PIIGs? Should all their legitimate businesses and people transfering payments have their cash stolen.
The reason that the Cypriots are wealthier on paper is that many own their own home and the EU banks financed a property boom. Germans prefer to rent. These values have now crashed, thanks to the EU, as they did in Ireland. You ballsed it up. You are happy to be in the club. Pay up.
(etc ed).
April 16, 2013
@stred: 5% is way above the euro rate of inflation, and when and where did you hear Dijsselbloem use the word template? I believe to have watched all interviews and have read the fateful transcript as well, so I’m a little puzzled here. The policy of moving from tax payers to shareholders etc. is currently being developed in the EU, so no surprise there.
April 17, 2013
I think I heard him say template in a Channel 4 news interview after the Irish meeting. Anyway, are they planning to do the same to accounts holder in PIIGS banks? If not, for the sake of sanity, please say so, otherwise there will be a banking crisis. No argument about shareholders. Stealing honest peoples livelihoods is disgusting. Do these untaxed Eurocrats even care?
April 18, 2013
@PvL
See reuters article – http://www.reuters.com/article/2013/03/29/us-eurozone-cyprus-ecb-knot-idUSBRE92S05P20130329
“template”, “model” or “recipe”, it doesn’t matter which word was used the intent has been made very clear.
April 18, 2013
@David Price: Indeed. the German Bundesbank president (also on the ECB board) on Cyprus in WSJ: “Though the specific deal isn’t a blueprint for others, it shows the importance of having a “pecking order”. That the tax-payers are the last ones the pay is a good principle.
April 18, 2013
The German Bundesbank president and messrs Dijsselbloem and Knot don’t appear to agree while the financial market also seems to have problems believing words in the face of actions.
Also, your position that the taxpayer should be the last to pay is at odds with your demand that the UK taxpayers bail out the Eurozone, despite not being a part of it.
April 15, 2013
(site ref left out)Ask yourself how your democracy, of which you like to boast, could be so fundamentally defective that it produced successive governments which readily agreed that your country would share a currency with this other country (Cyprus-ed); while our democracy, admittedly flawed, stopped our politicians following yours down that primrose path to eurozone hell.
I suppose that the ordinary Dutch electors could plead ignorance, as could the ordinary Cypriot electors; but that could hardly be the case for the politicians who they had elected to mislead them, and nor I would suggest would it be your case; it is simply not credible that you had no idea of how badly Cyprus was being run and could not foresee the likely consequences; so stop complaining, and pay up for the terrible mistakes made by the politicians you freely elected.
April 16, 2013
@Denis Cooper: I must give it to you that you often bring a smile to my face Denis. For someone living in the “eurozone hell” I had expected it to be a bit warmer! 🙂 I like to look at the very large picture, in which all will sort itself out both politically and economically in a Europe which is “coming together” in the 21st century. Whether Britain will be part of that Europe is irrelevant (personally, I’ve long given up living in Britain, as we don’t want to experience new sterling devaluations, and besides, France still has better food, health-care and weather, if we got bored of the Netherlands). As you realize, now that the eurocrisis is in calmer waters, the burden of bailing-out is shifting away from tax-payers to shareholders, bondholders and larger deposit holders. I’m actually not complaining. I’m only complaining about the free riders and cherry pickers in the neighborhood.
April 16, 2013
Well, Peter, instead of exhibiting this smug complacency why don’t you show some “solidarity” with your fellow Europeans by giving up your comfortable life in the Netherlands and going to live in one of the distressed eurozone states?
April 16, 2013
@Denis Cooper: Currently, the Nethlerlands itself is a distressed EZ country. We have a deficit above 3% and a fasst rising level of unemployment. The Dutch economy needs my consumption, as well as you buying more Dutch export products, for which I offer you my gratitude in advance. Giving your wife a bunch of flowers every week would be a good start 🙂
April 17, 2013
Peter–Absolutely love the way you blithely ignore the unadulterated horror and undiluted misery that has been visited on the peoples of large parts of, especially, the EZ by the fanciful artificial construct that is the EU. It is obvious that the Euro does not, cannot and will not work unless the relative countries jump PDQ to completely pooled sovereignty, not just the hogwash about banking unions, and that simply is not going to happen which I suspect you agree with. There are huge differences in idealogy, history, culture, law, religion, language and just about anything else one cares to name and long may that continue. The only thing the EU thinks, repeat thinks, it has got going for it is geography but that is very far indeed from being enough, indeed as a glance round the world will indicate geography can easily work the other way. That is what borders are for. It is a disgrace that so much decision-making power is in the hands of people earning huge salaries in Brussels (I went there once–a most unimpressive place) who of course will never look at the question objectively because what of any use would they be to anybody if or when it all falls apart?
April 18, 2013
Postscript–Re-reading, should have been ideology of course–Apologies.
April 15, 2013
So Peter, the UK which is a net contibutor to the EU budget of some £10billion is a bad neighour? I’m sure that Germany will do whatever has to be done to keep the UK in the EU so that they don’t have to also pick up the contribution the “bad neighbour” UK is currently making! The £10 billion does not include the UK money in the IMF that is being channelled to support the Eurozone experiment. It will all end in tears when the German voters realise the price they are having to pay to support the Euro spendthrifts.
April 15, 2013
Given all the reforms that the countries requiring bailouts have to comply with in exchange for these bailouts I doubt that the German voters will ever feel they are paying too much.
April 15, 2013
@P O Pensioner: As far as I know, the UK net contribution (net!) is less than you mention. This contribution also helps develop markets to which the UK can then export. It pales in comparison to what EZ countries do in bail-outs. In addition the UK (the conservative part of it) has made itself the global bastion of anti-euro propaganda (in the global linga franca as it happens) and I see no reason why that should be forgotten when the continent will get its EZ act together. Neither should it forget that the UK 1986 “bigbang” (financial free for all) did come full circle in the 2008 big-bust and that UK policies carry a special co-responsibility for the fiancial crisis since.
April 15, 2013
I see that if Scotland were to vote to become an independent nation as Alex Salmond hopes, the Nationalists still want to share our bank account with the Bank of England so we can bail them out if/when they get into difficulties!
April 15, 2013
I think your analogy passes the “soundbite test”, but is that really as substantial as we should be in political dialogue? Surely if your analogy is wrong but can’t be argued against with a soundbite, that doesn’t mean you should still be peddling it?
I think the most important point about your analogy is it is incredibly narrow. Yes, some countries have been forced to support others, but they’ve also been able to trade without exchange rate risk and costs for a decade – the kind of benefit completely absent from your analogy which focusses only on the downside risk.
You go on to talk about how unwilling some countries are to fund the deficits of others. Is that really any different to the unwillingness of rich councils being unwilling to share their surpluses with poorer councils in the UK – a proposal of Eric Pickles not too long ago? Is it really too different to the animosity that now exists in this country against anyone who claims any sort of benefits, regardless of how justified they may be? I’m not so sure.
Reply You make my point by reinforcing the analogy. The national government does send large extra sums in grants and loans to the financially stretched Councils in parts of the UK.
April 15, 2013
I think that the massive ECB Target2 imbalances are the real effective exchange rate risk within the Eurozone. In effect, as those default de facto if not de jure the depreciated rate of exchange will be made apparent.
April 15, 2013
I wonder whether the theory that business risk (and therefore the cost of capital) has been reduced by the Euro will turn out to be an illusion. Although exchange rate risk disappears in a currency union, it is apparent that sovereign risk markedly increases. The German business trading in Greece might not have FX to worry about, but has new uncertainties in all manner of counter-party risk due to the sovereign insolvency which the euro has caused (or at least enabled). Would any German business contemplating investment in Greece really now think the euro has reduced the cost of capital?(!)
April 22, 2013
Good point – though the sovereign risk is only something quite recent, at least judged by the interest rates various of the PIGS have been paying relative to Germany.
Furthermore, with less incompetent management of the eurozone and willingness of those that have benefitted (notably Germany) to cough up to support the system that’s given them those benefits, there might not have been the resulting spikes in these interest rates.
Also, German firms are still able to profit from their exports into the PIGS, even if fewer of them might be being bought. And of course those in the stronger economies still benefit from exporting with a cheap currency – which wouldn’t be happening if they had their own currency.
April 22, 2013
Yes but my point is there’s less and less political will to do that – you’re missing my point, yet again.
April 15, 2013
Your analogy is exactly right and this is why in the longer run the Euro will fail.
Even though the EU has a lamentable history of ignoring the views of it’s member’s citizens, it will only be able to keep the lid on the problem for so long.
Sooner or later there will be rioting in the streets by the 50-60% of young people who are unemplyed in Spain and Greece and the German taxpayer and those of Finland Austria the Netherlands will revolt in a more civilised way against the policy of fiscal transfers to the Clubmed countries.
Van Rumpuy and Barroso have no answers for these problems.
The first signs of an end to the cozy consensus amongst German politicians are emerging :
The CDU and FDP are against further bailouts using German taxpayers money and the even the SDP made it clear they would not support a large contribution of German Taxpayer’s money that would end up in the pockets of Russian investors in Cyprus.
Then there is the formation of the anti-Euro Alternative party. Although it’s predicted to fall short of the 5% threshold needed to get seats in the Bundestag, there has to be a strong possibility that the electorate will give the politicians a severe jolt just as in Italy.
These are healthy signs and Frau Merkel will ignore them at her peril. In fact, the settlement imposed on Cyprus is a clear sign that she is already shifting policy away from slavish support for the single currency.
It can surely only be a matter of time before the neighbours are revolting !
April 15, 2013
There is only one Gordon Brown policy for which I give thanks. Keeping us out of the Euro. Whether this was down to good economics, or because Blair was keen on our entry, I know not. But he did us a favour.
April 15, 2013
When we got married my wife had to give up her job in another part of the country, and as all our income was then going into my bank account we agreed on the simple move of converting that into our joint account, while she could retain her own account and could spend whatever money she had in it as she pleased.
One of my more traditionalist friends had a different approach. He had the bank account, he wrote all the cheques, and he gave his wife weekly housekeeping money in cash; until the day came when he had a cheque for privatisation proceeds made out in her name, and to his chagrin he was finally forced to allow her to have her own bank account.
Nowadays it would be more common for a couple to keep their own accounts but set up a new joint account for the shared expenses, and perhaps that would be the analogy for a parallel EU currency as proposed by Margaret Thatcher.
Here is what she said about it in the Commons on October 30th 1990, as part of the same statement which led on to her famous “No. No. No.”:
http://www.publications.parliament.uk/pa/cm198990/cmhansrd/1990-10-30/Debate-1.html
“The hard ecu would be a parallel currency, not a single currency. If, as time went by, people and Governments chose to use it widely, it could evolve towards a single currency. But our national currency would remain unless a decision to abolish it were freely taken by future generations of Parliament and people. A single currency is not the policy of this Government.”
Well, of course that suggestion was given short shrift by the eurofederalists, who quickly made it clear that even if they sometimes found it expedient to represent the proposed currency as being a “common” currency they very definitely wanted it to be the “single” currency for all EC/EU member states, issued by a eurofederal central bank as the only legal tender across the EC/EU.
And that is what Major agreed to through the Maastricht Treaty, in what is now Article 128 TFEU:
“The European Central Bank shall have the exclusive right to authorise the issue of euro banknotes within the Union. The European Central Bank and the national central banks may issue such notes. The banknotes issued by the European Central Bank and the national central banks shall be the only such notes to have the status of legal tender within the Union.”
Quite unnecessarily: he had a veto, and he could have refused to agree to the EU issuing its own currency at all, let alone as the EU’s single currency displacing all the national currencies.
April 15, 2013
This is probably very much over-simplified, but the way I see the Euro is that Germany joined at a very favourable exchange rate (perhaps because of its own recent incorporation of East German currency into the D-mark). In order to sell its desirable products it then took advantage of the sudden loss of restraint by bankers and Central banks and the apparently endless supply of cheap credit to sell these products to Southern European countries. Eventually and inevitably, lenders began to worry about their loans and the borrowers couldn’t pay. Now Germany sees no point in throwing good money after bad, but it doesn’t look to me as though that strategy is going to get the ‘bad’ money back. However, the first thing to do when you’re in financial difficulty is to stop losing money. A lot of Germans seem to have woken up to this idea.
April 15, 2013
my very thoughts
April 15, 2013
I have a joint bank account with my wife . She is prudent , selective and a good manager of our household . She has never written a cheque without informing first . There are many attractions in this relationship including the advantage of splitting the tax implications , thus benefiting the bottom line . Were the UK in an equally beneficial financial and social relationship with the EU , and if the democracy prevailed as it does in my marriage , I would be enthusiastic with a ” joint account “. Clearly we are not consulted and have no control over EU expenditure , and , there is no ultimate bottom line advantage . The conclusion is keep an independent account .
April 15, 2013
Given that when Portugal, Ireland, Greece, and Cyprus needed a bailout they couldn’t just withdraw all the money they needed but had to negotiate for it, it seems that the joint bank account analogy isn’t accurate. I’d say this relationship is more akin to being a guarantor, with strict terms regarding when such a guarantee will be honoured (such as making reforms).
April 15, 2013
As with any ‘relationship’, when you put it on a formal setting ie marriage/union, you make a serious legal and, hopefully binding commitment to each other. As they say, “for richer, for poorer, in sickness and in health.” Germany and others have made a commitment to share a currency, but not the rest. This was the only way the Germans’ were going to buy-into the Euro and be trapped into ever closer ‘Union’. Something the French desperately want.
The only way the Euro and even the EU can survive is by going for full political and financial union. That’s one big step everybody’s going to have to take. The sooner we face up to this threat and start dealing with it, the better. Because if you think that what has happened across the EU can only happen in the EU, think again. What we have been witnessing will soon visit these shores.
April 15, 2013
Today has seen an extraordinary speech from Draghi at the ECB. He admits that there can’t be a single interest rate that suits all the countries of the Eurozone.
http://www.ecb.int/press/key/date/2013/html/sp130415.en.html
WB Yeats
April 16, 2013
“the euro area comprises multiple sovereign states.”
But some are more sovereign than others, or to be precise technically all are equally sovereign but some have been rendered largely incapable of exercising their sovereignty without consequences which would be even more dire than the dire consequences of their present subjugation to German power.
April 15, 2013
I find your analogy somewhat difficult. Is this not exactly what happens within the U.K., the richer regions subsidising the poorer ones?
Reply Of course. The Uk usually stands behind national and local government spending and borrowing around the country. On a rare occasion when the government refused to stand behind a Council’s borrowing there was a big row and much surprise.
April 16, 2013
” If the ECB does not honour the Cyprus accounts in full, they no longer have full value Euros to withdraw.”
I just do not understand this at all. The Euro is, surely, the Euro? It cannot have different values in different countries? Isn’t that the whole problem?
April 17, 2013
Fifty-five comments in all (so far) of which thirteen provided by a foreigner resident outside the UK. Is there nothing else to do in the Netherlands?