People from the Irish Republic are rushing over the border into Northern Ireland to take advantage of the cheap prices in the shops as they flash their Euros. The shops in Kent and London are welcoming many continental trippers who find sterling prices cheap to them. On Sunday visiting a shopping centre nearer to home, I was struck by how many of the voices were speaking foreign languages.
The market is beginning to work, to adjust the big deficit in the UK balance of payments. Foreign shoppers will swell receipts, whilst UK shoppers will buy fewer foreign made goods as their prices surge. Families nervous of job prospects and finding it difficult to balance domestic budgets will cut back on foreign holidays. Gradually imports and exports will come into better balance.
The danger in the present situation is that many countries and currency blocs might like the sound of devaluation. The UK’s neighbours in Euroland are becoming unhappy about the very strength of their currency which makes UK goods and services such a bargain for them. The Euro area is demonstrating just how dangerous it is to impose currency union on economies and markets that had not properly converged in the first place.
There has been considerable worry about Portugal, Italy, Greece and Spain. None of these economies had been brought fully into line with France, Germany and Benelux, the core countries of the currency union.
The cost of borrowing money has risen for the governments of the weaker economies of the Union, despite the fact that they are all part of the same currency area with some implied obligations from the stronger to the weaker members. Spain is struggling with a property collapse, and all four are finding it tough to export at current levels of their currency.
Some Euro critics see in these pressures the beginnings of a break up of the Euro. They think that maybe one or more of the troubled countries will conclude they need to leave the Euro, devalue, and get more people back to work through such a realignment. Why not take the softer option to price yourself into work, rather than the tough option of staying within the Euro and having to cut wages and other costs?
I think this is a misreading of the Euro project. The single currency was always more of a political project than an economic one.
There is no easy way out of the currency. Whatever the people of the peripheral countries may think of their currency, their governments regard it as a matter of faith to stay in and manage the consequences.
At the same time as some members have to accept the pain that the common currency brings them, some are discussing British membership of the Euro again. German sources have confirmed to me that Germany herself does not think this would be a good time for the UK to join, as they are worried that at this rate of exchange the UK is too competitive for comfort. They see the recent large moves of the pound against the Euro, showing that the two economies have not converged. I think the UK government appreciates that 80% of the UK public are still against membership, and understand that the promise to hold a referendum before joining is a pledge they dare not break. Ministers regularly repeat the mantra that now is not the right time to join, even though they stick to the view that in principle they would like to.
My conclusion is the Euro club’s membership is going to be more stable than some commentators suggest. Weak countries will be reluctant to leave, and big new entrants will either be reluctant to join or kept waiting before they do. Looking at the economies of Western Europe it is difficult to conclude that the Euro area is a perfect size and shape. It appears that too many peripheral economies with different economic policies and circumstances have already been allowed in.