Why are people surprised that some countries find it tough in the Euro?

Some things are as easy to forecast as the conventient truth that night follows day.

When they were setting up the Euro some of us said if they allowed in countries whose economies had not converged there would stresses and strains. If they let in countries that were borrowing too much and had too much inherited debt, they would first free ride then struggle to stay the course.

The people setting up the Euro said they knew that. That is why they set strict criteria for membership. They said every state joining had to have total debt below 60% of GDP, and no state should borrow more than an extra 3% of National Income in any given year. That was all very sensible.

Then they started fiddling the figures. Everyone knew they were fiddling the figures. They could not help themselves, as they put the poltics of it ahead of the economics. That meant putting the interests of the poltical elite determined to do it over the interests of the electors who stood to lose their jobs or suffer lower living standards from the governments fiddling it. Today the elites are blaming the banks who did the deals for the governments who did the fiddles!

In “Our currency, our country”, the Penguin I wrote to urge the UK to stay out, I wrote in 1997

“At present only Luxembourg could properly qualify for the single currency as designed in the Treaty of Maastricht….five countries (including Greece) are so far beyond all the requirements they have no chance of joining on any sensible interpretation….It is confidently expected that when the decision comes to be taken in the first half of 1998 a more tolerant view will be taken of the requirements…” (and how! – all were allowed to accept the poisoned chalice)

In the run up to monetary union Greece was borrowing 8- 14% of her National Income each year and had a stock of debt more than 100% of National Income. Her inflation rate was 8% and her long term interest rate a massive 15%. Why did anyone think she was ready?

In 2001 I wrote “Just Say No” to provide the 100 best arguments against the UK joining the Euro, in case Labour carried out its threat and held a referendum on this proposal. I saw the scheme as the ultimate rigged exchange rate system and said

” History shows that rigged exchange rates do not work. The Gold Standard…bankrupted many businesses and created mass unemployment.The snake in the 1970s failed to keep the pound at a constant value against the Continental currencies. The Exchange Rate Mechanism caused a bad recession, and then collapsed.”

I went on to explain how you needed a single economic policy, a single budget and a single country to make any success of a single currency.

“There isn’t one exchange rate that is right for London and Lisbon. (or for Athens and Aachen).There isn’t one interest rate that is right for Manchester and Marseilles. (or for Lisbon and Lubeck) You cannot have a single economic policy without a single budget. The poorer and richer regions are too different The poorer ones are likely to lose out. There isn’t a single labour market because there isn’t a single language. There will be areas of high unemployment as a result.”

Nothing has changed. The political elites drive on against the interests of their electors. It isn’t the bankers who sold the swaps or the bond traders who sold the bonds that created this mess. It is the politicians and senior officials who wanted a new currency for Christmas, whatever the price.


  1. Donna W
    February 17, 2010

    "I went on to explain how you needed a single economic policy, a single budget and a single country to make any success of a single currency."

    And that's what the Eurofederalists will insist is now needed. They will use Greece (and the rest of the PIGS) to try and achieve it.

    Thank the Lord we stayed out. It is possibly the only thing Gordon Brown has ever done right – not that I think he did it for the country's benefit, it was probably done to spite Blair.

    1. alan jutson
      February 17, 2010

      Donna W

      They will argue it is because the Politicians do not have complete control over everything that it is failing, hence the Lisbon Treaty being introduced where they can now make up what ever new rules they wish.

      It will sooner or later all end in tears, as the European Countries will not be able to compete with the rest of the World due to their high costs, overheads, and regulation, introduced by the EU Politicians who run it.

      Eventually some Countries will get fed up with constantly subsidising others to their own cost and disadvantage.

    2. Citizen Responsible
      February 17, 2010

      I always felt that the motives behind the single currency were political. The single currency has created problems and then the solution to the problems can be used to achieve the political goals.

  2. oldtimer
    February 17, 2010

    In your later post about the Euro you comment on fiddles figures. I suspect there has been some fiddling on the issue of climate change and global warming too.

  3. waramess
    February 17, 2010

    Well, they can't say they weren't warned.

    I think that sometimes politicians simply believe it will never happen. Whatever it is, and however dangerous it might seem, they just go ahead as if they walk water.

    This little mess has quite a long way to go and presents the possibility of mass rioting in the Eurozone as governments resist ditching the Euro whilst unable to pay adequate benefits.

    Maybe this will be the beginning of the end for the Euro, What next I wonder?

  4. Lola
    February 17, 2010

    I bet you won't get to say that on the BBC.

  5. Y Rhyfelwr Dewr
    February 17, 2010

    To think that some people deny there's a democratic deficit in the EU! The best thing about democracy, despite all its flaws, is that it is the only system of government that links the welfare of the people to the interests of the political elite.

    In the Eurozone, however, the Greeks can starve, as long as the politicians' great project advances unabated. Whatever happens in Greece, Neil Kinnock et al knows it won't be him standing in the dole queue. It won't be his mansion that get repossessed, or his children who go hungry. What more proof do we need that the EU lacks democracy?

    Of course, one could say much the same of Britain's own politicians. Perhaps they would be less willing to cook up deals behind closed doors, less eager to conspire with the Brussels oligarchs to deny the people a say in their future, if Britain's own democratic deficit were not so acute.

    Unfortunately, the best we, the British people, are permitted is, every five years, to elect a Commons which is whipped and gerrymandered to the point of being little more than a rubber stamp for a Prime Minister who largely a dictator for five years.

    But given that ninety percent of constituencies are so safe that the MP has no need to fear the electorate, and the greatest threat to his future comes not from the voters but from a disgruntled party leader, the vast majority don't have even that much control over our nation.

  6. Robert George
    February 17, 2010

    Great crises are also great opportunities. Germany has a unique opportunity to force prudence in the Eurozone. That, however, requires they treat Greece with complete economic brutality.

    Greece is a small country of 11 million with a relatively small economy so if anyone is to be made an example of they are a suitable target. The most savage cuts should be demanded and independently audited before a cent is committed.

    Frankly it doesn't matter if the Greek government falls or if their people are impoverished, they are just not that important – except as an example to Club Med and the UK. The debtor nations need to be terrified into taking the same measures as the Irish and more where necessary.

    We need to make an example of Greece to scare the bejesus out of the wastrel politicians.

  7. Y Rhyfelwr Dewr
    February 17, 2010

    "It is possibly the only thing Gordon Brown has ever done right – not that I think he did it for the country’s benefit, it was probably done to spite Blair."

    Sorry, Donna, he deserves as much credit for that as for anything else. It was a policy that he inherited from John Major. I suppose one might argue that at least our Gord and Saviour didn't cook the books and then conspire with the Brussels oligarchs to deny us the referendum we'd been promised. Call me an ingrate, but it's an argument that leaves me distinctly underwhelmed

    Peter Meddlesome, you who just a few months ago were telling us how the recession would never have been a problem had we joined the Euro — you've been awfully quiet as of late. I do wish you'd clarify your opinion in the light of recent events.

  8. A.Sedgwick
    February 17, 2010

    Excellent summary and expose – the launch of the Euro was the start of the unmasking of the hidden agenda of a federal Europe. Neither has any chance of success, any comparison with the establishment of the USA is erroneous and totally fanciful the world has moved on. Consider a union of France and Germany – impossible so how can 27 states with serious historical, cultural and economic differences combine. It is for dreamers and political egotists.

    The huge disappointment of charging down this blind alley is there are so many benefits from a free trade area and fraternal grouping, which are being lost by all this bureaucracy and political chicanery.

  9. Javelin
    February 17, 2010

    I fear the route out of this mess is going to be withdrawing the right of Greeks vote in the EU. The EU leaders have made it more beneficial for the Greeks to stay in the EU and lose a few voting rights on a few commitees than to leave the EU.

    The EU politicians have been searching around for a route to greater integration and I think that this is the route they have chosen.

  10. GJ Wyatt
    February 17, 2010

    When the Euro was proposed the arguments in favour were cast in terms of improving efficiency via micro effects – eliminating the transactions costs of multiple currencies and the trading uncertainties of fluctuating exchange rates. The arguments against were about macroeconomic instability, and indeed envisioned the kind of scenario now unfolding. Now that it is a monetary reality, albeit without coherent fiscal support, and with much political capital sunk in it, the predicted consequence of large, long-term transfers within Euroland must be faced. Such transfers will be abhorrent to the populations in donor member states, for whose electorates this possibility was never spelled out. But without them the implied austerity measures in debtor states could lead to social unrest. Even simple ejection from the Euro would not be not a solution for the Euro elite, though it might get the recalcitrant state eventually back to equilibrium. Whatever happens there will be long term resentment. Hardly the nirvana of inter-state solidarity of the Euro dreamers.

  11. Citizen Responsible
    February 17, 2010

    When the Euro was set up, the ECB initially set interest rates to suit the largest economy in the Euro zone–Germany, which was far too low for many other EMU countries. The result was a boom in countries such as Greece where governments, companies and families massively over-borrowed and banks and investors massively over-lent. Now comes the bust. It seems that the Euro zone is becoming a two tier structure. An inner stronger Franco-German core and an outer weaker group – the PIIGS. By giving up their currencies and the bullion in their vaults, the Euro zone countries have lost their independence and will have to take the medicine as administered by the ECB.

  12. MartinW
    February 17, 2010

    I was quite astonished at the fair treatment given to John Redwood by Kirsty Wark on 'Newsnight' last night, and indeed, that she conducted the debate in a calm and even-handed way. This must surely have been a 'first' for a programme that has moved to the far left in recent years.
    I am thankful to JR for putting the case for reducing deficits so compellingly, and especially for putting the blame where it should lie – i.e. on Brown's crazed management of the economy. It is puzzling that shadow ministers seem loathe to criticise Brown's handling of the economy in such forthright terms.
    I am also pleased that the plight of the lower paid was recognised by both sides. It is they who have been and are hardest hit by the relentless torrent of regressive taxes imposed by this egregious goivernment, and I hope the Party will take some heed to what the union leader had to say.

    1. Alan Wheatley
      February 17, 2010

      I missed Newsnight on Tuesday, but MartinW's reference sounded like something too good to miss. So I hopped over to the BBC iPlayer and had a look see, and sure enough it was a debate well worth watching.

      Could it possibly be that in the inner sanctums of the BBC they are beginning to realise that the old "blighter" Redwood might actual be speaking sense!!!!!

      Reply: Maybe – or maybe they are worried I may have some influence with a future government that will have a different view on the BBC, and even they now realise they have treated me very badly in recent years.

  13. David B
    February 17, 2010

    Political union is the aim, and they do not care what the price we have to pay.

  14. […] John Redwood MP » Why are people surprised that some countries … […]

  15. FatBigot
    February 17, 2010

    If truth be told, there isn't a single exchange rate or base interest rate that is right for London, Manchester, Liverpool, Swansea and Glasgow. Even within the UK there are significant differences between the economic activity in various regions.

    We can sustain a single currency within the UK because the non-economic forces that hold us together as a single country outweigh the economic tensions between regions. So it is also throughout the world, for example the wine producers of France who thrive on exports have very different economic requirements than the French bakers who use imported flour.

    The greater the economic variations between areas, the stronger the non-economic ties must be to maintain a stable unit. Any suggestion that the economic woes of the PIIGS can be solved without significant political tension is laughable.

    1. Alan Wheatley
      February 17, 2010

      It is not so long ago that Gordon Brown, as Chancellor, was being taken to task for interest rates that were set for London to the detriment of the North East. Of course GB was not moved by the pleas from the North, but instead of arguing the case himself he sent Eddy George to do his job for him.

  16. Dee
    February 17, 2010

    And most importantly of all you would have to have a massive redistribution of wealth from the rich countries to the poorer ones. It wasn't going to happen then, it clearly isn't going to happen now so the Euro is doomed.
    Just make sure your Euro notes have an X on them, the Euro equivalent of the Deutsch Mark

  17. DavidL
    February 17, 2010

    I feel sorry for Greece. They face being smashed between the EU and the markets. The sad fact is that to have a long term sustainable position in the Euro they don't need to cut their deficit to 3%: they need to have a surplus of nearly 10%. That would be the case almost indefinitely or until they reduce their pension entitlements.
    They should never have been in the Euro and neither should the rest of the PIGS. To succeed they needed to keep wages competitive with Germany without their productivity and without their infrastructure. They went in at a low rate but rather than face up to these realities their politicians misled them into thinking they were richer than they were. Now it really is too late. The only option is to leave the Euro and default by paying Euro denominated debts in Drachma. Only this, generating inflation and recovering the ability to print their own money will allow them to reduce debts to sustainable level. They really have no choice.

    1. Citizen Responsible
      February 17, 2010

      If Greece wanted to leave the Euro and revert to the Drachma, I wonder what it could base its new currency on given its massive debts. And another thing, would the ECB give Greece back its gold bullion which it was compelled to deposit with the ECB as a condition of EMU membership?

      1. DavidL
        February 18, 2010

        Greece may have massive debts but it is still a rich Western country with a fairly reliable supply of future tax revenues. Obviously the new currency would have a bumpy ride and there would be an immediate and substantial devaluation but that is exactly what Greece needs. It needs its holidays to be the most competitive in the Med this summer and a large amount of foreign currency to come into the country that way creating jobs. It needs its industry to be able to compete with other manufacturers in the Euro zone and beyond. Right now it is being priced out of the market by a relatively high Euro which may suit Germany who want to bear down on inflation but does not suit them.
        The deposit of their Gold reserves is something I had not thought of. I am really not sure what the respective rights on that would be if a country came out of the Euro. I think it was an obligation to deposit gold not donate it but I may be wrong about that.

  18. Jamess
    February 17, 2010

    I'm still learning about economics and wondered if someone could explain this to me:

    ” History shows that rigged exchange rates do not work. The Gold Standard…bankrupted many businesses and created mass unemployment."

    Reading people like Ron Paul would suggest that the ultimate problem is caused by leaving something like a gold standard. I've not heard a good case against gold from someone who has got sound economic policies.

    And on the subject of gold – if Europe adopted gold as the national curreny (or as a second currency) couldn't we have a sound monetary system coupled with international usability?

    Reply: If you link your currency to gold then fail to run the economy prudently it leads to mass unemployment.

    1. Alan
      February 18, 2010

      "Reply: If you link your currency to gold then fail to run the economy prudently it leads to mass unemployment."

      The same is true of joining the euro. But you have to accept the corollary: if we (the UK) don't use the euro then we are giving governments freedom to run our economy imprudently. Our economy has been run imprudently but the effect has been disguised by devaluing the pound. Is it better to have a currency that makes the imprudence of governments clearly apparent (as in Greece) or is it better to have a currency that conceals the imprudence (as in the UK)?

      1. Richard
        February 18, 2010

        Good point. The failure of Greece is not an argument against the Euro its an argument against the kind of (Brownesque) policies Greece has pursued. The Euro has just shown them up for what they are.

  19. Anoneumouse
    February 17, 2010

    Britain holds $12.5bn of dodgy Greek debt. Do you think they would settle for the return of the Elgin Marbles.

  20. Richard
    February 18, 2010

    Let us not forget that we too have a rigged exchange rate with the Government / central bank having unlimited powers to print money & to determine (at least short term) interest rates. The right position for Conservatives should be to support a currency which holds its purchasing power – only then can undistorted investment decisions be made & the benefit of free markets be felt. If the UK had joined the Euro we would now face very similar pressures to Greece – money printing and devaluation have 'saved' us. Lets be wary of the Euro as you say, but lets remember that our government having the power to push the devaluation/inflation button is just as undesirable.

    1. Alan
      February 18, 2010

      "The right position for Conservatives should be to support a currency which holds its purchasing power – only then can undistorted investment decisions be made & the benefit of free markets be felt. "

      I agree with that. I would rather we had joined the euro and had the defects of economic mis-management made plain, then stayed outside and have most of the people unaware of how bad the situation is. What keeping sterling has done is allow the government to hide the consequences of its mistakes from the average man and woman in the street.

      1. Richard
        February 19, 2010

        But membership fo the Euro comes with unlimited potential contingent liabilities as the taxpayers of Germany + France are about to find out in the case of Greece.

        1. Alan
          February 19, 2010

          I don't think membership of the euro does come with unlimited contingent liabilities. The Treaty on the European Community appears to expressly prohibit one country being required to bail out another

  21. Lindsay McDougall
    February 20, 2010

    "……… you needed a single economic policy, a single budget and a single country to make any success of single currency."

    Let's follow the arguement where it might lead. If you don't want a federal Europe – and most Eurosceptics and Gaullists don't – then one of the ways of ensuring it does not happen might be to bring about the collapse of the single currency. The best hope of this happening is a major spat between Germany and Greece (and the other PIGS).

    So is there any way that we can play Perfidious Albion and worsen relations between Germany and Greece? Suppose that we insist that the Greek problem is for Eurozone countries only, and scupper any attempt by Greece to borrow from the IMF. Or is it better just to smile sweetly and to let the Greeks borrow from the IMF if they want to?

  22. […] John Redwood MP » Why are people surprised that some countries … […]

Comments are closed.