Yesterday in Oxford I gave the Oxonian lecture about the future of the Euro. I have attached the slides I presented here: The Future of the Euro.
Every currency needs a sovereign to love it and control it. The Euro has been an orphan currency for a decade, seeking government parents to look after it. Benign neglect by the member states has meant :
1. Some member states have borrowed far too much in the common currency, breaking the rules of the Stability and Growth Pact.
2. The transfer payments between the richer and poorer regions have remained well below the common levels in single currency areas like the dollar and sterling (1% of GDP versus 5% of GDP)
3. Some member states have experienced relatively rapid inflation, making them far less competitive against the German core of the Euro area.
4. There has been no successful common banking regulation. The banking systems of several Eurozone members are stretched, leading to state guarantees and recapitalisations the countries can ill afford.
5. The European Central Bank has been reluctant to reduce the gaps between the borrowing rates of the different Euro zone members by buying bonds. The ECB helped bring on the Irish crisis by refusing to carry on funding Irish banks.
The Euro zone does need an economic sovereign or government to make the following decisions:
1. How much can member states borrow in the common currency?
2. How much of the common currency should be printed?
3. To what extent can the ECB intervene in bond markets to keep borrowing rates closer together?
4. What would be a realistic level of transfer payments around the Union?
5. Can the Union develop a more jobs friendly pro enterprise set of policies to give countries more hope of growing out of trouble?
The UK should encourage the emergence of proper Euro institutions to regulate their banks,create a stable bond market and provide budgetary discipline. It should also make clear that none of that should apply to the UK, and should make its consent to the greater integration required dependent on the UK stepping outside that and getting powers back from the EU.