The future of the Euro

                 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.


  1. lifelogic
    February 19, 2011

    I agree with all this but with the lack of any real democratic control how is any of this likely to happen. We will just get a bigger and bigger malignant self serving EU with over paid EU parasites everywhere.

    1. lifelogic
      February 19, 2011

      I see a winter wonderland has been prosecuted for engaging in a misleading commercial practice (advertising something they did not provide).

      Does this law apply to the political parties and their pre-election promises? I suppose not as MP’s are usually just engaged in anti-commercial practices.

  2. alan jutson
    February 19, 2011

    What did you consider the response from your listeners.

    Reply: intelligent interest. I was, after all, mainly explaining the course of action the EU is likely to follow. I also stress I do not want the Uk to be part of this economic government.

  3. OldRightie
    February 19, 2011

    Might I suggest that it is indeed a currency born out of wedlock?

  4. David B
    February 19, 2011

    A reduction in the number of members of the euro seems enevatable. The position of Ireland is close to basket case and the prospect of default on the national debt is being actively raised in the current election campaign with Iceland being held up as an example of how this can be achieved. If Ireland were to pick this route leaving the euro and implementing exchange controls must happen.

    If default were ti happen then a complete re think on the euro will surely follow.

    1. Stuart Fairney
      February 19, 2011

      why would the Irish need exchange controls if they return to a floating punt?

      1. David B
        February 19, 2011

        Exchange controls would be required in the event of default. They would be used to buy time by preventing major capital outflows during the period the government will try and reschedule or restructure the national debt.

      2. Mark
        February 20, 2011

        Won’t the punt sink without Poles to propel it?

      3. StevenL
        February 20, 2011

        In the same way Argentina returned to a floating Peso in the early naughties?

  5. Mr J Leslie Smith
    February 19, 2011

    Very sound and rational. But what are the real intentions of the major players, the French and the Germans? The Euro was a political creation, yet can only survive on a rational basis, supported by a sovereign European Population, as a whole. Methinks, there will be a lot more catastrophic bangs, first in this great project, before European Politicians decide to tell the truth. Personally, I cannot see the Euro holding together if we have a further recession, which is now highly likely, with oil hitting two and three year highs and commodity prices subject to market speculation, across the world. I would bet that it is a 50/50% chance that we see at least one Country leave the Euro, before the next three years have passed. The Euro cannot stand Germany booming, whilst its minor players, the PIGS and Ireland are forced to keep cutting Public Spending whilst their debt repayment interest charges spiral ever upwards. It is the interest rates on debts, that are going to sink many of these so called Sovereign European States, the Euro will take them down, if they stay in it.

    1. Stuart Fairney
      February 19, 2011

      The European population is not sovereign but serf (as are we) to the mandarins and the identikit politicians. Their opinion is irrelevant.

  6. Robert Eve
    February 19, 2011

    Spot on John.

  7. Stuart Fairney
    February 19, 2011

    “Every currency needs a sovereign to love it and control it”

    The words of a died-in-the-wool statist if ever I heard them and dead wrong. Money arose spontaneously without the need for central control and it was only the various sovereign powers muscling in first by imprinting their image on the coins (before debasing) and then with various monopolistic legal tender laws (befre debasing, note the trend!) that gave us today’s status quo. As for politicians controlling money, PLEASE STOP!

    Money, like most everything else could and should be privatised and the Von mises institute and others have detailed proposals on how this could be easily achieved.

    Now I don’t expect a single politician to agree with this, but fiat currency the world over maybe about to die a spectacular death. Let’s not forget the current monetary system we have today is barely 40 years old. It won’t see 50.

    1. Gary
      February 20, 2011

      Politicians cannot help themselves. Even if there is no way to second guess the market without distorting the market, they want to have a go. It is in their dna. They may get away with it for a while, but eventually it comes back to bite them and ruin us. There is no way to predict a FREE market, for if their was there would be an algorithm that would make you the richest in the world. And that has never happened, not least because once it was discovered the marke would arbitrage it into impotence. This is the impossibility of Economic
      Calculation. But the politicians of all stripes cannot help themselves from having a go.

  8. Bernard Otway
    February 19, 2011

    What has the Euro achieved Nothing except chaos,how long before a Cliisters arises in Germany and France to organise rebellion against it,very very soon,if we can in this age have the Domino effect started in Tunisia now spreading in authoritarian regimes [previously],
    then it happening in the EU is EASY.WAIT

  9. Steve Cox
    February 19, 2011

    People can denigrate the Euro as much as they like, often for perfectly valid reasons, but the fact is that they have a Central Bank that is committed to, and evidently capable of, controlling inflation. Contrast that with our own situation, where policy is hell bent on beggaring savers for the benefit of borrowers, and I really wish that I had quit Sterling for the Euro four years ago. Too late now, but unless the BoE shows some change of heart in tackling inflation then it may be wise to ditch the pound anyway. A flexible independent currency at the mercy of academics and politicians who are unconcerned about inflation may be somewhat beneficial for the economy in the short term, but in the medium and long term it is disastrous. If Mr. King (with the tacit support of Mr, Osborne) refuses to raise interest rates this year when RPI is running at 5%, 6%, maybe even 8% by December, why would he raise them next year when RPI may be at 10% or 15%? Unless action is taken soon, Sterling is screwed, and savers even more so.

    1. Stuart Fairney
      February 19, 2011

      You note the central bank/fiat currency model as practiced by the bank of England is broken and has been for years. You would replace it with an identical model that you think has performed better on inflation while leaving 20 million people unemployed ~ no thanks

  10. A David H
    February 19, 2011

    Perhaps China might be interested in loving the Euro as a sovereign.

  11. sm
    February 19, 2011

    I am not sure a common Euro is good for all members at this point nor in the medium term. Those conditions are not in place.

    Meanwhile some banks will need to be liquidated or ‘recreated’ with the debts wiped out in some fashion. This is where it gets dirty.

    Some areas of the eurozone will suffer debt deflation leaving real growth to do the hard work over a longer timeframe. Some may be better defaulting in a (hopefully controlled) way and restarting with a new inflated currency. (This seems to be HMG/MPC policy gambit). .

    Is this Plan B to get us into the euro, if the controlled default becomes a rout?

  12. Denis Cooper
    February 19, 2011

    Very amusing that your slide on “The membership criteria for the Euro” is immediately followed by a slide on “Who qualified”, with the answer “Luxembourg” …

    The euro project always was and still is above all a political and constitutional project, a euro-federalising project, with the economics regarded as being of relatively minor importance and the rule of law as being of no importance at all.

    Provided those driving the project think that they can get away with bending or breaking the treaties, and the rules formally agreed under those treaties, then they will have few scruples about doing so.

    As the EU treaties have only gained legal force because they’ve been approved by each of the national parliaments of the member states, and they had to be approved exactly as they had been negotiated and agreed by the national governments, one might expect that national parliamentarians across the EU would be up in arms about any breaches of those international contracts.

    But apparently not; members of the national executives, ministers of the Crown in our case, go off and agree to break the treaties, and hardly any members of the national legislatures, MPs and peers in our case, raise objections to that abuse of delegated power.

    1. Mark
      February 20, 2011

      You always demonstrate an impressive knowledge of EU treaties. However, there is an interesting contradiction between the breaking of treaty provisions that you draw attention to and the assumption that the UK won’t get around to breaking provisions in the same sort of way as push comes to shove.

      I think it’s also instructive to consider what happened over the breakup of the Soviet Union. There were no formal arrangements in place to handle the dispersion of the 15 republics. Most went via temporary use of the DM and to a lesser extent the USD for serious transactions before establishing their own currencies. Roubles rapidly became worthless paper. At one point, one third of all DM in issue were in circulation in the former USSR. With a fiat currency, withdrawal is very easy to do – although establishing stability for a successor can be more tricky.

      1. Denis Cooper
        February 20, 2011

        UK ministers have already agreed to breaches of the treaties, but not yet to our national advantage, as far as I know, and not with the prior consent of Parliament but only with its subsequent acquiescence.

        As far as I’m concerned if Parliament explicitly agrees that a minister can act contrary to the EU treaties, or instructs him to do so, then that may still be breaking “international law” but it’s upholding the rule of the law which should matter above all else to us, which is our national law made by our national Parliament.

  13. Denis Cooper
    February 19, 2011

    It can’t be correct to say that the ECB “has not been able or willing to undertake QE programmes as the US and UK have done”, when only recently it was creating billions of new euros and using them to buy up previously issued Portuguese government bonds from private investors.

    In the same way that the Bank of England created £198 billion and used it to buy up previously issued gilts from private investors, and for the same reason – so that private investors would then be prepared to buy new issues of bonds from the government.

  14. lojolondon
    February 19, 2011

    Fair comment John, but far better for the UK to leave the EU and save 15 Billion pounds a year and leave them to do whatever they want to.

  15. Denis Cooper
    February 19, 2011

    My concern is that whatever is agreed for the eurozone will also apply to us, in part but a gradually increasing part while we still remain outside the euro, and then in its entirety when we’re finally manoeuvred into the euro.

    Bear in mind that as things stand on the one hand all the present EU member states apart from the UK and Denmark are under a treaty obligation to join the euro, and that obligation will also be imposed on all new member states, and on the other hand the treaties provide no mechanism for any member state which has joined the euro to renounce it and go back to issuing its own national currency.

    Anyone can see where this could easily lead: to the UK being the only EU member state – and one of a handful of European countries – still outside the eurozone, and then we would be told that this was no longer a tenable position and we must join.

  16. Freeborn John
    February 19, 2011

    Ireland and the UK were in a currency union from 1922 to 1979 without any financial transfers, and certainly not 5% of GDP. Therefore your strange argument for a quintupling of the EU budget seems unwarranted.

  17. Freeborn John
    February 19, 2011

    There is also a currency union (CFA Franc) involving 14 west African countries that has survived for 50-years (albeit with changing membership) without financial transfers amounting to 5% of GDP. Therefore I see no case for the increased EU powers you are calling for, which will simply lower growth in the eurozone core while fostering a dependency culture in the eurozone periphery.

  18. Neil Craig
    February 19, 2011

    The problem is we have been in there encouraging competence for nearly 40 years & the EU is less economically competent & more parasitic, by quite a long way, than when we started. Sometimes when its broke you don’t fix it you throw it away.

  19. Derek Buxton
    February 19, 2011

    The important part is of course the last paragraph. To the EU this is a “beneficial crisis” to help them in their quest for total economic harmony and on present form our government will agree right down the line. This will end any and all opposition to our being ruled by a foreign entity but it will be then too late. We will be history!

  20. BobE
    February 19, 2011

    A mortgage can be obtained on a UK house but from the French Banks. It might be a better bet to borrow from the Euro zone rather than the UK. Last time I checked the interest rate was 2%.

  21. zorro
    February 19, 2011

    Interesting presentation which does not reflect your views but shows the thinking of those behind the European project and exposes the real nature of what they are proposing with the single currency.
    There are, and have been, examples of countries using a common currency reasonably successfully, so the overall concept of a currency needing a sovereign isn’t correct……However, the EU would probably argue that it had systems in place to deal with/control the issues you raise in the presentation. The criteria (tests) for membership were pretty clear but, as you point out, only Luxembourg could comply with these tests.
    Therein lies the nub of the European project, it is totally political with a social and economic veneer to try and gain some credibility with the masses. It is the reason why so many politicians (in Europe and the UK) turn native when exposed to the European project…it is very insidious.
    For the Euro – federalists, in classical risk methodology, the presence of risk (economic failure) leads to both threats….and opportunities. The opportunity is their chance to enforce more political control over the EU with the stated aim of restoring economic order, when in reality they are closer to achieving their ultimate objective.
    Your presentation alludes to the nature of the control:

    Stronger central political control
    Veneer of ‘democratic’ accountability
    Stronger central bank
    More economic control over vassal (subject) states
    Overbearing regional policy to ‘deal with differential growth rates’

    It sounds very much like a socialist union which was tried somewhere to the East of us in the not too distant past.

    What is our ‘opportunity’ in this economic risk scenario – as you suggest to renegotiate/exit our current relationship with the EU…….interesting times.


  22. zorro
    February 19, 2011

    Germany, of course, will not exit the Euro and ruin its ready made export market….and it won’t let the others leave but will keep them clinging on by their fingertips…… It will not allow inflation and will let those countries suffer, by hook or by crook, to achieve that aim.


  23. David Price
    February 19, 2011

    In your presentation you discuss what you think may happen within the EU, but what impact do you think this will have on the UK?

    You seem to be suggesting that EU companies will become less agile and there will be constrained growth owing to bureaucracy while Germany will continue it’s impressive performance. But how will that really be different from the current situation from our perspective?

    Also, extrapolating a bit, once some EU components have tightened control of the finances, and I assume this will include the investment banking, equity and bond market in the EU, won’t this put UK based finance companies at a disadvantage?

  24. Kenneth
    February 19, 2011

    Of the three options that John suggests:

    1) Re-introduction of the DM and a devalued Euro
    2) Re-introduction of troubled states’ currencies
    3) Increased powers to the ECB and central institutions/quangos

    …I agree that 1 & 2 will not even be planned for as too many personal reputations will be ruined and the gravy train will crash.

    However if they work towards the third option then I cannot see how the People of the Euro zone states will stand for it. There is still enough democracy left in these states to make rebels of them.

    Perhaps they will end up being colonies of China (just a thought).

    1. StevenL
      February 20, 2011

      4) Some kind of public revolt. Youth unemployment is apparently 40% in Spain now.

  25. Lindsay McDougall
    February 19, 2011

    I don’t think that Germany and others want high levels of transfers from rich to poor Euro Member States. You have to remember that high levels of government debt apply right across Europe – in most nations, the ratio of debt to GDP exceeds 50%. Germany’s figure is 74%. There just isn’t the capability for large bailouts. Greece and Ireland have perhaps been dealt with and might (not certainly) be able to avoid default. Portugal is small enough for the Euro zone to bail out. But Spain and Italy ………………………… ?

    To what extent do we want to save the Euro? If we don’t want to join the Euro and don’t want to join a European Federation, I would have thought that it was in our interest to weaken the Euro zone.

  26. Lindsay McDougall
    February 19, 2011

    If you want to consider a really unpleasant number, Russian sovereign debt is just 9.5% of GDP – after defaulting twice!

    1. StevenL
      February 20, 2011

      Russian macro-economic indicators look dandy until you suppose upon the 59 yr male life expectancy and the low birth rate / top heavy population pyramid.

  27. lola
    February 19, 2011

    Every currency needs a sovereign to love it and control it. Not true. Money can perfectly well exist without a sovereign. Money was the invention of people, not sovereigns. Only fiat money needs a ‘sovereign’, for obvious reasons.

    1. Stuart Fairney
      February 20, 2011

      Indeed, it is pleasing to know I am not alone in this view, see my post above.

  28. BobE
    February 20, 2011

    So, after all, Germany was able to take control of all of Europe.

  29. david englehart
    February 20, 2011

    since when have members of the EU ever cared about the interests of other members unless it suits them.
    the euro is no exception and keeping us out is probably the only decent thing gordon brown did although there are some who still subscribe to the view that he also helped ‘save the world’ when the banking crisis came.
    however with gordon claiming such was the case the british tendancy to dislike braggarts soon shut him up.
    it seems the germans who were floundering when the euro was set up what with the cost of reunification and an overvalued currency are unlikely to leave now that they have helped begger their neighbours who can no longer devalue only inflate.
    i am one of those who on a good day think maybe we should stay in the EU but have many powers transferred back.on bad days i think we should leave them altogether.
    will there be another war?i think was after all the fear of another large number of blue eyed blond haired babies in paris that started the whole process. surely we can rule that out now.

  30. Anne Palmer
    February 20, 2011

    The Times (In 2003), which reported that if (and we may not have that option of “if” one day) we join the Euro, the European Central Bank had warned Britain it might have to give up its National Health Service. Even the Bolton Evening News, May 2003 reported that, “Britain would be forced to scrap the NHS if we joined the euro, so warns the ECB, saying free health care could be slashed to just emergency services”.

    Also, “The ECB recommends jettisoning the NHS in favour of private health care, saying Britain’s aging population will send NHS costs soaring, and euro-zone rules would not allow Gordon Brown to borrow necessary funds to foot the bill”. Does Britain have an aging population more so than any other country?

    William Hague has stated that, “Britain will not join the euro in this Parliament”? Yet quite clearly in the Treaty of Lisbon, it states, “That the Currency of the Union shall be the Euro”, and although the UK has an “opt out” on it, I jog your memory that there was an ‘opt out’ on the European Investigation Order (EIO) yet the first thing this Government did was to “opt in” when there was absolutely no need to do so (Mrs May looked most uncomfortable when she made that speech). So, how long, once the NHS has been ripped apart, will it be before this Country “opts it” to the Euro?

    So John, will William Hague say in the run up to the next General election, that if we vote Conservative we will not join the Euro in the next Parliament?

    Reply: Other EU countries have a bigger problem with an older population, but more of them have private sector insurance schemes. My stance on the Euro is that the Uk should never join. Mr Cameron has said , I think he would never join as PM.

  31. Javelin
    February 20, 2011

    John, there is no sovereign. So who is the future Sovereign? The unelected EU Government? What about Germany? I wonder what price Germany will extract, what controls would they impose? The answer is to go broader and not deeper, to let the ECu fall under it’s own weight.

    As economic cycles come and go like the tide we will see different weaknesses of the ECu exposed. The trick is to push the currency in a direction where it will fail when a tide goes out. I would suggest a link to equities or interest rates to do that.

  32. John Ward
    February 20, 2011

    I find myself asking the same question of John Redwood as I do of Malcolm Brady, David Davis, Norman Tebbit and so many sensible Tory backbenchers: what on earth are you doing in the Cameronian Conservative Party?

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