The Portuguese government has fallen because it was unable to push through yet another austerity package. The bond market demands ever higher interest rates to lend money to the ailing country. The economy remains mired in poor performance. Now all the talk is of another EU led bail out. There is no immediate demand from Portugal, as there is no effective government to negotiate a solution to their borrowing problems. Under EU rules a government needs to offer an effective austerity package and it has also to apply to the IMF.
Bail outs mean the stronger EU countries lending more money to the weaker at lower rates than market rates, to try to tide them over to better times. There are hazards in this approach. If the stronger countries take on too much extra debt for the weaker countries, they start to undermine their own credit worthiness and drive up interest rates more generally . If the austerity programmes are linked to tight money and a relatively high exchange rate it is difficult to see how the captive weaker economies get to grow themselves out of trouble.
One of my main arguments against the Uk joining the Euro was just this. I did not see how such a diverging group of countries could have stable finance and good growth together. I did not want the Uk to be dragged into accepting financial responsibility for other EU economies suffering in part from membership of a common currency. I said joining the Euro would be like sharing a bank account with the neighbours. German electors are now starting to understand just how true this is. They do not want to let others borrow more on the common overdraft at a time when some countries cannot borrow easily on their own credit. Meanwhile the European Central Bank has to help them out, drawing on the common resource.
Those of us who helped win the argument to keep the Uk out do not now wish to see the UK dragged into helping finance the problems in a Eurozone which was never properly constructed at the outset and which allowed member states too much leeway to misbehave, threatening the common credit rating.
Yesterday Bill Cash in the Commons highlighted the important discussions at the EU Summit on the future of the Euro and economic government. It gives the UK an opportunity to avoid being caught up in the new common rulesd and policies they will need and to avoid making further contributions to Euro bail outs. I asked the Leader of the House for a full debate on the future of the Euro and the negotiations underway for a common economic government of Euroland. They need to create a Euro soveriegn and are doing so in a crab like way..
The Uk needs to be well out of it. All the time the Eurozone contains such divergent economies as Greece and Portugal, Germany and France, Ireland and Spain, it is going to require big scale bail outs and transfers around the zone. Uk taxpayers should not be contributing to this. We want the dividend from staying out of the Euro.
Incidentally, by staying out of the Euro the Uk did the EU a great service. If we had been members during the 2007-8 banking and government debt crisis in the Uk it could have brought the whole structure down. The Uk would have been large for even the EU to bail. My worry in the late 1990s was about a strong UK having to help weak countries undermined by the common currency. Ten years later the worry was the other way round, given what the UK and EU regulators and government had done to the UK’s balance sheet. Today we do not want our deficit reduction programme made more difficult by demands for Euro payments. We are better off sorting our own problems out – at least we do not have to defend an unsustainable currency rate.