Can the Euro survive –and should it?

Thursday 26 April 2012

By Nick Powell

Although the United Kingdom is not in the Eurozone, the City of London is Europe’s most important financial centre and obsessively follows the currency’s fortunes.

Britain’s leading free market think-tank, the Institute of Economic Affairs, has been asking if the Eurozone crisis is moving towards its end game. In April it brought together many in the City to debate the possible outcomes.

Not just whether the Euro –or at least the Eurozone in its present form- can survive but whether it actually will survive and perhaps most importantly whether it should survive.

Those who expect some kind of Euro break-up discussed whether it will be a relatively orderly affair, initiated by Germany and its allies, or the much more messy result of events spiralling out of control in one of the weakest economies.

For those who thought that the political will to save the Eurozone will prevail, there was a further issue. Would that be the best outcome for its members and for the wider European Union? What would it mean for the world in general and London in particular?

Roger Bootle, who runs the Capital Economics research consultancy, was firmly in the break-up camp. He tried a little gallows humour, pointing out that the problem of what currency would be used to settle contracts denominated in Euros would literally have a silver lining. It would create a great deal of lucrative work for lawyers employed and paying taxes in the City.

He dismissed the idea that the Euro is irrevocable, ‘no more than the Holy Roman Empire, the Soviet Union and umpteen marriages’. As for it being illegal, he claimed that the European Union has been making up the law as it goes along in its handling of the Euro.

That was not necessarily a bad thing as it was not lawyers but politicians who had to decide vital economic and political issues. If a lawyer, even one in the City of London did not agree with what was required, than the answer was simple –find another lawyer.

As far as Roger Bootle was concerned, Nicolas Sarkozy and Angela Merkel let the cat out of the bag when they said that if Greece went ahead with a referendum on its bailout it would be treated as a referendum on Eurozone membership.

He predicted that the end would come soon, probably as the result of a financial panic. The European Central Bank would be unable to deal with a run on the banks in a Eurozone member state. So far the ECB had pursued a ‘double or quits’ gambling strategy but at some point its nerve will fail.

Nevertheless he conceded that the longer the crisis lasts, the more likely will become an alternative scenario in which Germany and a small group of other countries goes their own way.

That seemed the probable outcome to John Chown, an international tax adviser who described himself as a general supporter of European integration. He once co-wrote ‘The Right Road to Monetary Union’. It was not the road that had been chosen.

He said that the attempts to save the Euro risk destroying the whole concept of the European Union and destroying the banking system. He feared a botched fiscal union of Germany and a few of its neighbours, with greater tax integration than in the United States or Switzerland.

John Chown said Finland and Holland would have to watch out that they don’t take on the liabilities of the French. ‘Solvent outsiders’, such as the United Kingdom and Sweden, would have to watch for attempts by the inner group to impose anti-competitive practices.

He saw a positive outcome for economically weaker countries forced out of the Eurozone. Their revived national currencies could enjoy the benefits of a ‘fixed but flexible’ exchange system similar to the Bretton Woods system established after the Second World War.

The reformed Euro would become a secondary currency for the weaker countries. It could even be their de facto currency, if they were prepared to let the Bundesbank run their monetary policy as the Bank of England used to do for the sterling area.

Professor Patrick Minford, who like Roger Bootle sits on the Institute of Economic Affairs’ shadow monetary policy committee, dismissed what he called ‘Anglo-Saxon wishful thinking’. The Euro was a bad project that should not have happened but the elite of the European Union did not want to end it.

He argued that the Bundesbank knew that break-up would be immensely less expensive than continuation but it did not run Germany. The German economic model was an undervalued currency supporting its export machine –just like in China.

Patrick Minford expected the Eurozone ‘to lumber on’, with missed austerity targets, economic stagnation and slow or negative growth. Britain needed to diversify away from a slowly growing, badly run market

Matthew Hancock, a Conservative MP who advised the British Chancellor of the Exchequer George Osborne before the Conservatives entered government, made the case for saving the Eurozone.

He said the political will was strong and the recognition that monetary union needed a fiscal union was there. It would be settled by popular feeling, through elections. Break-up would be riskier than continuation and Britain should support the weaker Eurozone countries to improve their competitiveness.

Roger Bootle said the idea of what he called the peripheral countries achieving sufficient productivity improvement through economic reforms was incredible. 0.5% per annum improvement would be a miracle but they’re 20%, 30% or 40% adrift of German productivity.

He regretted that most people do not understand the options or how ghastly staying on the present path will be. He said the real disaster would be Germany and international organisations finding the money to keep the show on the road.