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If you’d like to see what could and would have happened to us if we’d joined the euro just have a look at what is going on in Spain:
The number of Spaniards unable to pay their debts has risen by 26 per cent to 2.7million in 2009, compared with the first four months of last year. During the same period 232,000 companies joined the list of bad debtors, a 67 per cent rise, according to AsNef-Equifax, a Spanish credit agency.
Bankruptcies are up 44 per cent in the first quarter this year against the final quarter of 2008, with the worst-hit sectors being services and construction.
Unemployment is running at 17.4 per cent, the highest in Europe, with more than four million on the dole. The European Union predicts that this figure will rise to 20 per cent by next year. Some Spaniards have to accept soup-kitchen meals to feed their families.
What has happened and is happening is quite simple. Being in a single currency inevitably means having a single interest rate. And that rate is going to be set for the majority, not for the needs of certain sectors of that currency area. Interest rates in Spain were too low for too long, setting off a huge construction and borrowing boom. Yes, very much larger than the one in the UK.
When it comes to an end, as all booms do (no, no one has abolished boom and bust) then there are several desirable policy responses. One can lower interest rates, one can deliberately devalue the currency for example. Or one can let the economy sffer through very painful deflation as Spain is doing.
For, of course, as members of the euro Spain cannot lower their interest rates nor can they devalue. Both things which we in Britain have done. Thus Spain’s recession is going to be deeper and longer than our own, for they do not have the room for policy manouvre that we do.
If we’d been in the euro our boom would have been more manic and our bust would be deeper than it already is. Thank goodness we didn’t join, eh?
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They might not be playing with an entirely full deck.
The International Monetary Fund has corrected an embarrassing error that led to the publication of exaggerated estimates of the external debt levels of crisis-hit eastern European states.
….
The ratio for the Czech Republic was cut from 236 per cent to 89 per cent and Estonia’s was reduced to 132 per cent from 210 per cent. It is understood the figure for Ukraine is also being cut to 116 per cent from 208 per cent, that Lithuania’s ratio of 425 per cent may also be recalculated and that others may follow.
If those highly paid international technocrats are capable of making such appalling mistakes then how can we trust what those highly paid international technocrats tell us about other things?
Which rather obviates the point of having highly paid international technocrats running our affairs for us, doesn’t it?
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For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction.
In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
We would say yes, of course. But when you’ve got the most recent Nobel Laureate in economics stating that either there is a pan-European fiscal govenment or we’ll have deflation for years….or, that we don’t have the euro, then people really should start listening.
Not the euro is I think your and my choice, no?
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During our recent bout of British gloom, many of the usual suspects were crawling out of the woodwork to make again the case for joining the euro. Now, they say, the exchange rate is right and we should lock it in. Yet they also wanted us to join some while back, when the exchange rate was 30pc higher. The truth is they always want us to join the euro. They must be mad. The issue is not about the right rate, which is changing all the time, but about flexibility.
In the current crisis, we in the UK have two major things going for us: first, we are able to enjoy a competitive exchange rate; and second we are able to set our domestic monetary policy in pursuit of our own interests. Heaven help countries like Italy which have no such way out. We should thank our lucky stars that we have managed to escape the budding economic and political disaster across the channel.
Sums it up rather nicely I think….
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In fact, the most recent Nobel Laureate in economics speaks out:
How does Spain get out of this? No devaluation is possible — and no, I don’t think exiting the euro is feasible. So it has to do it with relative deflation, hard enough in normal times, when at least costs and prices elsewhere are rising a few percent a year. In the face of a depressed and possibly deflationary European economy … this is going to be ugly.
Because Spain is in the euro they face years, if not decades, of grinding deflation.
That’s what we’ve avoided by not joining the euro ourselves. Worth remembering.