Could the euro collapse before Britain joins?

I am now beginning to wonder if some won't be forced by public discontent to leave the club

Share

The eurozone is now enveloped in its first, full-blown crisis. The relentless rise in the euro against the dollar has made European exports increasingly expensive. In turn, this has accelerated the departure of manufacturing industry from Western Europe to countries where wage levels are lower. Indeed, we have seen this trend in Britain.

The eurozone is now enveloped in its first, full-blown crisis. The relentless rise in the euro against the dollar has made European exports increasingly expensive. In turn, this has accelerated the departure of manufacturing industry from Western Europe to countries where wage levels are lower. Indeed, we have seen this trend in Britain.

For instance, Samsung, the Korean electronics giant, announced recently that it is to close its Teesside manufacturing plant because of cheaper production costs in China. Now Germany believes it is in danger of becoming a bazaar economy in which exports remain strong but the component parts are bought in from the third world.

Partly as a consequence of such trends, the further risk for the eurozone as a whole is that unemployment rises to politically unacceptable levels. In such circumstances some countries, say Greece, Finland or even Spain, might have to consider leaving.

Currency battles are hard to fight at the best of times, but the eurozone is particularly ill-equipped. Unlike the US, China or Japan, whose governments decide exchange rate policy, the eurozone has only its central bank to speak up for it. Thus we know what American policy towards the dollar is - let it fall. Its weakness safeguards jobs in an election year.

China is clear, too. Resist a revaluation against the dollar and let exports flourish. One knows where one is with Japan. Intervene regularly in exchange markets to prevent the yen from appreciating. And eurozone policy? It is hard to say, though European central bankers and continental politicians have at last begun to speak about the dangers ahead.

In defending a currency, though, talk will only get you so far. The standard second stage is to manipulate interest rates, upwards if weakness needs to be countered, or down if the problem is undue strength. Unfortunately the European Central Bank has a bias against cutting its interest rate as its first duty is to fight inflation.

Finally, there is the weapon of intervention in foreign exchange markets in a manner which bruises speculators. This is best done when both sides of a currency equation act together, in this case the eurozone and the United States. I cannot see this happening.

The Americans are unlikely to view intervention as being in their own interests. So when finance ministers from the major eurozone countries together with their opposite numbers from Britain, Japan and the United States meet in Florida next month, I expect the US to argue that it is the failure of the European economies to deregulate faster that is the major threat to the eurozone economy.

Within the borders of the eurozone, structural weaknesses are beginning to show. Germany and France have so brazenly flouted the regulations limiting the size of budget deficits, the so-called stability pact, that the European Commission itself, the civil service which runs the European Union, is appealing to the European Court. Absurdly a court of law has been asked to rule on the tax and spend policies of sovereign states.

What is needed for a successful monetary union are substantial trading between member countries, labour and capital mobility and a method of directing welfare funds to the poorer regions out of the tax revenues of the richer parts - such as takes place automatically, say, between South-east England and the North-east. In the eurozone, none of these factors are present in sufficient strength. Trade between members accounts for only 15 per cent of economic activity. There is more labour mobility between the United Kingdom and the eurozone than there is within it.

While Britons retire to the Dordogne or the South of France to laze around in the sun, bright young French people pour into London for jobs. There are few comparable movements of working people within the eurozone itself. And the budget of the EU is too small to be effective.

In truth, the euro and the eurozone increasingly demonstrate what happens when a political ideal takes precedence over economic realities. It doesn't work. Is it a coincidence that the three countries that refused to join the eurozone, the United Kingdom, Sweden and Denmark, have had much greater economic success than members of the system?

Furthermore, I am beginning to wonder whether some countries won't be forced by public discontent to leave the club. The awful example of faraway Argentina and its link with the dollar shows what can happen. The exchange rate of the peso was rigidly fixed in terms of the dollar during the 1990s. In effect, this created a monetary union with the US. However, the conditions for a successful union were completely absent. As a result, the peso became vastly overvalued so that the Argentine economy collapsed, unemployment rose to unbearable levels, businesses folded, protesters took to the streets until finally the currency link was abandoned.

Yet still the Prime Minister, Tony Blair, dreams of taking Britain into the European monetary union. And certainly, changing my pounds into euros when I go to France and then back again when I return is a bother I could do without. But would it not be richly ironic if we started to prepare for entry just at the point when others were pulling out? That is the warning provided by the rumbling eurozone crisis.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
iJobs Job Widget
iJobs General

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Recruitment Genius: Telemarketing Operative

£6 - £15 per hour: Recruitment Genius: This is an opportunity to join a well e...

Recruitment Genius: Data Scientist

£20000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Full Stack Software Developer - Javascript

£18000 - £27000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next
 

A promised 'women's museum' opens as a Jack the Ripper exhibit tonight, and I won't take it lying down

Becky Warnock
A protester wears a golden mask and Romanian flag during a demonstration in Bucharest against Gabriel Resources Rosia Montana gold and silver project  

Corporate vampires have tried to suck $4 billion out of Romania, and with TTIP the UK could be next

Kevin Smith
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen