Hamish McRae: The EU matters much more than the euro

Economic Studies
Click to follow
The Independent Online

What would happen to the European Union were a country, or several countries, to drop the euro and return to their own currencies? It is the sort of question that you are not really supposed to ask, or at least not if you are a eurozone politician. Angela Merkel said at the weekend: "I have said that if the euro fails, Europe will fail...."

But intuitively we all know that is wrong. Or rather, if the EU were such a weak entity that one misstep – some members adopting a single currency without proper preparation – were to reverse more than 50 years of co-operation, then there is something wrong with the whole EU concept. But she also yesterday said something else that rings right: that the eurozone's current problems and worries will not be fixed swiftly.

"Those who want to take political responsibility, and that's what the government wants and takes seriously, know that responsibly there won't be one spectacular step," she said. "It's entirely about creating a controlled, composed process of gradual steps and measures."

There you have in two statements the nub of two problems. The first concerns the euro itself, the second the indebtedness of several fringe members of the group. They are connected of course, but much of the comment has jumbled them together in a pretty unhelpful way.

So what we are having at the European summit tomorrow is a discussion about the second: gradual steps and measures designed to tackle the failure of the first effort at refinancing Greece. The problem has been that these are perceived as too gradual, particularly in the light of the initial failure. As a result, there have been rising fears that other highly-indebted eurozone members, Ireland and Portugal in the first instance but also others, may also need a second bailout – or in the case of the others, a first bailout.

But, and this is important, sovereign defaults do not of themselves mean a country leaving the eurozone. Some of us think that will eventually happen but it is not a necessary and immediate consequence of a default – indeed my own judgement is that while some defaults will occur soon, a country leaving the eurozone is some way off.

Now come to the future of the euro itself. A currency zone does not disintegrate just because one member leaves it. Ireland ran its own currency, the Irish pound, but it was freely convertible one-for-one against sterling until 1979. Then suddenly, on 13 March, it declared that the currencies were no longer convertible and the Irish pound swiftly fell by about 5 per cent. Ireland ending the link made little difference to sterling.

Greece is smaller relative to the eurozone than Ireland was to the UK, so on that precedent Greece leaving ought not to affect the euro, unless this was seen as a forerunner of several countries dumping the euro.

So there is a worst-case scenario, where Greece leaving the eurozone would lead to other countries being forced to do so. Assuming Germany remained a member, the euro would presumably become a Northern European currency, anchored by Germany, playing a rather similar role to the Deutschemark used to prior to its demise. The euro would have "failed" in Angela Merkel's terms; but would that mean the end of Europe?

Germany, which has the overall lowest indebtedness among the large developed nations, is doing well; Italy has the highest sovereign debt and is only growing slowly. So there are obvious tensions. There are other less obvious ones. Germany is becoming less and less dependent on trade within Europe. It looks as though China will soon become its largest export market, larger even than France.

So Europe's future prosperity depends on this ability to sell to the world. That is part of the inevitable rebalancing of international trade that is taking place. There is still value in European economic cooperation. Membership of the EU brings more pluses to its members than minuses. I think the fear behind Ms Merkel's comment is that were the eurozone to break up, the minuses would pile higher than the pluses. But there is an answer to that: the experience of the UK.

Projections vary and should never been taken too seriously anyway. But it is perfectly plausible that in about 30 years' time the UK will have a larger population than Germany and maybe have a higher GDP. Were the UK to remain a member of the EU (and on the reasonable assumption we don't join the euro in the meantime) that would demonstrate that it is perfectly possible to run an effective union with two major currencies and a number of smaller ones. So Europe won't "fail" as such; it would not have moved to an ever-closer union as some politicians wish. But it would survive in perfectly good shape.

The good news coming out of Africa

A key reason why David Cameron went to Africa was to explore and promote economic cooperation. So many stories about Africa focus on things that are going wrong that the huge economic developments taking place have gone unreported. A paper by Renaissance Capital brings out some truly encouraging facts. Here are three.

First, between 2000 and 2009 no fewer than 11 countries in Africa exceeded 7 per cent growth; second, Nigeria, the continent's most populous nation, has been growing at 9 per cent a year; third, the sub-Saharan workforce is far better educated than a generation ago, with secondary school enrolment similar to Mexico or Turkey in the 1970s. This is not to gloss over the continent's problems. But an economic take-off has clearly begun, and we should hope it will continue.



h.mcrae@independent.co.uk

Comments