I think we deserve an apology. By “we” I mean all the Euro-sceptics, Euro-pragmatists, Euro-realists and Euro-hysterics who were alarmed by some of the optimism that surrounded the birth of the single currency. Do you remember the disdain with which we were treated? We were told that we were boss-eyed Little Englanders. They used to say we were a bunch of xenophobic, garlic-hating defenders of the pint and the yard and the good old bread-filled British banger.
Whenever we protested about any detail of the plan for monetary union, we were told that we were in danger of stopping the great European train, boat, bus, bicycle or whatever it was. We were a blimpish embarrassment to our country, a bunch of idiot children who had to be shooshed while the grown-ups got on with their magnificent plans.
So it gives me a tingling pleasure to report that everywhere you look on the map of Europe we have been proved resoundingly and crushingly right.
In the late Eighties and early Nineties, I was writing for this paper from Brussels, and the big topic of the day was what was then known as the Delors Plan for Economic and Monetary Union. I had one major reservation about the proposals. The problem wasn’t so much that EMU involved scrapping time-hallowed currencies such as the Franc, the Deutschmark and the Lira. As far as I was concerned, we could all use the Rice Krispie, provided Europe could be turned into an optimal single-currency zone.
But Europe was nowhere near ready for the Euro, the Rice Krispie or anything else. The continent was — and still is – a collection of different languages, diverging labour-market traditions and individual approaches to deficits and inflation. It was very risky, we warned, to try to impose a one-size-fits-all monetary policy over the whole lot. What was right for Germany might turn out to be wrong for, say, Italy or Ireland.
Countries might exploit the low interest rate to spend more than they should, in the knowledge that they could still keep inflation low and avoid any penalty from the markets. Their relative profligacy would be masked; they could trade on German thrift, and free-ride like egrets perched on the shoulder of a hippopotamus, until disaster struck; and that is exactly what happened.
There was a boom, and during the boom years the governments of the PIGS (Portugal, Ireland, Greece and Spain), and to some extent Italy, went on a spending spree. Public sector wages soared. Low interest rates simultaneously helped to inflate the speculative bubble, especially in property. When the Irish bubble burst, the government was obliged to step in to rescue the banks that had lent to the speculators — and then found itself in a dreadful position. Irish government debt is now more than 100 per cent of GDP, and the difference between this debt crisis and previous crises is stark.
The Irish are locked in to the Euro, and cannot devalue, and so their government and people are facing a protracted humiliation at the hands of Brussels and, at one remove, at the hands of the German government. They have been forced to cut wages and benefits and to lay off public sector workers, so provoking serious social unrest — and still they may not have done enough. Their credit rating has just been downgraded by Fitch to BBB plus — the same as Libya. They simply may not be able to find enough takers on the bond markets to finance their debts. What then? Who will bail them out?
Back in the early Nineties we warned that a single currency zone must mean large fiscal transfers between the poor and the rich areas, between the productive and the less productive regions. That involves what we then called a sense of “political union”, a feeling of shared purpose and common destiny between the peoples of Europe. That feeling, we suggested, does not exist — and certainly not in the way that it exists in a long-standing unitary state like Britain.
London contributes massively in net tax revenues to the rest of the UK; by and large Londoners accept that this is part of belonging to a single political entity. But Germany, which already contributes significantly to EU budgets, shows no sign of wanting endlessly to bail out the poorer and more fiscally reckless parts of the currency zone. The Germans have already stumped up for rescue packages for Greece and Ireland, and Angela Merkel is plainly facing significant unrest from a growing constituency who see no reason why they should pay ever more in their taxes to finance a load of bludgers on the periphery of Europe.
So what next? All the options now look bad. If the Irish do the unthinkable, ditch the Euro and reclaim the Punt, they will certainly achieve a competitive advantage currently denied them. Since this would logically involve a default, there would be huge collateral damage to banks in the UK and Germany that are exposed to Irish debt, and the Irish would find it hard to raise money on the markets for a long time to come.
Any break-up of the Euro would also be viewed as a tragedy for the European “project”, and though that assumption bears closer examination, it is a fair bet that the EU’s political classes will stop at virtually nothing to keep the single currency alive and intact. Most sensible people seem to think that they will succeed, and that the contagion will not overwhelm Spain as well — but then huge numbers of apparently sensible people managed to shut their eyes to the glaring flaws in the Euro.
Politics made the Euro, and politics can destroy it, especially if electorates start to feel it is a machine for German domination and the destruction of benefits and wages; or if the German electorate feels that it is a machine for fleecing Germany.
In the meantime, all those snooty Europhile politicians and journalists who sneered at us for our doubts should be forced to crawl in penitence to Dublin Castle, scourging themselves with copies of the Maastricht Treaty. We have been vindicated; the least they can do is admit it. They know who they are.
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Boris writes for The Daily Telegraph on Mondays.