Sunday, March 01, 2015
If Europe keeps growing, Brexit won't happen
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Greece’s negotiations with its creditors have provided us all with an entertaining glimpse into the dysfunctional family that is the eurozone. So we have had Wolfgang Schauble, Germany’s finance minister, playing the part of the stern, unbending father figure, almost taking it beyond caricature.

Yanis Varoufakis, his Greek counterpart, has won admirers for his style and his straight-talking approach, the antithesis of most professional politicians. But ultimately he has been cast in the role of the rebellious teenager who insisted over and over again that he would never tidy his bedroom but has now got the vacuum cleaner out.

It remains to be seen where the Greek episode goes next. Syriza’s tactics have alienated many of its eurozone partners and the “deal” (or no deal) it achieved – which if not nothing was not far from nothing – has led to understandable disillusionment at home. Maybe Greek voters always took their new government’s promises with a pinch of salt but Syriza has made the mistake of over-promising and under-delivering, the opposite of what good governments try to do.

There are further episodes in this family struggle to go but, in a curious way, and despite its dysfunctional aspects, it has probably strengthened the euro. The chances of Greece leaving are smaller than they were, and the risks of other governments seeking to overturn austerity – which in many cases has already run its course – are quite low. Germany may not have won many friends but it has prevented what it would see as fiscal anarchy. “Grexit” – Greek exit – is off the agenda for now, and the 19-member euro lives to fight another day.

Less noticed amidst all this is that the eurozone economy, having looked like something of a basket case just a few months ago, has been quietly gaining strength. Maybe most people and businesses in Europe never took the prospect of Grexit seriously, or if they did were not troubled by it, but the eurozone is looking better, even before this month's bond-buying quantitative easing programme from the European Central Bank.

It began with the official figures for growth in the final quarter of 2014, published earlier this month. Though eurozone quarterly growth of 0.3% was weaker than Britain’s 0.5% expansion, it represented an improvement from the 0.1% and 0.2% increases of the previous two quarters. Some eurozone members, notably Germany and Spain, both of which saw a 0.7% rise in gross domestic product, outperformed Britain.

That improvement has carried through into this year, according to the purchasing managers’ index for the eurozone produced by Markit. Its composite measure for February showed a third successive monthly rise, was at its highest for seven months and showed the fastest pace of job creation since 2011.

Germany’s official unemployment figures showed a 20,000 fall for February, with the jobless rate of 6.5% remaining at a record post-unification low. With two of Germany’s biggest industries – metals and electronics – having struck a 3.5% pay deal, Oxford Economics predicts that this year will see the biggest rise in real household incomes since 1991.

Even France, which seemed to be in real trouble, is looking up. Unemployment fell by more than expected in January, admittedly from a record high of 3.5m, and consumer confidence is rising. Italy, judging from its purchasing managers’ survey, is growing. Ireland, Spain and Portugal are looking better.

Eurozone unemployment remains much too high, at 11.4% of the workforce, but is coming down. Growth in the money supply M3, a necessary precondition for continued economic growth, perked up to a perky 4.1% in January.

Nobody is suggesting, of course, that the eurozone is enjoying anything other than a modest recovery. If it grows by 1.5% this year, a percentage point or so below Britain, it will have done well. The eurozone is benefiting from a similar “good” deflation boost to spending power as Britain, though with a bigger risk that deflation becomes entrenched. But a weaker euro may help head off that danger, while also boosting exports.

Though we sometimes take pleasure in the eurozone’s dysfunctional family tearing itself apart, stronger growth in Europe is good for Britain. Much of the growth disappointment in Britain in the early stages of recovery was down to the eurozone’s woes. The better it does, in general, the better we do too.

The performance of the eurozone also has another important British dimension. If Labour policies worry business, the prospect of an in-out EU referendum is the big concern for many of them about the Conservative agenda.

I think fears of “Brexit” – Britain leaving the EU – are overstated. A few days ago a YouGov showed record support of 45% for staying in the EU (in a question that has been asked since 2010), against 35% of people who would vote to leave. The 10-point margin in favour of staying in was also the highest since 2010.

Attitudes to remaining in the EU reflect two things. One is the state of Britain’s economy. The better that people feel about the economy in Britain, the less they will be inclined to take a risk by voting to leave the EU. The second is the state of the eurozone economy. Support for staying in the EU was just 28% during 2012, at the height of the eurozone crisis, and head of Mario Draghi’s “whatever it takes” commitment to holding it together.

A situation in which Britain’s economy is doing pretty well and the eurozone growing slowly but surely is one in which voters in Britain are likely to opt for the status quo, as they did in Scotland when faced with a similarly big decision last September. Open Europe, a think tank, puts only a 17% probability currently on Brexit.

Things could change, of course, between now and 2017, though other polling evidence suggests that voters will not casually vote for EU exit. When people are asked whether they would want to remain in a renegotiated EU, support is around three to one in favour.

That could change if current evidence of a eurozone upturn proves to be a false dawn, and the euro lurches back into crisis. Those who want Britain to stay in the EU have a vested interest in Europe doing better.