Sunday, January 31, 2016
Confidence and a brighter eurozone argue against a Brexit vote
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.

We do not yet have a date, and we do not yet have much of a campaign, but the referendum on Britain’s membership of the European Union is slowly looming into view. Moreover, it is already starting to affect the markets.

An opinion poll a few days ago which appeared to offer a greater probability of “Brexit” weighed on the pound. City economists, responding to requests from clients, are busy penning notes both on the effects of referendum uncertainty on the economy and the consequences of a vote to leave if it were to happen.

There will be time to consider these things in the coming weeks. Today, however, to continue my planned programme of pre-referendum pieces, let me address another aspect to the European question.

The euro is the pinnacle, so far, of European integration, and it is the fault-line on which many of the continent’s problems rest. Badly designed, open to too many countries too soon, it brought Europe to the brink of a crisis a few years ago that could have been at least as big in its impact as the banking crisis of 2008-9.

That should have been a wake-up call for Europe’s leaders. So far, however, they have been content mainly to kick the can down the road rather than pick it up and redesign it. The fundamental problem of the eurozone remains. It is not what economists call an optimal currency area. There is no central Treasury, or properly co-ordinated fiscal policy, to offset the power of the European Central Bank. Eurozone labour markets, and wages, are inflexible. And, contrary to what you might think from your TV screens, there is not enough mobility of labour within Europe.

There is a second issue about the eurozone, and it is one that troubles George Osborne, when he can drag his thoughts away from Google. There are 19 members of the euro, out of the EU’s 28 members. 337m people, two-thirds of the EU’s population, live in euro member countries. More countries are likely to join, despite its flaws, in the next few years, though Britain never will.

The danger is that the euro “outs”, comprising a diminishing minority within the EU, gets outvoted and outmanoeuvred by the rest. Ensuring this does not happen, which will be difficult, is arguably the most important aspect of the government’s renegotiation.

For some people, the flawed euro and the risks of being repeatedly turned over by the euro majority in the EU are sufficient grounds for a “leave” vote. As I have said before, I will hold fire on my verdict until nearer the time of the referendum.

In terms of how the economics of the referendum vote will play out, however, and trying to cut through the noise from other issues, let me offer a view of how voters may see things.

Most people do not think too deeply about the euro. They certainly do not trouble themselves over whether the eurozone is an optimal currency area or not. A perhaps disturbingly large number of people in Britain thought – and may still think – that euro membership would be good for us because it would cut out the inconvenience of having to exchange currencies when holidaying elsewhere in Europe.

But people do know when things are going badly. Three years ago, when all the talk was of a double-dip recession in Britain (it never happened), the eurozone had a proper one. It lasted for over a year and it coincided with talk, not just of Greece leaving but of a complete dismantling of the single currency. Eurozone unemployment stood at more than 12% and in Spain and Greece was more than 25%.

This, to not quite paraphrase Groucho Marx, was a European club that we wanted nothing to do with. Polls at the time showed a lead of 20 points or more for the exit camp.

How we feel about Europe matters. How we feel about ourselves also matters. 2012-13 was the time of the squeezed middle, the squeezed bottom, and the squeezed just about everything else. Growth was tentative and the rise in employment, while happening, was weaker than subsequently became the case. Prices were rising faster than wages. Consumer confidence was very depressed. We felt miserable. We probably blamed the eurozone crisis for some of that misery.

There has been a turnaround. The euro’s fundamental flaws have not disappeared but the eurozone has come through its crisis. You would not rule it out indefinitely but Grexit, the departure of Greece from the euro, has ceased to be an imminent threat. It was a close-run thing, but the eurozone has held together.

It has also returned to modest growth. The eurozone started growing again in the spring of 2013 and has continued to grow since. Its current growth rate of 0.3% or 0.4% a quarter is nothing to write home about but it is better than the alternative. The unemployment rate has come down to 10.5%. No longer does Europe appear to be in economic crisis.

As for consumer confidence in Britain, figures on Friday showed it has maintained its strength of last year this month, in spite of tumbling stock markets. Last year was the best for consumer confidence in Britain in the more than 40 years GfK, which surveys the public on behalf of the EU, has been assembling the data. This month has seen a two-point rise in its overall measure of consumer confidence, on the back of continued strong employment growth and rising real incomes. Britain’s consumers are “resiliently bullish” says GfK. They are no longer feeling miserable and they are no longer looking for somebody else to blame.

If these two things persist – a crisis-free and modestly growing eurozone and heightened levels of consumer confidence in Britain – the leave campaign will have its work cut out in trying to persuade voters that change is either necessary or desirable.

That does not, of course, preclude non-economic factors coming to the fore, though people tend to vote with their wallets and purses. The economic backdrop to the referendum is more favourable for a “remain” vote than David Cameron could have imagined when he pledged an in-out vote three years ago this month.