Sunday, April 24, 2016
In or out of the EU, we need a euro with stronger foundations
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.

There are now just two months to go (two months!) to the referendum and as promised another instalment in my series on the economic issues. So this week, the euro. Do the single currency’s flaws mean we would be better off leaving the EU?

A few days ago the Treasury produced a comprehensive and rather impressive 200-page assessment of the impact of EU membership and the alternatives, taking the economic debate to a new level. I suspect most of its critics either have not read it or did not understand it. This week the Paris-based Organisation for Economic Co-operation and Development (OECD) will be the latest heavy-hitter to warn of the consequences of Brexit.

Even the most sophisticated economic modelling cannot, however, either product or sufficiently allow for disaster and crisis, as we saw in 2008. What if the subsequent near break-up of the euro was just one of a series of damaging convulsions that will be the norm for the eurozone in coming decades?

The euro and I go back a long way. Two decades ago, with my former colleague Andrew Grice, we had the world exclusive on the single currency’s name. Like all great stories, it did not make it onto the front page.

In 1999, my book Will Europe Work? was published, which concluded that the euro, as it had been set up, could not. The euro lacked the conditions of a so-called optimal currency area and would struggle. When it was published I encountered a small army of enthusiasts for early UK membership of the euro. They included Adair Turner, now Lord Turner, when he was director-general of the CBI. He has since admitted that he was wrong to advocate membership. Most of the others have airbrushed it from their memories.

Perhaps the euro advocates were not as out of step as it looks now. In the early 2000s, we started regular polling on the issue with the new (at the time) firm of YouGov. Throughout 2002, the year euro notes and coins were introduced, a majority of British people thought we should either join immediately or when conditions were right.

It is intriguing that, a decade or so after a time when joining the euro, or not, was the hottest topic in British politics – 2003 was the year of the Treasury’s famous five tests exercise – voters should be deciding on whether to leave the EU, something few thought was even the remotest of possibilities back then.

So what of the euro and its flaws and dangers? It is fair to say that the eurozone has been held together, sometimes against the odds, by the extraordinary actions of the European Central Bank. Since Mario Draghi, its president, said in 2012 he would do “whatever it takes” to save the euro, the ECB has run through its armoury of weapons, including most recently negative interest rates and quantitative easing. It has resulted in a return to modest growth and falling - though still very high - unemployment. The euro has held together.

Lessons have been learned. I would be surprised if a crisis of the kind that hit the eurozone in a series of waves between 2010 and 2015 were to repeat itself exactly. That was the time when its banking, sovereign debt and competitiveness crises came together. These were special and unusual circumstances. Glib forecasts of another big impending crisis should be taken with a large pinch of salt.

Even the euro’s best friends would admit, however, that much more needs to be done to make the eurozone secure, and turn it into a monetary union in which more than modest growth is possible.

Some things have been done since the crisis, of which the move towards banking union is the most impressive. But some initiatives, such as the so-called euro plus pact agreed at the height of the crisis, have foundered. Last summer’s “five presidents” report, Completing Europe’s Economic and Monetary Union, set out an ambitious programme, including fiscal union (one of the conditions for an optimal currency area).

But the attention of Europe’s leaders has wandered, to the migration crisis and even Britain’s referendum. Reform of the eurozone still has a very long way to go.

What does that mean for Britain? Both sides of the EU debate would agree on one thing; this country cannot be moved to another part of the world. Proximity is important. When the eurozone slid into a second recession in the 2011-13 period, Britain was affected, despite the attempt of some to portray the slowdown in that period as entirely home-grown.

But Britain’s growth over that period, 2%, 1.2% and 2.2% (2011, 2012 and 2013) was better than the achieved by Switzerland, a non-EU country, and Sweden, like Britain in the EU but not in the euro. I have mentioned before that being inside the EU but sensibly outside the euro has been good for Britain’s relative growth performance. Since January 1999, Britain’s economy has grown by twice as much as Germany and France and 10 times as much as Italy.

Are there enough safeguards to prevent Britain being dragged into future eurozone crises, as and when they occur? As a European country, Britain would be affected, but one key element of David Cameron’s now largely forgotten renegotiation is that the rights of non-euro countries have been given enhanced protection. Britain will never have to participate in eurozone rescues, except as a member of the International Monetary Fund (which would continue to be the case outside the EU).

And, according to last week’s Treasury assessment: “The new settlement provides the basis for stable and sustainable economic governance arrangements. It puts in place a set of legally-binding principles, supported by a new safeguard mechanism, that will ensure the UK is not penalised, excluded or discriminated against by EU rules because it is not part of the euro area. The new settlement recognises that not all member states have the euro as their currency and that the UK should not be forced to participate in measures designed for euro area countries. “

It would be better, of course, if Europe’s leaders were able to move on from the migration crisis and focus on strengthening the euro. Its existence makes life easier for British businesses, while Britain’s non-euro status provides us with the most important freedom in this debate; freedom to pursue an independent monetary policy. And we should not be too gloomy. The euro is here to stay. One way or another, we have to live with it.