June 11, 2012

The most pro-European thing to do now is reject the euro


Those readers who have been berating me for years for even considering the possibility of a country leaving the euro have recently fallen silent. (You know who you are.)

The most pro-European thing to do now is reject the euro
European history has been about various powers trying to dominate and Britain trying to stop them. In the last four hundred years it has been either France or Germany. 
This week I want to move on from trying to forecast what even the most purblind of euro-fanatics now recognise as, to put it mildly, a very distinct possibility, to considering the consequences.
You may think this is premature. Personally, I have always thought that if you are going to be a forecaster you should specialise in being early.
So what would happen if Greece were to leave the euro? The short answer is that I don’t know. What’s more, neither does anyone else. Moreover, you should beware anyone who tells you otherwise.
We are in the realm of pure uncertainty. Much depends upon how confidence reacts and on the inter-linkages in financial markets, about which we know little in advance. Nevertheless, there is some information about how things may pan out, and there are good and bad arguments on which to base a view about the future.
Some people fear that Greece’s departure could deliver a seismic shock to the world financial system. After all, a country leaving the euro is potentially a much more significant event than the failure of a US investment bank. So it could be “Lehmans on steroids” – but I doubt it.
There can hardly ever have been a financial event more telegraphed in advance. Deposits have fled the Greek banking system, companies have cut exposure to Greek customers, banks have written down Greek debt and central banks have prepared their reactions. By contrast, the Lehman’s debacle came like a bolt from the blue.
I wouldn’t even be surprised if, after a Greek departure, the world’s equity markets ended stronger. Indeed, this is starting to be the smart view in the City.
We all know that the important issue would be not so much the direct impact as the possible contagion. But I am sure that the full resources of the eurozone would be deployed to ensure that a line was drawn in the sand under Greece. And for a time, the markets would probably buy the line that the rest of the eurozone was now secure.
As I wrote last week, however, that would not necessarily be the end of it. Much would depend upon how well Greece did. Concerns about a wider euro break–up could resurface before long.
So what should be the stance of the British government? Its view has been that a break-up of the euro would be a disaster, even to the extent of supporting moves towards full fiscal and political union to prevent it.
This strikes me as completely wrong. European history has been about various powers trying to dominate the continent and Britain trying to stop this. First it was Spain, but in the last four hundred years it has been either France or Germany. Now we have both trying to do it together, with Spain and the others in tow!
On the economic front, if the euro splits, of course we would initially suffer enormously from the financial damage and from the inevitable contraction of aggregate demand on the continent. But what about afterwards? If the euro were to break, the new German currency would be sent higher on the exchanges. That would benefit Britain’s competitiveness.
Admittedly, the new currencies of the peripheral economies (which collectively are larger than Germany) would weaken. That would harm Britain. But that effect could be offset by what would happen to demand in these countries. They would now have the chance of sustained growth, which would help UK export prospects.
But the really important issue would be aggregate demand in Germany. How would she react to the loss of net exports caused by the rise of her currency? The classic answer would be to boost domestic demand. If this happened then, inter alia, it would increase the market for British exports.
The upshot is clear: above what we are already bound to do, we should provide no financial resources to keep Greece in the euro, nor for the defence of the eurozone more generally. I realise that we can hardly be standing on the sidelines shouting “yah boo sucks, we were right all along” (although this is true), but the British authorities, far from helping to prop up the euro, should be preparing for its demise.
Britain’s self interest is best served by having a Europe that is economically strong and vibrant. Does anyone seriously believe that this can best be achieved by preserving in aspic the depression-creating regime called the euro?
There is a tendency for our governing elites to identify the interests of Europe with whatever European institutions currently exist and with whatever euro-twaddle is spouted by the people in power in Europe at the time. This is profoundly misguided.
The most pro-European thing anyone can do now is to reject the euro.


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