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It used to be said that Britain was the sick man of Europe. These days it could be said that Europe is the sick man of the world. Ongoing crisis in the EU regarding its monetary union are not going to get better any time soon. We can expect the weakness of Eurozone output and job creation to stay for the long haul, and the hegemony of Germany over EU economic affairs to continue.
The Economic and Monetary Union is an umbrella term for a group of policies that aim to harmonize the economies of EU member states. At the final stage it includes an obligation to join the Euro, of which the UK has opted out. The idea is to further unite Europe, creating better conditions for trade and reducing the chance of conflict. However, in reality the EMU has significant design faults, runs on an undemocratic system and creates more dividing lines than it actually abolishes.
While the plans for the EMU and the single currency were being drawn up, the powers that be were only interested in one thing. Exchange rates. We know all about this in Britain, because we crashed out of the European Exchange Rate Mechanism (aimed at converging european exchange rates) on Black Wednesday, 16 September 1992. It is significant that the bureaucrats and bankers only really looked at converging exchange rates when modelling the currency union as they missed out one key factor…unemployment. There was no mechanism to reduce high unemployment under EMU monetary policy. As I will argue later a lack of control over exchange rates meant a state couldn’t devalue its currency to create demand, this effectively locked certain economies into long-term unemployment and contributed to a culmination of debt.
Fixed exchange rates have been and continue to be a disaster for the European Union. A sovereign nation having no ability over its own exchange rate, and therefore reduced ability in how it adapts to economic shocks can have severe consequences. When I said the EMU has created more dividing lines than it has abolished I was hinting at a North/South issue. The single currency has benefitted the surplus exporting nations of Germany and others, but led to long term harm for the economies of Southern European states such as Greece, Spain and Portugal. This is because the Southern states found their exports uncompetitive compared to their Northern counterparts when tied into the same currency and exchange rate. However, what they did have access to was cheap credit, which was the kick-start for the sovereign debt crisis that almost brought the European project to its knees.
Part of the issue, and part of the reason for this culmination of debt among the poorer Eurozone states is that there is no method of fiscal transfer in the eurozone. This is the system of which money is transferred from rich to poor states to help deal with asymmetric shocks. This kind of system is beneficial in any currency union as it means states can rely on fiscal assistance rather than borrowing. It also helps to reduce uneven growth.
Further to all this, German power in the EU and Eurozone is not just held due to its economic power, but also due to the fact the European Central Bank (ECB) is modelled on the old German Bundesbank. Consequently, what we see in the workings of the ECB is an extremely unaccountable organisation that is very hard to make statutory changes to. It is not surprising therefore, when we see the same lop-sided system of German economic governance pre-EMU embodied into the Eurozone system of economic governance. Most notably this takes form in a supranational monetary union (so the ECB has control of exchange rates) while member states still have control over fiscal policy (which is taxation and spending). Yet the most significant characteristic that the ECB adopted from the Busdesbank was an insistence on fiscal consolidation over all other monetary policy. This therefore explains the German, ECB and IMF (2/3 unaccountable) treatment of Greece. High sovereign debt had to be treated (in their eyes) with austerity and budgetary consolidation, under the model set out by the Bundesbank and adopted by the ECB. In the eyes of many commentators, both left and right wing, this has caused low demand and high youth unemployment in Greece.
So then, what is the significance of this to the UK? Why should we vote to leave based on a part of the EU we are not signed up to? The answer is simple, to mitigate any effects of future economic shocks and get out of a union that is only going to integrate further. Currently the EU is looking to harmonise corporate tax rates and place rules on government borrowing. This is to try and fix the vulnerabilities of the EMU and avoid the turmoil talked about in previous paragraphs coming back in the future. At this moment in time floating around Brussels is the ‘Five Presidents Report’;this document commits the EU to the formation of a ‘genuine Economic Union’, a ‘Financial Union’, a ‘Fiscal Union’ and a ‘Political Union’ by the year 2025. This shows that the UK’s relationship with the EU is going to change rapidly beyond the forthcoming referendum as deeper integration is being sought. It is important to note therefore, that we are not voting on a status quo, but on a fully integrated supranational union by 2025.
The economic climate maybe uncertain, but that means that yet again the stability of the Eurozone is threatened. Its recovery has been uneven, while several Southern European states are now consigned to long-term social problems due to extremely high youth unemployment. If the growth and prosperity of the bloc cannot be guaranteed, the UK needs to look beyond the continent. A paper produced for the House of Commons library states ‘Trade between the UK on the one hand, and China and India on the other, has more than doubled in the space of five years, while the share of exports going to the EU has declined from 54% in 2006 to 46% in 2012’ demonstrating that our opportunities increasingly lie further afield. It is also pointed out that ‘The EU has thus far failed to secure any preferential trade agreements with Brazil, India or China…Concluding deals might be easier for the UK alone, given the greater diversity of interests involved when the EU negotiates as a group…A particular area where UK interests may be poorly represented in EU trade negotiations is services market access. Language, time zone and structural features of the UK economy give it a comparative advantage in cross-border services trade.’ From this information it is clear that the safe option is for Britain to leave the EU, avoiding any further shocks in the EMU and capitalising on growing trade links with emerging markets. The UK can much better negotiate deals on its own, rather than having our interests pooled with another 27 countries.
The history of the EMU and the Eurozone is a turbulent one to say the least. The bloc has faced crisis, and in Brussels they only know one answer to crisis: more integration. Therefore, the weaknesses of the EMU that I have spelled out will attempted to be fixed by the ‘Five Presidents Report’ and deeper integration in every area. Uncertainty, slow and sluggish growth and deeper integration are all issues of the current EMU AND they are all things the UK should actively avoid in order to protect our economic interests. This can only be done with a vote to leave on June 23rd, 2016.
