David Laws and Vicky Pryce on the crisis in Europe

Monday evening at conference saw a discussion between David Laws, economist Vicky Pryce and Simon Tilford from the Centre for European Reform entitled “Europe: from crisis to growth”.

This wasn’t an event that one went to if one needed cheering up: the overall message coming from all the speakers was a downbeat one, even if they all picked out some small shards of positivity.

Simon Tilford began by giving some reasons why on the face of it the past month has been a rather good one in the ongoing saga of the Eurozone crisis: we had the announcement from Mario Draghi, head of the European Central Bank, that he is willing to do whatever is necessary to save the Euro; alongside that we had the ruling from the German constitutional court that approved the bailout fund; we had the European Commission’s proposals on the EU banking system; and finally we had the Dutch elections, where the extremist party of Geert Wilders were set back significantly.

But he felt that these achievements didn’t go nearly far enough. The ECB must actually start buying large amounts of debt, rather than just talking about doing so. And on the wider issue of forging a more equitable solution between debtor and creditor countries of the Eurozone the ECB is pretty powerless; the political obstacles to such a move remain as great as ever.

Further, he said, the banking union is nowhere near sufficient because there is no pan-European deposit insurance mechanism. And Eurobonds seem to remain off the table.

In Simon Tilford’s analysis three things are needed: a rebalancing of trade deficits and surpluses within the Eurozone; a relaxation of the fiscal rules imposed on bailed out countries; and a sustained period of higher inflation.

He sees two plausible outcomes to the crisis. Either the Eurozone does what is necessary, becomes a closer, more cohesive block, relegating the UK to an isolated outer tier, or the Eurozone collapses, an EU-wide bank bailout is necessitated, the whole EU project and single market is put under threat and the whole area enters recession.

Next to speak was economist Vicky Pryce. She started with the point that it is massively in Britain’s interest to see the Eurozone crisis solved, not just because we need to increase our exports to close the trade deficit but because of the interconnectedness of our banking systems.

As a long-term critic of the Euro, it was no surprise to hear her set out eloquently the arguments against it: by removing the balance of payments issue within the Eurozone, everybody bought BMWs and Mercedes because they weren’t worried about the consequent effect on interest rates and we therefore saw a huge transfer of funds from poor Eurozone countries to rich ones – and nobody cared because they didn’t think it mattered.

The rich countries didn’t realise what was taking place, and the only solution was to have massive internal devaluations – massive drops in GDP – because there could be no currency devaluation to even things out. As a consequence, many of the poor countries of the Eurozone have regressed back to the position they were in pre-Euro.

Pryce’s solution was as follows: unsustainable debt levels means a massive write off is necessary, we need to flood the market with ECB cash and we need not to worry about the non-existent problem of inflation.

The last speaker was David Laws who started on a similarly pessimistic note, saying that the Eurozone problems remain “immense” and that there is relatively little that the UK can do about them other than hope that our European colleagues succeed in fixing them. He cautioned against underestimating the effect that the continuing crisis is having on the UK economy, pointing out that unfortunately the UK has chosen to trade with many of the countries worst effected by the crisis.

He, too, welcomed the changes at the ECB, which had previously acted in a rather conservative way but which is now much more willing to do what is necessary to fix the problems.

Laws takes the view that the worst of the crisis in the Eurozone has now passed, but because of the deep underlying problems the situation will take a long time to resolve. He also disagreed with Vicky Pryce, who made the case that Greece is in a similar position to other similarly indebted countries, arguing that Greece’s position is much more serious and precarious, with already very heavy fiscal retrenchment having failed to put the country’s public finances on a more sustainable footing.

He spoke of the frustration felt by Liberal Democrat ministers who see the potential for good alliances in Europe with those who have similar views, particularly with eastern European countries, but those countries are reticent because of our reputation as not being a core, team player. He said that we have to realign ourselves into that spot to forge those necessary alliances, and stressed that Liberal Democrats can do that better than the other parties.

However, he takes the view that the UK’s relationship with Europe will remain ambiguous while Eurozone countries are preoccupied with fixing their problems and creating structures to secure the Euro’s future. Only then can the UK afford the “indulgence” of deciding how we want to engage what is likely to be a significantly different Europe.

* Nick Thornsby is a day editor at Lib Dem Voice.

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19 Comments

  • Well that’s cheered me up.

  • Richard Dean 27th Sep '12 - 1:26pm

    Vicky Pryce’s analysis just seems wrong, but it does lead to interesting places. When a person or family buys a car, they do not normally base their choice on the consequences of their purchase for future interest rates.

    Without the Euro, many purchases of foreign goods by Greeks would have meant that Greek demand for foreign currency would increase, so Greek demand for their own currency would decrease. So foreign currency would get more expensive, and foreign goods would get more expensive for Greeks. Eventually foreign goods would be impossibly expensive, and the situation would have stabilized.

    Also, the reduction in value of Greek currency could have made it significantly cheaper for German and other cars to be produced in Greece. The consequent inwards investment could have enriched Greeks in a way that also created a stable equilibrium.

    In reality Greece adopted the euro, so exchange-rates could no longer stabilize the situation. What else could have done the job? One way for prices of foreign goods to rise is for local wages to fall, and this too would have led to inwards investment. But the Greek government decided instead that lying about its debts was the answer. Perhaps other governments also took a short-sighted and economically ignorant view – expecting their own unemployment rates to rise if production moved to Greece.

    Vicky Pryce’s solution is not realistic – for the reasons that jedibeeftrix sets out. Reducing total wage bills is difficult – individuals don’t wag cuts, so generally it has to be done by firing people. But Greeks (and others, wherever it happens) do need to work to get back into an equilibrium, so unemployment is also not the solution. That leaves investment as the only way forward. It means that, right now, foreigners need to invest in building modern factories or vineyards in Greece and Spain.

    According to Keynes this need not lead to increased unemployment in the places where production moves away from. This is because the increased employment in Greece and Spain will increase demand by exactly the right amount. Anyway, that would be a theory -I wonder what these so-called experts would think of it? 🙂

  • Richard Dean 27th Sep '12 - 7:15pm

    So what is stopping investment in production in Greece and Spain?

    My guess is that there are larger short-term profits to be had from lending to the Greek and Spanish governments. The interest rates are ridisculously high – possibly because the ratings agencies have not believed in European determinantion not to let its parts fold – which means that the risk is being over-estimated and the over-estimate is translating into extra profits for banks and other lenders.

    There are plenty of people available for work in Spain and Greece. So I guess we have arrived at a new self-sustaining equilibrium in which financial services dominate productive services. One solution might be to break the financial system, but the system is trying to do that to itself anyway. I suggest instead that the ECB should invest directly in productive industries in the affected countries, instead of buying debt. Would this type of intervention be acceptable to anyone?

  • Old Codger Chris 28th Sep '12 - 12:13am

    David Laws repeats the longstanding Lib Dem moan about the UK not being a team player. But being a team player would have involved joining the Euro.

    While the Leader is apologising about tuition fees perhaps the whole party should apologise for having advocated joining the Euro, and admit that the Tories and Labour were right and we were wrong.

  • Indeed. It would be sobering for veteran Lib Dems to look back at their airy dismissal of the economic, political and constitutional arguments put by those sceptical of the euro 10-15 years ago, and throughout the subsequent period until the crisis blew up in 2010.

    Party spokespeople routinely implied that to be against joining the euro was tantamount to demanding ‘stop the world, I want to get off’, if not faintly xenophobic. (After all, we were told, the CBI and the TUC were both in favour, so case closed that it would be good for the economy… Of course both had also backed our ill-fated ERM membership.)

    Many of these former enthusiasts seem to be unrepentant, seemingly denying that the current crisis exposes deep-seated structural flaws or raises any more fundamental questions than how to put out the immediate fires. It is delusional to believe that simply vowing to actually abide by the fiscal rules next time will keep a 17-member single currency zone on the straight and narrow.

  • Richard Dean 28th Sep '12 - 2:01am

    In repsonse to jedibeeftrix, yes, I would, and my action would add to the reasons for the EU to sort itself out without shedding members. Is that playing chicken? Maybe, but big lenders like Germany can’t afford to let their debtors default. In response to also to Old Codger Chris, I suggest that it’s arguable that, had we joined the Euro, some of the problems that now beset it might not have happened, and we might all have been better off now.

    The reason is a bit convoluted…. As has been well stated by the PM and DPM, British government institutions as well as the City of London really does have expertise in financial services. So it’s just about feasible that we would have been horrified of what we found out after joining. We might have been so shocked that we might have insisted on controls that might have prevented some the European debts to get as large as they eventually became.

    David Laws is correct that our foolishness in not joining now means we are virtually powerless to affect the future of the 40% of our exports that go to Europe. And we will be even more powerless if and when Europe sorts itself out, regulates itself without our input and so not necessarily in our interest, and leaves us behind as it forges ahead with a recovery.

    So my humble opinion is that we need to drop our silly insularity, re-think our identity in a post-colonial, post-Empire world in which we will soon be a minor power compared to nations now emerging, and that we should now do whatever it takes to join the Zone. There is no need to be frightened of this. No nation in Europe has lost its essential culture or distinctness as a result of being part of the EU or the Zone.

    I recognize that some respected economists disagree, but I also see every day that many economists don’t actually have much of a clue about why things are happening and why the measures they recommend aren’t working. Indeed, the divergence between Laws, Pryce, and Tilford show this well. If economics theory provided a credible solution then all three of these experts would agree on the major points at least.

  • Richard Dean 28th Sep '12 - 10:28am

    @Jedibeeftrix. Loss of national culture cannot be a sudden thing, at least for culture that matters, so if this is to be a reason for breakup in five years, symptoms ought to be visble now. Do you have any evidence that such symptoms are appearing? I see no symptoms at all.

  • Richard Dean 28th Sep '12 - 11:03am

    My impression is that most Greeks and most Spaniards want to stay in the Euro. I gain this impression from things like BBC News in the case of Greeks, and talking to people here in Spain.

    I see no unwanted change to culture here in Spain – people still speak Spanish, think Spanish, sing and dance Spanish, celebrate Spanish, and are taught Spanish (and also Catalan where I am). I’m on the coast in a tourist spot, and you can still reciognize the Italians as distinct from the French. No one is feeling culturally threatened.

    There are also plenty of economic pressures keeping the Eurozone together. Germans don’t seem to show any evidence of fear of becoming Portuguese, and Germany certainly wants Greece to stay – it would lose heavily if they left. In effect, the Zone is doing exactly what it was designed to do – keep countries together while they sort out amongst themselves how to cooperate to mutual advantage.

    We need to be in there, partly because we’re European anyway – we actually originate in Europe – but for other reasons and one in particular: becuase otherwise we won’t share that mutial advantage.

  • Jedi,
    your conception of culture as an immovable feast is bizarre. Human culture is constituted by the actions and behaviours of those people within the group, and as such it is ever-evolving. Culture cannot be ‘lost’ as it must be constantly renewed.

    On the point about the single currency I have some sympathy, but it is impossible to agree and any speculation by the public on the composition of the Euro in any number of years time is relevant only insofar as it is harmful.

    A single currency is an essential ingredient of a completed single market, but it is not fundamental to the basic construction of it.

    So you are merely highlighting the incoherence and unsustainability of your position while you state your desire for access to the advantages of the single market without a desire to complete it.

    I agree the European project has been designed to fail by many of the illiberal elements to be found throughout every country in their attempts to cherry-pick the order and limits of integration according to their domestic agendas, but this will never be a permenant state of affairs.

    Monetary union was botched and rushed through too fast, before the institutional infrastructure was in place to support it, but the process has not been proved wrong, rather the illiberal manner of its top-down implementation has.

    The Eurocrats who became impatient and wanted to note achievements within their political lifetime are to blame – integration is not a 10 or 20-year job, it will take 100 years of investment in our relationships with our neighbours.

    The rewards for committing to achieving the aim are immense, as are the punishments for turning back.

    I don’t see any reason why the LibDem position regarding Europe need be adjusted – the UK didn’t join the Euro because the budgetary rules (on debt etc) were ignored, and had we joined it would be a very different beast as our involvement would have ensure it were so.

    Put frankly, that France and Germany couldn’t convince the UK of the merits to join the Euro at the time should have been a strong indicator to them that the way they were going about it was flawed and that they were destined to end up where we are now. If the politics and economics don’t coincide then they will tear each other to shreds.

  • Richard Dean 28th Sep '12 - 12:17pm

    Being part of Europe means recognizing and managing differences, not ignording them.

    Catalonia, a province in North-East Spain, provides more tax revenues to Madrid than it receives. Popular unrest takes the form of people demonstrating for independence from Spain. No-one demonstrates for independence from the Eurozone.

    In Madrid, people demonstrate against austerity – sometimes quite violently. Government has been ineffective in preventing incompetence and corruption in banking. But again, people do not seem to be demonstrating for independence from the Euro.

  • Old Codger Chris 28th Sep '12 - 5:23pm

    @Richard Dean
    “British government institutions as well as the City of London really does have expertise in financial services. So it’s just about feasible that we would have been horrified of what we found out after joining. We might have been so shocked that we might have insisted on controls that might have prevented some the European debts to get as large as they eventually became”.

    Would that be the City of London that has proved to be so wise and farsighted recently? Even if the City were as wonderful as some imply, it’s an open question as to whether other members of the single currency would have taken much notice of UK caution. And it would not have addressed the fundamental problem – a single currency would only work if it were a product of full economic union, not an attempt by dogmatists to bounce Europe into economic union.

    It’s a shame that everyone who opposed joining the Euro was demonised as a UKIP style little Englander. That attitude will come home to roost if a referendum causes the UK to quit the EU.

  • Richard Dean 28th Sep '12 - 5:43pm

    @Old Codger Chris.

    Yes, you have a point about the City of London there – it’s not at all certain they would have helped. But things would have been different anyway, and so maybe we’d be in a better place – it’s hard to imagine a worse one.

    What is “full economic union”? And why do people think it is needed?

    The present Eurocrisis seems to have been created by what is essentially fraud, including the export from the US of worthless sub-prime debts, and by mis-reporting and over-optimism by some European governments and financial service bodies.

    Combatting fraud, mis-reporting, and over-optimism isn’t done by having, for example, identical fiscal policies.

  • Old Codger Chris 28th Sep '12 - 9:30pm

    I’m not suggesting that the Euro was the sole cause of Europe’s current problems – it clearly wasn’t. But it hasn’t exactly helped the situation and its inherent contradictions were sure to cause trouble sooner or later.

    I don’t advocate economic union – it might happen sometime or it might not. But I do say (as do many people who understand these matters much better than I do) that a single currency makes no sense without it. The cart was put before the horse by politicians whose enthusiasm for the European Project led them to ignore reality. Certain Lib Dem MEPs among them I fear.

  • Richard Dean 28th Sep '12 - 9:44pm

    Those people who “understand these matters” actually don’t understand them at all! They dispute amongst themselves on causes and on remedies.

    If you have a cart and a horse, tying them together is a first step towards motion. The next step is to let them wriggle around into a geometrical relationship which allows progress. That is what may be happening now!

    One day soon, the horse will choose to drink, and the cart will choose to move! 🙂

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