Is the Euro a good reason for Euroscepticism and Brexit?

I often read here that the Euro has pushed Southern Europe, and indirectly somewhat also the UK, into misery and that the EU is therefore a doomed project that must be left. I could not disagree more.

Greece did not develop any competitive employment, especially for the qualified, since joining the EU 1981. Its dominant public and partially closed private sectors do not have the economic structures of a developed industrialized country. Strong growth in the last ten years has been based on public and private consumption financed by the EU and an uncontrolled amassment of debt. The disappearance of cheap money and the resulting fall in demand have brought record unemployment perpetuated by structural standstill.

Portugal attracted numerous businesses after joining the EU in 1986, but neglected to implement structural changes necessitated by the opening of Central and Eastern European markets. It is better integrated into international production networks than Greece, but has become too expensive for the labour-intensive type of production that once boomed there. Thus, export-driven growth has tapered off. Quick, profound and already loosening austerity now seems to be working towards a noticeable recovery.

Spain’s joining the EU triggered a catch-up process supported by its solid industrial base. The temptation to make fast money in real estate, however, ended this process. After the bubble burst, unemployment exceeded 20 percent. A rigid labour market and high levels of private debt have slowed economic recovery.

Italy has had no growth since 2000, high public debt has built up over many decades without significant acceleration since the financial crisis. Unemployment has grown only modestly since 2008. With debt-capacity already limited, bank-recapitalisation has not happened. Italy has a substantial industrial base with pronounced export-orientation. What holds the country back is business-hostile unions, excessive taxes for the honest, pervasive bureaucracy and a slow legal system.

A separate currency would have led to less debt, growth and wealth in the boom years. Higher inflation and currency devaluation, anyhow no fix for uncompetitive structures, would have provided transitory relief only to the meaningful exporter Italy.

Leaving the Euro would not only be unhelpful, but practically undoable. Pervasive informal sectors, organized crime, corruption, and ineffective public administrations would make the resulting capital flight uncontrollable and therefore devastating. Incidentally, London would be the big beneficiary.

The UK was booming until 2008 because of debt-financed speculation in financial assets and property, and high consumption. When credit dried up, asset-prices and consumption collapsed. The slow recovery since had nothing to do with a cheap Pound. In the absence of major new wealth-creators, immigration, low productivity and a liberal labour market drove employment. Public debt continues to rise, private debt and asset-prices are back up. The UK’s fiscal crisis management (so called austerity) was unavoidable, successful, and first-rate in Europe.

To sum it up:

  1. Southern Europe needs structural reform and budget control, not devaluation.
  2. The EU provides a helpful support structure for this.
  3. Leaving the EURO is neither helpful nor practically doable.
  4. The UK fared better because it was better governed, not because it has its own currency.

* Arnold Kiel is a self-employed Management Consultant, father of two sons in British education, and very concerned about their future in this Europe

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This entry was posted in Op-eds.


  • Laurence Cox 18th Apr '17 - 7:55pm

    The Euro can only work at present if there are large and continuing payments from countries in surplus (read Germany) to countries in deficit. The German public will not stand for this as is evident from the rise of groups like AfD. Euroscepticism is a rising force on the Continent as France shows, not only on the Right (Le Pen) but also on the Left (Melenchon) and much of this is linked to the Euro and the rigidities which it imposes. If the EU had introduced the structural reforms back in the 1990s when they turned a blind eye to both Germany and France running deficits above the 3% limit they might have been able to achieve the outcome you desire, but it is much easier to do this when economies are growing strongly.

  • Peter Martin 18th Apr '17 - 8:38pm

    @ Arnold Kiel,

    Your argument essentially explains the ordoliberal (just Google that word if you think I’ve made it up) thinking of the powers-that-be in the eurozone. It has been that thinking which has shaped the workings of the eurozone and led us to where we are now. So faced with a sick patient who has become even sicker, the advice you are offering is just “Carry on with even more of the same! ”

    There is no reason why a single currency will not work but the money flows need to be better understood than they are. Currently the dominant economic power in the EU, Germany, is running close to a 9% of GDP surplus in its trade. This means that euros are sucked from the economies of the rest of euro using countries leaving them short. It can be no surprise that these economies end up in recession. How can they possibly not?

    Yes we need the structural improvements you mention but they aren’t going to work on their own. Germany works because there is only one Germany. We can’t have lots of mini copies. It simply isn’t possible for everyone to run a surplus. Germany’s surplus is, euro for euro, pound for pound, dollar for dollar, someone else’s deficit.

    If Germany wants to run a surplus, the PTB in Germany and the EU have to recognise and welcome the fact that others run deficits.This has to happen within the eurozone too. It isn’t sustainable for the UK and the USA to pull along the world’s economies for ever. Alternatively, Germany needs to offer a better market to Greece, Spain, and the rest so they can earn the euros needed to pay their debts. They should do that by lowering taxes and encouraging German people to spend more. In other words Germany needs to run a trade deficit like the USA and the UK.

  • Nom de Plume 18th Apr '17 - 8:51pm

    Nice, german analysis. The problems of a transfer union needs to addressed. Can an ad hoc approach continue indefinately? The conditions for convergernce need to be maintained, as do the conditions of the Growth and Stability Pact, as do structural reforms. Strong medicine which can not be imposed on sovereign states. Politics gets in the way. Maybe not everyone is German. Many of the southern states (mis)managed their currencies differently before they joined the Euro. You may have a point on the irreversability of the Euro. The big euro gamble continues. Viel Glück!

    The AfD has mutated since its inception. I am not sure what it is now. The rise of populist and extreme parties in (some) european countries have varied causes. It is also linked to demographics. It is all quite complex. Europe is not homogenous.

  • Nom de Plume 18th Apr '17 - 8:54pm

    Hi Peter Martin! You got your comment in before I did.

  • Eddie Sammon 18th Apr '17 - 11:48pm

    I’m not a Europhile but I’m a defender of the Euro. Devolution is not a solution and the subsequent volatility could actually make things worse for southern Europe.

  • David Evershed 19th Apr '17 - 3:28am

    Struggling countries like Greece need to
    a) devalue their currency and
    b) have low interest rates
    c) have high inflation

    Surplus trade and surplus government budget countries like Germany need to
    a) revalue their currency
    b) have higher interest rates
    c) keep inflation down

    You can’t do that with a common currency.

  • Peter Martin 19th Apr '17 - 9:46am

    @ David Evershed,

    “You can’t do that with a common currency.”

    You’re right that the EZ countries are in an economic straightjacket at present. But there are large common currency zones which work perfectly well. The euro could work perfectly well too. There are things you can do much better with a common currency.

    The PTB in Europe were extra-ordinarily stupid in setting up common currency zone with only a central bank to hold it together. As ‘Nom de Plume’ suggests there needs to be a transfer union as well as a political union. This means a common taxation system which can net levy taxes in the wealthier regions and net spend in the poorer regions. There is a successful model for all this in the USA. Why can’t the EU simply copy that?

    Germany is good at engineering reliable cars. But absolutely awful when it comes to engineering a financial system which works and is fit for purpose. The much maligned East German Trabbi was an engineering marvel by comparison to the euro project. At least it had a starter motor to get it moving again when the engine had stalled!

  • The comments here about a “transfer union” are very simplistic and ignore the fact that the EU has operated regional development funds for decades which do transfer money from the richer to the poorer regions of the EU.

    Equally it should be pointed out that historically speaking countries have used currencies without “transfer unions” for centuries. The idea of the modern state with its spending on health, education & social welfare would have barely imaginable a hundred or two hundred years ago, yet that didn’t stop us using the pound, the dollar, the franc etc. Indeed I believe that during the famine in Ireland, the net transfer of government monies was FROM Ireland to Westminster, not the other way around, and yet the then UK of GB & I continued to use a common currency for decades afterwards without anyone suggesting that Sterling was unsustainable.

  • Peter Martin 19th Apr '17 - 10:48am


    You are right that there are some currency transfers between the richer and poorer countries of the eurozone. Incidentally, the eurozone shouldn’t just be considered to be the only countries using the euro. Countries who are in the process of aligning their currencies to euro and have pegged them to the euro are almost equally affected.

    We need to distinguish between currency transfers in the form of loans and the process of fiscal equalisation. There is some of the latter happening but it is nowhere near enough. We just need to see how it works in the USA. The poorer States , like Mississippi, aren’t expected to manage on loans. Those loans would simply put them in a state of permanent debt which they would never be able to repay. Just like Greece now!

    There’s no need to pretend that the process needs to be more complicated than it is. If we want Northern Ireland to be part of the Sterling zone then we have to accept that taxes are net raised in the SE of England and net spent in the six counties. It was the same in Germany when they had the DM. Taxes would be raised in the West and spent in the East. And in meaningful amounts. Not just token gestures.

    This is how it has to work everywhere.

  • *Absolutely zero* mention of the elephant in the room here, Germany’s current account surplus of 9% of GDP, which keeps on rising year after year and sucking effective demand out of the rest of the world, including the UK. Our huge trade deficit with the EU has got far worse since the euro zone crisis exploded in 2011, whereas the deficit with the rest of the world is far smaller and has shrunk in the past five years.

    The undervaluation of the euro of around 30-35% (for the German economy) has helped Germany accumulate this surplus, which it refuses to do anything about, either by effectively reflating consumer demand or through fiscal transfers of any significant nature. This is the ticking time bomb at the heart of the euro project.

    And the German response: everyone must become more “German”. This ignores the fact that not everyone can have a trade surplus – for every surplus there needs to be a corresponding trade deficit.

    The transfer union idea is absolutely not on the agenda and wouldn’t ever happen even if it were – it would be pure poison for German, Dutch, Austrian etc. politicians. And even if money were to be transferred to Italy (currently a big net EU contributor), Greece and other underperforming countries, where would that money end up? Given the history of public spending projects in e.g. southern Italy you can only imagine.

    This article is so very, very wrong and illustrates the fatal problems at the heart of the euro. Lecturing other countries and telling them exactly what domestic economic policy is not going to work and simply antagonises nations’ electorates. The euro project’s inherent flaws are such that it is doomed to fail and when it does, it will explode with one almighty bang with very bad consequences for everyone concerned.

  • @ Peter Martin

    “And in meaningful amounts. Not just token gestures.This is how it has to work everywhere.”

    You try telling the German and Dutch voters that they have to send “meaningful amounts” of money south to Greece and Italy every year to be spent on God knows what and see what political response that idea gets.

  • Peter Martin 19th Apr '17 - 2:00pm

    @ RC

    Not exactly zero mention of the 9% if you include my comments.

    I do understand the political problems of trying to get German and Dutch voters to understand. But they can’t have it both ways. Either they recycle their surplus or the euro doesn’t function.

    It won’t make them any worse off to do this. A surplus is money that isn’t spent. If they give it to the poorer countries instead of stashing it away in the Bundesbank vaults it won’t make any difference to the average person in the short term. In the longer term it stabilises the political situation in the EU so everyone benefits.

  • Lorenzo Cherin 19th Apr '17 - 4:06pm

    Was and am against the creation of a single currency.

    It leads to power for the big not the small. A fundamentally illiberal practice in itself.

    It leads to centralisation and the most important decisions on economic policy decided by other than the individual states. A fundamentally undemocratic practice as accountability is not possible without common language or shared media.

    As a Liberal Democrat I do not like what I describe .

    The formulators of , “ever closer union”, including Liberal,Social and Christian Democrats, have led to Brexit because of their squeezing of square pegs into round holes and the reverse !

    There is nor has there been an appetite for the homogenisation of three hundred plus million people.

    Those who have had it , are idealists wanting that which is not ideal in any way to most of us.

  • Arnold Kiel 20th Apr '17 - 7:37am

    Thank you all for your thoughtful comments. Admittedly, I am still learning on this question; therefore, somewhat disorganized, my responses:

    It was not my intention to portray the EURO as a stellar success-story; many things have gone wrong. I am just arguing that exclusion from the EURO, or even the EU, would not have improved the fate of the average Greek (or Briton) today compared to the year 2000.

    Greece certainly should not carry on with more of the same: it must stop consuming above its means. Unfortunately, it was a poor country when it joined the EU, when it introduced the EURO, and it still is today. Sadly, tens of billions from other member states were spent on votes instead of invested in education, infrastructure, and effective institutions.

    US-states have their own credit rating, cannot be bailed out by the federal government, and, surprise, there is freedom of interstate-movement. Emigration from Greece to e.g. the UK is, economically speaking, beneficial for both countries.

    I am honestly not sure if sustained trade imbalances are really such a big problem. If you looked just at the UK and Germany, this has been going on without damaging either side, because the UK was an attractive destination for German capital. I do not believe this is a common currency phenomenon. Even if it had the Drachma, Greece would still have to import all of its cars, because it does not make any. The question is how many it can afford: a lot less than it bought between 2000 and 2008. This was always true, just covered up by cheap credit for a while.

    Conversely, what could Germany do to reduce its surplus? Damaging a competitive private sector is not advisable: it creates wealth, irrespective of its distribution. Higher domestic consumption would help only, if it were directed at imports from deficit countries. There is not much more the rest of the world can do to buy Greek. The islands are fully booked and already expensive.

  • Arnold Kiel 20th Apr '17 - 7:37am

    continued, because of length

    The idea that uncompetitive countries devaluate their way out of their problems seems outdated to me: it stems from the times of simple labor-cost arbitrage. Today, even China loses out if labor cost is the only name of the game.

    Substantial transfers were and are being made from e.g. Germany to Greece. This is not sustainable, hence the need for Greece to consolidate. The EU structural funds are a transfer union. Given their wastefulness, it is difficult to argue for an expansion. Even Wales, possibly one of the least corrupt recipients, achieved very little with them (not even a remain majority).

  • Peter Martin 20th Apr '17 - 10:02am

    @ Arnold Kiel,

    “I am honestly not sure if sustained trade imbalances are really such a big problem. If you looked just at the UK and Germany, this has been going on without damaging either side, because the UK was an attractive destination for German capital.”

    You need to think about this a little more.

    First of all you need to ask yourself why Germany wants to consistently swap a higher value of goods and services for a lower value. If you make wine and I make beer it makes sense to trade one for the other. Say on a weekly basis. It might make sense for you to run a surplus one week and take may IOUs in return. You can spend them the week after when I supply you with extra beer in return. But it doesn’t make sense for you to consistently swap, week after week, more wine for less beer and take my IOUs to make up the difference.

    I just end up heavily in debt. So heavily in debt that I’ve lost my capability to make good on those IOUs. I simply couldn’t supply you with enough beer even if I wanted to. So we both have to pretend that my IOUs are worth what you think they are worth to keep the system sort-of-working.

    Unlike Greece, I’m a currency issuer so I can write out as many IOUs as I like. There’s no point you complaining that I’m in debt. I can’t force you to take less beer for more wine. That’s been entirely your decision. And that is the key point about different currencies.

    But if like Greece we were both using the same currency things would be different. I couldn’t just write out IOUs. I would have to come to you to borrow the money or borrow it from a bank. Then you could perhaps say it was my decision to be in debt.

    Except for the Greek Government they don’t have any way to stop their own citizens buying too much wine (or cars or whatever) from you. Tariffs are illegal in the EU and they can’t devalue. All they can do is force their economy into recession so their citizens can’t afford so many cars. That’s obviously not good for them and its not good for anyone else either.

  • Peter Martin 20th Apr '17 - 10:40am

    @ Martin,

    You need to think a little more too. The euro isn’t a competitor to the US dollar. Anymore than the Canadian or the Australian dollar. It really doesn’t matter what currency Saudi Arabia prices their oil in. If you have enough euros, or pounds, or Thai Baht, or whatever, you can buy oil from Saudi Arabia.

    It’s just like buying a watch on eBay. If the price is in US dollars, or euros, you (or eBay) just work out what that is pounds and you press the button, your Paypal account is deducted and hopefully you’ll get your watch in the post. You don’t care that the seller get his euros. The seller doesn’t care that you’ve paid in pounds. But his euros have to come from somewhere and your pounds have to go somewhere too. So just what currency people choose to save in can matter. But not what currency sellers choose to price their goods in. That’s of no consequence at all.

  • Peter Martin 20th Apr '17 - 12:41pm


    There isn’t a single officially designated “reserve currency”. The US dollar may have been de-facto that when it was guaranteed against gold up until the early 70’s, and most other currencies were pegged to it. But it hasn’t been guaranteed against anything at all for over 40 years now.

    The dollar is just another currency. An IOU of the US government. We can use any currency as a ‘reserve’ if we choose to save in it. So on that basis the pound and the Japanese Yen are reserve currencies too. The Japanese Govt has a much bigger debt proportionately than the Americans at over 200% of GDP

  • Arnold Kiel 21st Apr '17 - 8:39am

    @ Peter Martin

    Some of the world’s richest countries, the US and the UK, have persistent trade deficits. It is a sign of their wealth, compensated by capital inflows from surplus countries. The sustainability of this is currently more a political than an economic debate. Neither the American, nor the British “solutions to this problem” are overly sensible.

    But my point was Greece. No transformation of the German business model, and no currency policy would solve its problems. Greece must either earn more or spend less. It comes down to productivity and competitiveness, just like in the UK with its own currency.

  • Peter Martin 21st Apr '17 - 9:41am

    @ Arnold Kiel,

    But Denmark, Germany, Switzerland, Singapore are rich countries too. So if a trade deficit is a sign of wealth why don’t they have them too?

    Also you can’t consider Greece in isolation. Greece, by giving up its own currency, has lost the fiscal room for manouvre that a country like Iceland has. But whereas Iceland has recovered well from the severe shock of the GFC, Greece hasn’t because it can’t. Greece is in essentially the same fiscal position as Cornwall county council. There isn’t much it can do,on its own, to revitalise the Cornish economy. It needs the assistance of the Westminster Government. Greece needs the assistance of the EU government but there isn’t really one in existence. So yes Greece needs to do many of the things that are suggested for it, like having a better tax system but that’s not going to fix the problem of Greek debt. The Greeks need to repay in euros but they don’t have enough.

    There’s just two ways that can be fixed. There needs to be fiscal transfers from wealthy countries in the EU to the poorer. Just like there is in the USA. Or countries like Germany and Holland are going to have to take active measures to run large trade deficits so that countries like Greece and Spain can export their way out of trouble. The USA did this in the post war period. Germany didn’t have dollars to repay international debts, not all of which were cancelled in the 50s, but it did have VW cars, for example, to sell in the USA to raise the dollars. The USA switched from being a net exporter to a net importer to facilitate the process and Germany now needs to do the same.

    I like the opening remark in this article from Wolfgang Münchau in the FT:

    “German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes. ”

    Keynes is my favourite Liberal BTW! It’s a pity that the Lib Dems have also lost sight of his economic genius.

  • Peter Martin 21st Apr '17 - 10:03am

    PS If you have trouble with the FT paywall just try Googling:
    “The wacky economics of Germany’s parallel universe”
    That should get you in.

  • Arnold Kiel 21st Apr '17 - 1:27pm

    @ Peter Martin

    You believe that a currency, rightly characterized here as just a formal paper convention, is a material driver of a country’s fundamental wealth. Let me try another thought:

    Imagine Greece had the Drachma back ignoring all transitional problems. How would Greece then improve its economic wellbeing?

    On this day 1, Greece’s resource-situation would be unchanged. Its exports are already sold in hard currency at the prices international competition allows; no change here.
    The country needs hard currency for all its imports, also no change. Could it attract new business by devaluating local content (labor, land)? No. Depressed wages would quickly drive inflation, because Greeks consume predominantely imports. Turning this spiral forever might feel better than euro price-deflation, but in reality, it is not and produces many undesireable side-effects. In all small countries with funny local currencies, all serious assets (realestate, cars, etc.) are priced in $ or eur. And I am ignoring the capital-flight-problem here. In reality, all Greeks would try to convert their spare Drachma as fast as possible in euro or real-estate, triggering an abrubt one-off devaluation of an new Drachma for which there are only sellers but no buyers. My turkish (not even a small country) professional friends, all have $ contracts. These local currencies serve to buy fruit and vegetable at the corner shop, not much else.

    It also would not expand the available credit market. Very few international investors would be interested in local currency debt, which, according to your theory, has the explicit purpose to be constantly devalued. Also locals would be very careful to accept a fixed future Dracha repayment which might not buy them much in the future. Hard currency credit availability would depend on the rating, as today.

    Admittedly, in this situation the capital markets would not make the implicit bail-out assumption which allowed Greece’s overindebtedness. But this Bonanza, enjoyed as long as it lasted, is now over anyhow.

  • Peter Martin 21st Apr '17 - 2:18pm

    @ Arnold,

    The case for Greece to have its own floating currency is the same as for Australia, Canada, New Zealand, or even Iceland. Not big countries at all. Especially the latter with a population of just over 300,000. Just about enough though to find 11 decent players to beat England in the Euro cup last year! So why doesn’t NZ use the same currency as their biggest trading partner Australia? Why don’t the Canadians save themselves the hassle of currency conversion with their main trading partner the USA and use US$ too? They could. Ecuador chooses to do just that. But Ecuador can’t create US$ like the US can. So their borrowing costs will be much higher. If the Bundesbank put their spare US$ into their account at the Fed they know that the US can never involuntarily default. The risk is just about zero. If they lend them to Ecuador though there is a risk of default. So they would want a much higher rate of interest as an insurance. Their economy can be healthy but only if Ecuador perpetually runs a trade surplus. They need those dollars and other tradeable currencies coming in to allow Ecuadorians to save in dollars which the Government can then borrow if they need them.

    So having a requirement that every country in the world run a trade surplus to ensure economic health obviously isn’t going to work. So it really makes much more sense to have one government and one currency. But we don’t have this in euroland. The surplus countries do well. The deficit countries struggle with debt. But there has to be equal numbers of each.

    If anyone want to export to Iceland they, or someone else, effectively has to accept Icelandic Krone as payment. That’s all they have. They don’t have euros or dollars. So if the Krone falls in value, Icelanders can’t afford so many imports. There exports become more attractive to the rest of the world. The Icelandic economy self adjusts to any shock. The Drachma would work just the same way. This is not to say that a separate country is a sufficient condition for economic prosperity. Countries like Argentina can get themselves in a mess if they borrow too much in a foreign currency. But if countries limit their debt to their own currency they should be fine.

  • Peter Martin 21st Apr '17 - 2:18pm


    If Germany, or anyone else, wants to run a trade surplus with Iceland then the Bundesbank needs to recycle that surplus by buying Icelandic debt. Icelandic bonds. If Germany doesn’t want to run a surplus then it doesn’t buy the debt. The Krone self adjusts in value to ensure that trade balances. That’s all there is to it.

  • Peter Martin 21st Apr '17 - 3:02pm

    Should be:
    1) Icelandic Krona not Krone!
    2) “This is not to say that a separate currency is a sufficient condition….
    3) “Their exports become more attractive….”

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