Opinion: Liberal Democrats should abandon support for the single currency

Despite the media perception of the Liberal Democrats as a party of Euro fanatics, there is arguably a wider divergence of opinion on this issue in the party than in any other UK party.

Defence Minister Nick Harvey voted against the Maastricht treaty (which only 22 of the more than 300 Tory MPs at the time did), while many others in the party are confirmed federalists.

In the broad media discourse, the EU draws only extremes of opinion, based either on a nationalism whose stripe is funneled through a yearning for a “them” to give an identity to the “us”. Commentators believe this is patriotic pride but, in reality, it is closer to nationalistic insecurity about Britains’s place in the world.

These figures, resembling Evelyn Waugh’s William Boot, are among the first British generation to be born without an empire to rule or a world war in which to fight.

They bestride the airwaves seeking to turn tariff policy negotiations into the new Paschendale.

Those on the other side of the debate more closely resemble the character modelled on Neal Cassady from Kerouac’s On The Road, as they seek a Europe free of the pragmatic concerns of existence and believe that such a Europe can be a reality if we ignore those realities, as we commence its creation.

But perhaps the literary hero whose world view the Lib Dems should follow when forming EU policy is Mathieu, the protagonist of Sartre’s “The Age of Reason” who seeks to abolish all metaphysical concerns (such as pride in nation or sense of belonging to a wider post-nationalist society) and embrace a pragmatic and free approach to existence.

Such an approach from the Liberal Democrats in relation to the single currency, would see the party discard its support for Britain entering the currency at any time in the future on the pragmatic basis that such a currency cannot be a long-term success long.

The problems we are seeing in the eurozone at present are not merely the consequence of a few countries being over-optimistic in their budget forecasts in order to be allowed admittance to the single currency in 1999. There are systematic flaws which ensure that a single currency can only ever be a collective European pathway to singular European ruin.

This is because a single currency has a collective monetary policy, with a single central bank setting interest rates for the whole area. This ignores the fact that every country in Europe is at a different point of the economic cycle, and need different policy measures to best manage their economies.

As EU leaders are presently discovering, a collective monetary policy is expensive and not particularly effective. In times of severe crisis it boxes the European Central Bank into a corner. The only instruments available to it are monetary tools. The markets know this and so watch the fiscal policy developments of individual countries as the true indicators of where the eurozone economy is going, rendering the ECB simultaneously irrelevant and all powerful.

This is acknowledged by the ECB’s president Mario Draghi, who places the emphasis on nation states to drive eurozone growth.

For there to be a common growth strategy, it could be argued that a common fiscal policy is needed. This is impossible to implement as each country needs differing levels of growth at different times (one present example of this is Ireland’s central bank last week revising its growth forecasts upwards, while in Spain the growth forecasts are being revised downwards. A common fiscal policy for both those countries over the next five years would be a disaster.)

In times of plenty, common monetary policy is enough to allow for a single currency area to function, but it is at times of crisis that such an area faces its true test, and the Eurozone is failing.

Liberal Democrat hearts are in the right place in wanting ever greater union between the peoples of Europe, but support for the single currency should be sacrificed to the altar of realism.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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31 Comments

  • david thorpe 6th Aug '12 - 2:51pm

    jedibeeftrix-

    the desire to increase britisih compeitiveness by being open to other markets-and allowing other markets to be open to us did not start with europhilia-it was at the heart of britians empire building prioro to the industrial revolution-and later due to the realisation that protectionism doesnt work-and just as britian made deals with other lands then without acquiring the negative aspects of thsoe socities so it can within the european union

  • david thorpe 6th Aug '12 - 3:02pm

    britain created the welfare state and i hope maintain it-the copmmentatoras i mention ate eurosceptic for the reasons i mention-some commentators are pro-eu for reasons you mention-different commentators

  • david thorpe 6th Aug '12 - 3:10pm

    of course i do-ive just written a eurosceptic article mocking the colonel blimps!

  • To me the biggest mistake in Europe is not the single currency. It is the expansion to include countries that don’t really benefit from or contribute to it. Fortress Europe would be fine, but it ain’t a fortress it’s a conurbation.

  • After I read “there is arguably a wider divergence of opinion on this issue in the party than in any other UK party” at the beginning I realised this article would be of limited worth.

    It does seem that this article is fairly ignorant of the EU area that uses the Euro. The author might be surprised to learn that despite the banking crisis, the Euro remains popular. The background is that the Euro is here to stay and UK politicking is pretty irrelevant. In fact it would be easier to break up the EU than break up the Euro. The issue is to what extent will the UK be sidelined?

    Does the author not understand that without a single currency a single market is unsustainable? It is simply not economically feasible in a single market to have a mixture of currencies playing ‘beggar thy neighbour’. Inevitably the strong currency would drive out the weak as no one would wish to be paid in the weak currency and anyone with the weak currency would want to transfer it into the strong currency, which of course in a single market would be everybody’s right.

    A hot issue for Lib Dems is the question of support for an EU referendum. In the past, Lib Dems have proposed an IN or OUT referendum, but are noticeably distancing themselves from this at the moment. I do not think that a half-way house position is sustainable, but I admit to being very unsure of the time-scale involved. Cameron is looking for a new treaty in which the UK is more detached. I could see voters in Ireland and other countries giving that the thumbs down, even if it were agreed at Council of the EU level (which I cannot see happening either).

    In any case if such an agreement were made it would include a range of issues, such as relinquishing vetoes on many issues, that would call for a UK referendum that in the absence of a prior IN or OUT commitment would be thoroughly chaotic.

  • david thorpe 6th Aug '12 - 3:27pm

    martin there are many single markets in the world which do not have single currencies…ANSEAN comes to mmind….as for the rets of your post..which UK party has a wider diveregence of opinion than the Lib Dems on Europe?

  • This ignores the fact that every country in Europe is at a different point of the economic cycle, and need different policy measures to best manage their economies.

    Whereas, for example, London and Sunderland have perfectly synchronised economic cycles and benefit from identical policy measures to best manage their economies?

  • Tories and Labour both have a wider divergence Clarke to Redwood, McShane to Hooey for example (this is not something I wish to discuss further). ASEAN is not a single market (though there are moves to create this, some say by 2015), though perhaps it is a free trade area. Do you know the difference?

    Jedi thinks the Germans might want to ditch the Euro, but this is wishful thinking. Read what I have said about a single market. Lets suppose hypothetically that the Germans could and would (they cannot and would not), then in a single market it would not take long everyone to keep their accounts in the German currency and for the whole area to be priced in Marks or what ever they decide to call it.

  • david thorpe 6th Aug '12 - 4:41pm

    @ catherine.

    London and sunderland are very diverse-thats why you need to decentralise the economy, the UK econmy is over relaint on the wealth creating areas of the south and the north has been neglected-thats why we are in the medd we are-the European community without the single currency is decentralisedand benefits all and a model for those who want to decentralise the UK economy to follow-but with the single currency its overly centralised.
    The sunderland and Lonodn ECOnomies need different measures but are on the same part of the cycle-sunderland isnt big enough to have its own cycle, it needs different policy measures though.

    ANSEAN is not a singl market though it is certain to be there-its alreday agreed only the timing is in doubt-I report on economics for a job on a daily basis and we watch ANSEAN closely-Clarke is not as pro=-EU as some Lib Dems-Redwood is of cousre a sceptic-but he most pro eu tory is less pro eu than the most pro eu Lib Dem-so the diveregence is greater in the Lib Dems

  • Jedi: no government is proposing to repeal the single market act as I wrote earlier, it would be easier to break up the EU. Yes under the Lisbon Treaty the Germans could leave the EU, you are welcome to put your money on that, what odds would you think are worthwhile? I am sure many would take your money, whatever you proposed.

  • Richard Dean 6th Aug '12 - 5:22pm

    If I change £100 into euros at one airport and then change those euros back to pounds at another, I end up with about £70. This means that there is an effective 15% tax on UK goods selling in the Eurozone, which makes those goods less competitive, and a 15% tax on Eurozone goods being sold in the UK, which means we benefit less from inward trade than would otherwise be the case.

    Put another way, I seem to have rea somewhere that we export something like £400 billion of goods to Europe annually, 15% of £400 billion is £60 billion, so the present arrangements mean that UK companies and consumers are paying £60 billion per year to the financial servives industry in currency transactions that add no value, and another £60 billion a year to export goods to Europe. Personally I think that’s crazy.

    It means that, for the UK, any Eurozone membership price less than £120 billion per year is beneficial. Germany would be in a similar situation if it came out of the Euro. Put another way, if we joined the Euro and had to fork out up less than £120 billion annually to support poorer nations, as costs of a common monetary policy, we would be quids in, to coin a phrase.

    So no, as a Party we need to stick up for Britain by continuing to support a single European currency, and continuing to work towards joining it.

  • Jedi: I gave reasons why none of what you suggest can happen is possible, but you have just responded with but it is possible without addressing how it could be possible. As a starter you can try to explain how you would prevent everyone keeping their money in the German currency in a single market: hint – in a single market all banks can hod accounts in any of the currencies within the market – that is what a single market does.

  • James Nicola 6th Aug '12 - 8:30pm

    @Richard Dean

    Your figures might be valid if businesses were in the habit of using airport currency exchanges to transfer money around. Oddly enough, this isn’t the case. To give you an example – a company I run has an office in Slovakia, which is in the eurozone. I needed to do some transfers today. I phoned up my bank to send the payments just before noon. They gave me a rate of 1.2420 euros to the pound. The spot rate at that time was 1.2562, so the actual transfer loss was 0.0142 euros per pound sent, or just under 1.2% . There was a further £9 transfer fee per transaction(using the SEPA transfer system), which, because we were sending four payments which averaged around £1500 each, adds a further 0.6%, making the total approximately 1.8%. Bear in mind that I have done absolutely nothing to optimise this rate – we use a normal high street bank; I don’t use the services of any specialist transfer companies, forward booking contracts, or anything else like that. If we did – and particularly if we were willing to transfer a large amount of funds in one go, and then draw on that, which is what most larger firms do, we could reduce this to less than 1%.

  • David Allen 6th Aug '12 - 8:40pm

    “If I change £100 into euros at one airport and then change those euros back to pounds at another, I end up with about £70. This means that there is an effective 15% tax..”

    Well, first of all, you can find far better deals than that if you are not seeking convenience and trading small cash. Your currency losses on the financial markets should be a tiny fraction of 15%.

    Granted, it would be nice to get rid of them. However, as this article points out, the euro has created financial disaster throughout the eurozone. Isn’t the downside – bankrupt nations, disunity, and conflict – rather more important than your upside, the fact that you could save a few bob in transaction charges if we were part of the euro?

  • “The problems we are seeing in the eurozone at present are not merely the consequence of a few countries being over-optimistic in their budget forecasts in order to be allowed admittance to the single currency in 1999. There are systematic flaws…”

    This is true. But these systematic flaws are not part and parcel of a single currency. The framework can be improved.

    We’d all be in a much better position now if the eurozone had a proper lender of last resort in the form of the ECB or, similarly, some sort of shared risk in the form of eurobonds.

    The aversion to higher inflation is also a big obstacle that doesn’t have to be there. Without Germany’s hang-ups and ECB complicity, real debts could be shrunk and wage competitiveness quickly increased.

    Is the eurozone really that much more heterogeneous than the USA? Krugman has written that the difference between Mississippi and New England is greater than that between Greece and Germany. How about other huge countries like Russia, China or India?

    And of course the UK has its own single currency despite big regional differences. As commenters have said, the way around this is fiscal transfer (ditto in the US).

    So the system can be made to work.

    But the costs for some – e.g. the aforementioned shared borrowing or fiscal transfers, possibly alongside fiscal policy centralisation – are great. The current eurozone may have no choice but to go down that path. Neither joining them nor being left on the sidelines are appealing options!

    What I really want to see more of is imaginative thinking. Why should liberals support currency being so linked to nation states? Why don’t we promote the use of a multitude of currencies (as Carswell suggested, and a bit like Major’s proposal for the euro to be *additional* to national currencies)? Couldn’t we have a global currency? Is central bank control over rates liberal? Do we have the optimum system of money creation? I’m not proposing any of these ideas – just saying that there doesn’t seem to be enough questioning of the status quo, including within our ‘radical’ party.

    @Richard, I don’t think businesses tend to do foreign exchange at airports! It’s only us lot that get such a raw deal!

  • Richard Dean 6th Aug '12 - 9:56pm

    @James Nicola and David Allen, Thanks for the info! Even so, 1% of £400 billion imports and £400 billion exports is more than “a few bob” – £2 billion – enough to solve a few problems in the NHS!

    I remain convinced, in my ignorant way, that joining the Eurozone is the way forward. I’ll just have to find some other arguments in support! 🙂

  • Richard Dean 6th Aug '12 - 9:57pm

    £8 billion, not 2! Things are getting better all the time!

  • The fate of the Euro is the direct result of the ‘deepening/widening’ debates which followed the end of the Cold War.

    Frankly, politicians underestimated the scale of the challenge to balance the speed of integration with the development of institutional structures capable of managing integration. It’s not surprising since patience goes out of the window as politicans seek headlines during their electoral cycle and the financial world exerts pressure to take any and all advantage – integration is a 100-year plan, not a two-term premiership.

  • as someone said, if we had been part of the Euro then the ECB would have been in London, the ground rules would have been better thought out and more firmly applied… – and there would not have been this daft rule that the new accession countries should immediately buy into the Euro, adoption of the single currency should have been a stage 2 to be applied for and considered separately. The current mess was inevitable.
    What surprises me is that more businesses don’t operate on dual currency, especially in retail, hospitality or public transport. If that was more prevalent then we may find a wider acceptance of the Pound around the continent, as is the case with the Dollar.

  • david thorpe 7th Aug '12 - 2:03pm

    Hi Peter-

    Im afarid that the gorund rules would have been the same because the politicians felt ‘the hand of history on their shoulders’-the phrase of Helmut Kohl explaining why he ignored the advice of his staff that Greece wasnt ready for entry-they were building a major politicla project to be their legacy-if your building a political project then sadly the economics becoem secondary.
    @ Phil

    The problems can only be overcome if there is a common fiscal policy is my belief, or at leats some framework. In the US there are regional and national taxes-the eurozone is so disdaparet in its outlook on tax that Im not sure common taxtation could be agreed even to the extent it is the United States. Its also important to emphasise that the ES States which came together were closer economcially at formation than the eu states are….

    there is also an argument that spain and greece’s economy can, under its presnet model, only exist if its currency is less valuable than those of the richer antions as it gives them competitive advantge in realtion to attracting tourims.
    The collapse of the former yougoslavai eats into this competitive advantgae as countires like croatia, from a toruism point of view…tourism is such a massive aspecvt of their economy..but the second area in which a single currency impacts is that spain and greec became more expensive holiday destinatiosn for german and british tourists the morning the former countries joiend the euro…those are structural obstancleswhich restrict the potential of those countries to grow…

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