Opinion: The Euro chain gang

Woody Allen once made a film about a prison chain gang, shackled together at the legs to work in the fields, who decide to make a run for it.  At first the going is easy and the gang make good progress.  Then hard times strike.  Somebody raises the alarm and gives chase.  A panicking gang member (let’s call him Prisoner Farage) yells “Split up!”  In seconds, they are all flat on their faces.

EU finance is generally considered complex and difficult to understand.  Fundamentally, it isn’t.  Quite simply, in the globalised economic race between sovereign nations, Europe in its wisdom has decided to enter as a chain gang.  Hard times have now struck, and the eurozone has fallen flat on its multinational faces – as it was bound to do.

It isn’t as if Europe can afford the luxury of competing in shackles.  The BRICs and others didn’t ask the Europeans to hobble themselves.  They won’t make concessions to the handicapped.  As global competition and resource exhaustion threaten future prosperity, Europe is acting like Marie Antoinette.

The phrase “ever closer union” has proved to be a cruel self-deception.  Unity does not work like that.  When the Berlin Wall fell, Helmut Kohl did not declare a long term aspiration toward the concept of German unity.  He bulldozed it through, with the support of his public, and picked up the pieces afterwards.

So there are only two real solutions to the Eurozone problem.  One is the United States of Europe.  The other is the abandonment of the Euro and restoration of national currencies, with or without a loose trading alliance.  Nothing else will do.  Bodged compromise will merely postpone the evil day.  Until Europe decides on one or other of these stark choices and implements it, there will be nothing but pain and decline.

Once upon a time, a United States of Europe (USE) was viewed as a utopian conceit, an impractical dream.  We now see that it is none of these things.  In fact it is far more practical than what we have now – but it is no utopian dream.  With all the lingering enmities and imbalances to be tackled, it might be a bit of a nightmare.

The alternative of European disintegration, however, is even less appealing.  When Farage talks reassuringly about friendly disengagement, he is trying to pull the wool.  He knows perfectly well that it would be a bruising fight, and seeks to conceal his pugilistic instincts from more moderate voters.

History may well see Cameron’s assertion of independence, and Clegg’s desperate fence-mending, as two complementary halves of a fairly rational response to Europe from the UK.  To be sure, Cameron’s crass negotiation was a bad mistake, albeit one which will probably be overtaken by events.  However, many people will sympathise with Cameron’s position for commonsensical rather than xenophobic reasons – simply, relief that we are (largely) outside the mess, and determination to stay that way.

Sadly, the odds must favour the collapse of the Euro, or else prolonged, pointless and painful dithering, rather than a rush to real unity.  The USE concept is rational, but few yet want it, or can see past national blinkers.  At least the PIIGS are beginning to recognise some truth in the lecture about their moral turpitude.  The Germans have yet to recognise that, alongside hard work and sound planning, their dominance also stems from a rigid economic nationalism which makes no viable basis for European consensus and unity.

Speaking out over Europe has not been the political disaster for the Lib Dems that some feared.  The voters know where we stand, and can see that we have at least found some backbone this time.  If the Euro suffers an unplanned collapse, Britain will be hurt.  A party which had tried to help avoid that disaster would probably gain credit with the British public, rather than losing it.

Let’s do that.  Let’s do it in a way which is rational, tough-minded, in tune with public opinion.  Let’s begin by declaring that we wouldn’t, in the indefinite future, rule out joining a real USE.  But we will never join the Euro Chain Gang.

*David Allen is a Lib Dem member in Rushcliffe.

* David Allen is a member of the Rushcliffe Local Party and has been a member of the Lib Dems or its (SDP) predecessor since 1981

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16 Comments

  • @ thechristophe

    Obviously I haven’t made this clear enough. A United States of Europe could retain the Euro as its sovereign currency. My argument is that the USE is the ONLY viable way for Europe to retain the Euro.

  • Bill le Breton 23rd Dec '11 - 4:15pm

    The Eurozone got into this problem because its central bank refuses to implement monetary stimulus. In fact it jumped in to increase interest rates as quickly after 2008 as it could – and even when it reversed this it did so only very recently and grudgingly and insignificantly.

    There has been no quantitative easy in the Eurozone – a tool that the US and the UK have been quick to use and reuse (though still insufficiently).

    If the Eurozone economy had a monetary policy that allowed it to return to its long term trend rate for Nominal GDP only one country, Greece, would be in a position where their debt to GDP ratios exceeded the 3%.

    The ECB has created the problem – not the alleged over-indebtedness of those countries, as their pre- 2008 position made that debt level sustainable.

    As in Japan, for the last quarter of a century, the Central Bank has determined to squeeze out any inflation even if that means choking off any chance of growth.

    The third option, therefore, is that the EU forces the ECB to provide even lower interest rates and wave after wave of Quantitative Easing until the NGDP resumes its trend position – at which point there remains only Greece to continue their structural reforms, the Eurozone becomes viable again.

    Nothing has been learnt from the 1930s and nothing from the Lost Decades in Japan since 1990.

  • David Allen 23rd Dec '11 - 7:46pm

    @ jedibeeftrix:

    Praise from a Eurosceptic leaves me with mixed feelings. However, I do think that natural Europhiles like myself have to recognise that the Euro Chain Gang is not viable. Of course, some of the people who have been making that argument for years also happen to be nasty narrow-minded xenophobes. However, that should not prevent us all from recognising that, in their assessment of the practicality of independent nations sharing a common currency, they got it right.

    You are quite right to point out that there is also a third possibility, that the formation of a USE with the Euro as its currency could be based on fewer federated states (or indeed, more federated states) than the current 17 members of the Eurozone.

    What most seems to me to be missing, in all of these cases, is some sort of viable vision for future prosperity in the global marketplace. The US has a vision, of a sort: control of shrinking global resources through military dominance. The Japanese still have a vision: technological leadership. Even the UK has some ideas, deeply flawed though they may be: leadership in global finance and arms manufacture.

    Of course, none of these Western visions looks as convincing as what might be called the BRIC vision, to win the market competition by matching everyone else in terms of technology and resources and beating everyone else on price. In particular, the Japanese and UK visions seem likely to flounder, for reasons which include their relatively small size and isolation, which is of course one of the things which attracted us towards Europe in the first place! But, at least the US, Japan and UK have some sort of vision for the future, even if flawed. What is Europe’s vision? What, apart from German washing machines, is Europe going to sell to the world, in order to pay for the gourmet food it wants on its plate?

    @ Liberal Eye:

    Thanks for taking the analysis a bit further. As you point out, the will to unite (for example) Germans and Greeks is just not there at the moment. Discrediting Brussels and all its works might happen, but that won’t in itself increase the will to unite. What has to happen is that people learn to see unity, not as an indulgent academic cocktail-party dream, but as a grim necessity. What will that take? A famine? A war?

    @ Bill le Breton:

    I won’t pretend to understand fully your recipe for Eurozone survival. But in my terms, it would seem to be a piece of athletics coaching for the chain gang, which points out that if each gang member were to gather up the chains, pay out just enough slack, and then learn a style of synchronised loping, then maybe the guys could manage a respectable pace. For a while. If, that is, everybody were to agree that the le Breton recipe was the right one, and not someone else’s recipe. Then of course, events would change, there would be a need for more QE or less QE, and the chain gangers would need to sort out a new loping style.

    I have an alternative proposition. Get rid of those chains!

  • Bill le Breton 24th Dec '11 - 12:01pm

    David, the UK economy was never closely enough aligned to the majority of Euro countries for it to be wise to surrender its control over monetary policy – that was obvious when we had to drop out of the European Monetary System.

    But there are attractions to a monetary union – all those countries that joined saw these advantages. One of which is that the union has more power to deter currency raiders and another is that in a trading block currency union prevents competitive devaluations. So a union is a force for openness and your Chain Gang analogy is therefore somewhat prejudicial.

    It may sound impertinent, but I think you should try and understand the effects of the Eurozone’s central bank (the ECB) running an extremely tight monetary policy at this time. It is stopping recovery and actually if the ECB did provide (or declare that it was providing) sufficient monetary stimulus until the former level of Nominal Gross Domestic Product among its members was reached the debt crises would be rectified.

    Can you imagine where the UK would be if the Bank of England had followed the ECB’s policy of not lowering interest rates to where in fact the BofE did lower them, had raised them prematurely and had done no Quantative Easing? (Even so the BofE has done too little)

    Imagine the differences such a policy would have had on magnifying the different economic fortunes of the regions of the UK?

    Instead we have a set of unelected, unaccountable, and incompetent central bankers in Frankfurt jeopardizing the global economy.

  • @ Dane Clouston,

    Please start telling the voters the truth – that the real ambition of Eurosceptics like yourself is to lose all the advantages of collaboration in Europe, and get back to the imperial tradition of independence, competition, and every twenty years or thereabouts, European war.

    While you’re about it, perhaps you could reflect on the wisdom of trivialising the debate with tabloid sloganeering, and recognise that both sides can play at that silly game, should they be forced to do so.

  • jedibeeftrix 28th Dec '11 - 11:24am

    @ David – “the real ambition of Eurosceptics like yourself is to lose all the advantages of collaboration in Europe, and get back to the imperial tradition of independence, competition, and every twenty years or thereabouts, European war.”

    I absolutely reject the notion that ever-closer-union is justified because without we are predestined to savage butchery across the continent.

    It is FUD, nothing more.

  • @ Jedibeeftrix,

    Your first response to my article was rational and courteous, and I treated it (I hope) with due respect. Dane Clouston’s response was to distort my views in order to score cheap political points. My reply was intended to show that both sides can play the game at that level if they want to.

    There is no risk-free way for Europe to get itself out of the bind it has got itself into. The dissolution of the Eurozone might or might not be accomplished amicably. It is too alarmist to assume that Europe would inevitably revert to division, conflicts, and wars: but equally, it is far too complacent to pretend that there is no risk. The formation of a USE, whether incorporating the UK or not, is also fraught with dangers and hard to see happening any time soon. Its most likely variant would be a merger of France, Germany and the Benelux countries, leaving nations like Italy, Spain and the UK outside. That would risk intense economic competition between the USE and the rest of Europe, with both sides harmed and one side (and it isn’t clear which that would be) losing disastrously.

    I have put forward a tentative view that in these circumstances, reviving the concept of a USE may be the lesser of two evils. I hope it will be obvious that this is not at all the same as the starry-eyed idealist internationalist attitude that used to be common in this party back in its distant past. Simplistic partisan thinking will get us nowhere. My thanks to people like Bill le Breton and Liberal Eye who have used this thread to advance non-simplistic viewpoints which make worthwhile reading.

    Just one point to finish on – I note that nobody at all has yet taken issue with my main conclusion, which is that the Liberal Democrats should now declare that we should never join the Euro “Chain Gang”!*

    (* NB the small print: this means ruling out joining a group of separate states using the euro as a common currency. It does not mean ruling out the possibility of eventually joining a single USE which uses the euro as its currency).

  • jedibeeftrix 29th Dec '11 - 12:36pm

    @ David – “Your first response to my article was rational and courteous, and I treated it (I hope) with due respect. My reply was intended to show that both sides can play the game at that level if they want to.”

    You, did. If that was your aim then you succeeded.

    My main intention was to draw out assent to a third possibility avoided in the OP:

    “You are quite right to point out that there is also a third possibility, that the formation of a USE with the Euro as its currency could be based on fewer federated states (or indeed, more federated states) than the current 17 members of the Eurozone.”

    You did so, so I am quite content, for all that i mistook your deliberately controversial statement.

    “Its most likely variant would be a merger of France, Germany and the Benelux countries, leaving nations like Italy, Spain and the UK outside.”

    I tend to believe that the future USE will include Italy and Spain, and potentially Portugal as a logical consequence of the latter, but may not include Ireland or Finland.

  • Richard Swales 29th Dec '11 - 8:50pm

    I would add Slovakia and Estonia to countries likely to continue in a smaller Euro group. If no such group continues they will peg at 1 to 1 with the DeutschEuro. Estonia independently pegged with the DM before the euro was created. The trading advantages are too great to throw away, Slovakia exports 6-7 percent of its total GDP to just one country, Germany, more than the UK exports to the whole eurozone. The main growth plan is getting plugged into German companies’ supply chains. Before Christmas the MPs passed a debt brake constitutional amendment, under which their own pay is freezed if debt goes over a certain level.
    So it’s important to remember that in Europe the division is not between rich and poor countries, but between responsible and irresponsible ones, and the former Eastern Bloc countries of the eurozone are in the responsible group.

  • David Allen 31st Dec '11 - 4:29pm

    Belated reply to Bill le Breton and Liberal Eye (24th Dec) – if you are still reading.

    You point out – rightly of course – that the Euro Chain Gang is not the sole cause of Europe’s problems. Taking the right stance on deflation / relation and on QE is of course also crucial.

    However, it seems to me that the Chain Gang situation is also to blame in this context. Deflation appeals to Merkel for political reasons. It can be sold to the German public as being a win for German discipline over the “lazy” Greeks. Under cover of this “punishment”, Merkel can gain more room for manoeuvre and scope for allowing ECB (ie German) money to be used for bail-outs.

    As this helpful article points out:

    http://www.bbc.co.uk/news/business-16290598

    it’s all a bit of a pretence. The new “tough” 3% borrowing limit is simply a re-statement of an old European policy which was made a long time ago and has since been repeatedly broken – first, in fact, by Germany! So, instead of concentrating on what policies will restore prosperity, Europe is juggling with deflationary policies, for no better reason than to try to keep all members of the Chain Gang in step. They would do better, of course, to cut the chains!

    Incidentally, the BBC article is also worth noting for its lucid explanation of what caused the crisis in the first place. Greece, where bad behaviour by the State really did cause the problems, was exceptional. Elsewhere, it was private debt, not state profligacy, which caused the bubble and its collapse. Whilst Gordon Brown did make mistakes in tax-and-spend policy, their adverse consequences have been vastly exaggerated by untruthful political opponents – sadly, including our own party’s present leadership.

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