Euroland could be worse

Another Tory flipflop on Europe as they reneged within 2 years. Not as if we have seen opportunism from them over Europe before have we...

Particularly interested to read the latest blog piece 'Euroland is not working' from John Redwood; the arch Euroloon and as many will remember from the 1990s the 'bastard' behind the Tory leadership election in 1995.

It is particularly interesting and worrying to note now that John Redwood's position in the Conservative Party is now accepted as mainstream; such is the drift towards the right in the current crop of Conservative MPs.

Of course the argument positioned by John is utterly one-sided and I would suggest dangerous for UK jobs and our future economic interests. They must be ignored by the government; I hope they will, but these days you can never be sure...

Firstly he uses the argument that because unemployment is high the Eurozone it must be failing; whilst on the face of it this is compelling argument it totally ignores the fact that the crisis in unemployment is global. John knows as well as everyone else that unemployment is also very high in non-Euro countries in the EU - Latvia (16.2%), Lithuania (with flat tax - 15%). Bulgaria (12.1%), Poland (9.9%), Hungary (9.785) and UK (8.3%). These unemployment rates are broadly comparable, whether in the Euro or not, and are more related to the relative designs and strengths of domestic tax and spend policies then currency.

Secondly he argues that the weakness of the management of the Euro has caused the problem but then argues against further controls by rejecting the treaty. He is correct; the lack of central control over those in the currency from the centre allowed nation states to engage in debt-binges over the last 10 years. The Euro creators saw this early on which is why they tried to limit the budget deficits of the nation states involved, but it was (and this is crucial) watered down by the individual governments of the Eurozone at the time. The cause of the problem is not the Euro itself but the fact that individual nations tried to get out of the rules. Germany is therefore absolutely right to require sovereign capital monitoring and tighter fiscal control not because they want to 'take over' other countries but because it will keep stability across all the states using the Euro. Stability incidentally which will help all those in Europe whether in the currency or not, including the United Kingdom, in growing our economy because stability means growth, and growth means exports.

Cameron I believe was wrong to veto the treaty and that is why; the guff over the City of London was never on the table... and that is also why he will go back to the table to help push through a fiscal compact.

Thirdly, John targets the loss in equity value on banking stocks. There is always a risk of jumping on such fluctuations in stock valuations and some would say just a tad opportunistic. The decline in bank stock is related to cross-border loan exposures to in-debted economies and the capital implications on the bank balance sheets. Currency valuation is important but French banks investing in Greece would be just as exposed to loan implications were it in the Euro or not; however and I would juxtapose that the fact these countries remain in the Euro does give some form of underlying guarantee that payment will be received; albeit one that currently has little confidence.

It would be far worse believe me if these countries were kicked out of the Euro not only on its short term impacts but the markets would have zero confidence in these countries in extracting themselves from the problem (remember they have distorted the truth on economic performance / tax / spend for years). There would be a flight on capital like we have not seen and this would impact UK banks as well; we have huge exposure to Italian debt. Returning to the dracma or lira would have undermined Bank capital balance sheets across Europe even more...

John then talks about bond yields which he fails to mention are decreasing. Gilts are high and that happens when any national government is overly exposed; irrespective of its currency. The fact is gilt yields are not solely related to currency and is actually related to government balancing its books; exactly the treaty solution which John opposes and Cameron veteod. Incidentally if a country were to de-value its currency the gilt repayments would skyrocket... creating an even larger risk to surrounding states and those banks John is talking about.

The last mistake John makes is on currency valuation. Now there is a truth to the fact that had Greece been allowed to leave the Euro that it could have revalued its currency so making exports more attractive - and therefore magically improving jobs. This assumes though that other countries are fiscally stable and that there is a demand elsewhere in the global economy; neither is true currently. I would suggest it would be worse for the countries kicked out because unemployment would still go up, gilts would go up and this would spread instability. it is also likely the Eurozone would have introduce tariffs on imports to prevent wholesale destruction of nationalised industries in Euro-land economies; leading to fiscal nationalism and the undermining of the common market itself.

And that is what these Tories want.

The break up the Euro would lead to major instability in the European Union. The end result in my mind a round of fiscal nationalism and tariff impositions across Europe as nation states compete to be the best value; not only would this have been self-destructive but also immensely damaging to employment prospects in the UK, which has a relatively high wage bill and which could never compete on a 'race to the bottom.' Fiscal nationalism of course leads to jingoism and the election of extremist governments and so the political implications mentioned by Merkel are entirely accurate.

Incidentally the fact that Greece, Spain, Ireland and Italy can remain in the Euro does confer stability. The markets know that the Eurozone nations are acting, albeit and I agree, not quickly enough. They also know that politics in these countries is subservient to the wider economic interest; the imposition of Mario Monti in Italy may be anti-democratic but no one is suggesting it has not been a necessary solution.

The Euroloon Tories state that imposing policy on government is anti-democratic but ignore the fact that IMF has been doing this for years by the backdoor. In an interconnected world to be utterly niave to this fact is playing games for populist appeal. Of course the ideal solution would be the election of a government that has a mandate (e.g. Spain) but this is not always the case in countries with a very pluralistic system of political engagement; sometimes difficult choices need to be imposed and I believe the President of Italy acted correctly in selecting Mario Monti.

And for those who dont think there is precedent in the UK; you'd be wrong. The formation of a national government of all parties happened in the 1930s where the King led the creation of a joint Labour and Conservative government. I refer primarily to the government of Ramsay MacDonald.

It is all very easy for the Euroloons to moan from the sidelines but the basic premise of fiscal union and currency union is sensible. Free trade, no tariffs and open movement of Labour increases wealth in all countries and reduces conflict; it is the basic premise of capitalism. For it to work properly we all need to balance the books and for the hypocrites to claim this at home whilst opposing measures for it abroad are playing a dangerous game with our jobs for a principle.

The Euroloons are posturing to the national-flag to gain grubby votes out of people's natural response in a crisis which is to protect one's own. Pandering to prejeudice whilst ignoring the end result of their political argument which is essentially nihilistic and regressive.

The destruction of the Euro would be immensely damaging to our economy and for anyone to claim otherwise is living in laa-laa land.