Tuesday, 6 January 2009

Euro is no panacea

Back in September, I suggested that the economic downturn meant that it was time to look again at joining the Euro. It was interesting to see others turning to the same theme last Friday, although I was concerned that some of them were seeing it as a simple panacea. It is not.

There are three real advantages, as I see it, to the Welsh economy in becoming part of the Euro-zone, but none of these are instant fixes to the problems that we face.

The first is that, for many businesses, fluctuating exchange rates are an unmanageable risk which they could well do without. Of course it's important to fix the exchange rate on entry at the 'right' level, but there is a sense in which the mere removal of the uncertainty is more important to many businesses than getting the rate precisely right.

The second is that, for most of recent history, the European interest rate regime would have been better for Welsh industry than the UK interest rate regime, set as it has been largely in response to the overheated housing market in the South East of England rather than according to the needs of industry and commerce.

And the third is that it would give our currency greater protection from the speculators and gamblers who have done so much damage to the economy. Smaller currencies are inevitably easier to target than larger currencies, and the coming of the Euro has unquestionably relegated the pound to the minor league, a fact which the post-imperialist mindset in London still seems unable to comprehend.

Of course it matters that the timing and the rate are as 'right' as we can make them, but the current crisis has destroyed the argument that the Sterling economy was 'too strong' to join the Euro, and that was always the main (stated) objection. (Is it really the same people now arguing that the problem is that the UK economy is 'too weak'?) In reality, the real objection has always been a result of the Little Englander separatist attitudes which prevail amongst LabourTory politicians. Those attitudes remain as strong as ever, and I suspect that, yet again, the long-term interests of Wales will be over-ridden as a result.


Draig said...

I think you're right about the problem of the "little-Englanders" John, and also right to point out that fluctuating exchange rates are a deterrent to businesses who (at the moment more than ever) need stability of some kind. But I see another problem.

To my mind the Euro is simply an extension of the logic of a common European market - one trading bloc, one currency. It will not solve (and may well exacerbate) the underlying problem of productive capacity being outsourced to other countries.

This is the logic of these big trading blocs after all, and it's as true for the Eurozone as it is for N. America with NAFTA. And this is partly why we have a crisis now. We have outsourced productive capacity to Eastern Europe and the rest of the world and haven't replaced it with anything of real value. Labour introduced a minimum wage but over the years companies have gotten round it by simply migrating to countries where wages are far lower. In turn, these countries have followed "export-led" strategies geared towards sending these cheap goods back to us. We in turn have run up more and more debt to buy them.

With the credit crunch that dynamic has now broken down completely. The debt must be paid down, consumers are turning into savers, and exports as a result are collapsing. The most extreme example of the situation is East Asia, where exports are plummeting at an alarming rate.

The Euro is looking pretty strong for now, but I'm not convinced it will last. Protectionism will be the order of the day methinks, and maybe that's what we need ultimately to rebuild the productive base that we've lost.

From a Welsh point of view of course, protectionism may require something a little stronger than just the law-making parliament on other, but maybe I'm wrong...

Anonymous said...

"real objection has always been a result of the Little Englander separatist attitudes which prevail amongst LabourTory politician"

John - I don't think this is necessarily true. I know many people who oppose joining the Euro and are not Little Englanders.

I'm in favour of joining the Euro sometime in the future but I don't think you make any case for the Euro by peddling this 'Little Englander' line. In any case the Little Englanders was the term originially given to those who opposed an imperialist British policy and the Boer War ... not a bad line to take I'd think from a Welsh nationalist perpective!

John Dixon said...


Happy to accept the history lesson about the origin of 'Little Englander'. I still think though that most of those opposing the adoption of the Euro are doing so from an insular perspective ('save the pound', 'keep the Queen's head') rather than from a thought-through economic perspective, which was the basic point I was trying to make. And I think that the leaders of both the main UK parties are afraid of taking on that insular attitude, so the argument is being lost by default.


I agree that adoption of the Euro won't solve the underlying problem of productive capacity being transferred to low wage economies. I'm not convinced that it will necessarily exacerbate it either, although I can see how some might think that it would.

"Protectionism" isn't quite the term that I would use, but I certainly agree (and have said so previously) that we do need to re-localise the economy, and bring production and consumption closer together.

plaidcasnewydd said...

I would, just, favour the UK joining the Euro. Although the I think europe needs weaning from its fondness of the free market, and the entire set up needs to me more democratic.

If the recession is deep and prolonged the continued ill fortune of the sterling may see the next government with little option but to take sterling into the Euro. What a delicious irony this would be if this were a Tory government...

I'd very much like to see George Osbourne pressured into stating whether he would rule out joining the euro over the course of the next parliament should the tories be in power...


John Dixon said...


I'm not sure that it would be in anyone's interest for the UK to be forced into joining the Euro-zone as a result of sterling's problems, although I accept that in extremis it could come to that. My argument is more that we should be planning to join at a sensible rate and a sensible point in the economic cycle. What the recent economic downturn has done is to completely overturn the stated reasons for staying out, but without leading to any rational re-appraisal. The only conclusion is that hostility has much less to do with the stated (economic) reasons, and much more to do with emotion and, yes, nationalism at a UK level.

Anonymous said...

This looks like a fair commentary on current thinking behind the question of "to join or not to join" but I think what you're talking about, John, is a wider battle for the 'Hearts and Minds' (sorry, couldn't think of a better way of saying it) of the people in the UK regarding the EU.

The problem, as I see it, is that the Euro will never be an acceptable option for the UK as long as European institutions are run as they are now. There will be no new referendum on the UK's membership of the EU, but there may well be a referendum on the UK joining the Euro - therefore that will be the only chance the people have to voice any discontent that exists regarding Europe's institutions.

I really think that this (rather than the 'little Englander' point that you legitimately make) is the real reason why we will not adopt the Euro any time soon.

As a Plaid voter, I am very comfortable with adopting the Euro as a currency. But I am not comfortable with the way Europe is currently run - taking sovereign powers from nation states and acting as a sovereign state in its own right. If only that could be sorted out so that the issue of the Euro could be judged purely on its own merits.

John Dixon said...


I agree that joining the Euro is not the most popular of suggestions at the moment; but the last time I looked, neither was Independence for Wales. And you're absolutely right to raise concerns about the way the EU is run and the way it is developing; there are some major questions to be answered, which are effecting the perception and popularity of the whole institution.

For a nationalist considering the options for currency, it seems to me that there are only three long term options which we can consider for an independent Wales.

1. We could remain in the sterling zone and have our interest rates and monetary policy decided by a neighbouring state in which we no longer have any influence.

2. We could introduce a brand new currency all of our very own.

3. We can join the Euro-zone.

Option 1 seems to me to undermine the very idea and purpose of gaining any degree of independence. I know that there are nationalists who support option 2 because of the maximum degree of autonomy that it confers without actually leaving the EU; and support for this option is just about the only good reason that I can think of for opposing the very principle of UK entry into the Euro, which would effectively 'close down' the longer term option of a Welsh currency.

I think, however, that introducing a new currency is swimming against the tide of history, and that leaves Euro membership as the only realistic alternative, even though it is not without significant issues. That is why I support UK membership at the right time and on the right terms and exchange rate. What is missing at the moment is any real discussion of what the 'right' time and terms are - even though the circumstances have changed dramatically since the option was rejected.