The European Experiment
Guest blog by Simon Denham, founder and former CEO of London Capital Group, one of the UK’s leading ﬁnancial services companies specialising in online trading services for retail, professional and institutional customers, globally.
According to Hollande, the French premier, “unemployment…is causing people to turn their back on the European project”. One is tempted to stand back and mutter “well as it is the European project that, in all likelihood, is responsible for their lack of gainful employment, their antipathy is rather to be understood”.
One does not have to be a Little Englander to shout “I told you so”. A small number of economists and a large number of merely vaguely intelligent people were banging on about the incompatibility of a single currency fifteen years ago using the most basic of economic tools. The biggest one of which was the glaring and fundamental difference in productivity between what can generally be termed “the North” and the less industrial/industrious South.
European politicians wished to move to a utopian fiscal union but instead of picking a long term model of convergence based upon economic compatibility envisaging the slow accretion of member nations they chose instead a specific, line in the sand, date with a load of easily fudged criteria. Obviously we are aware that politicians in modern democracies can never think in terms of longer than the ‘next election’ and so the idea that countries might have to wait decades before joining was a non-starter from the beginning. A single date also suited their own vainglorious ends and cemented their personal places in history.
As we now know this sudden loosening of fiscal reins created by the simple fact that people could suddenly borrow at 4 or 5%, when they had been more used to 10% or higher, caused a massive asset bubble that we are still trying to unwind even now. Not only this but the currency (bolstered by the massive German economy) remained stable no matter how low rates went and how much the various nations spent and the inflationary bubble normally associated with such a huge surge in demand was quashed by the rise of the vast, and cheap, manufacturing potential in the Far Eastern (mainly China).
Unfortunately these effects served to hide away the widening cracks and this was ably assisted by governments willing to build up huge budget deficits (although miniscule by today’s numbers) because “Boom and Bust was a thing of the past” (Thanks Gordon), meaning that any possible increase in spending could be artistically accounted away by the magic GDP growth and its attendant increase in tax revenue that was sure to come.
Oddly enough the history of most monetary unions is not actually very good and is occasionally, in the end, quite bloody. In ‘recent’ history we have a few: from the US through to the Communist Bloc of Eastern Europe. Probably the single major contribution to the US civil war was nothing to do with the issue of slavery but in reality the attempt by the Northern States, via the new constitution, to force a fiscal union on the South.
At least in the US there was the central link of a common language. In Europe, an unemployed Greek worker is unlikely to find work in Germany or France or Holland simply because they do not speak the lingo. In the US, the rust belt was testimony to the flexibility of a mobile workforce able to up sticks to more favoured corners. If there were no jobs in Pennsylvania then they could be found in California or Florida. But in Spain? Considerably over 50% of youth is out of work and yet there appears to be no major migration impetus to other nations. Norman Tebbit’s ‘get on your bike’ finds just as few adherents now as it did back in the eighties.
Eighteen months ago, once again, a bit more masking tape was placed over the cracks as Italy, Greece, Spain, Portugal and Greece looked like imminently blowing us all into penury. At the time central bankers and politicians went about claiming that a workable solution had been found. The silence from many economists at the time was almost deafening. They knew that the tin can had merely been kicked a few yards down the path in some kind of vague hope that something would turn up. A dignified silence seemed more suitable and, you never knew, something might have turned up so why rock the boat when it was in everyone’s interest in it remaining stable.
This of course has not stopped every single bank this side of the Danube spending the last few years frantically building up balance sheets as a kind of defensive dyke in the hope of riding out the potential financial tsunami that might engulf them all (again!).
Over the last two years most Southern EC economies have continued to diverge from the North with France possibly slipping into the South’s camp. Sadly the hope that the single currency will survive relies, in the long run, on the exact opposite happening. The fracture lines were massive five years ago, they are simply vast now and getting bigger. If we stick with the current single currency European experiment I fear that it will be literally decades before some workable form of economic parity is achieved (if ever) and in the meantime the Garlic Belt economies will suffer…going from absolutely dire to, potentially, explosive.
Inflation, currency devaluations, variable interest rates etc are all the healthy release valves of economies under pressure. Unfortunately none of these is possible in today’s straight jacketed European model.