The eurozone crisis – history is repeating itself … again

It’s funny how history repeats itself. The inconclusive general election in 2010 took place when the economy appeared to be on the mend and against the backdrop of a crisis in the eurozone prompted by Greece. As things stand, we could be in for a repeat performance in May 2015.

Be in no doubt, what’s happening in Europe matters to Britain. The eurozone is perhaps one crisis and one deep recession away from splintering. The more TV pictures of rioting on the streets of Athens or general strikes in Italy between now and the election, the better support for Nigel Farage’s UK Independence party will hold up.

Stronger support for Ukip will encourage the Conservatives to adopt a more Eurosceptic approach, hardening their stance on the concessions required for them to continue supporting Britain’s membership of the EU. Meanwhile, a permanently weak eurozone economy will push Britain’s trade balance into the red. The economic debate in the current parliament has been about sorting out the budget deficit; the debate in the next parliament will also be about sorting out the current account deficit.

Let’s start with Greece, which was where the eurozone crisis began all those years ago. The French statesman Talleyrand once said of the Bourbons that they had learned nothing and forgotten nothing. The same applies to the bunch of incompetents in Brussels, Berlin and Frankfurt responsible for pushing Greece towards economic and political meltdown.

This might not matter so much if this were the Europe of the 1950s and 1960s, which enjoyed rapid rates of growth and full employment. The Europe of 2014 is not like that: it has barely any growth, double-digit unemployment, is on the cusp of deflation, and – above all – is saddled with a currency that doesn’t work.

Monetary union is a textbook case of the dangers of allowing politics to trump economics. Germany is a completely different economy to Greece. Portugal’s economy is not a bit like that of the Netherlands. Italy was able to remain competitive in the pre-euro days only by regular devaluations of the lira. To yoke all these countries together in a one-size-fits-all single currency was an act of supreme folly.

So how will events unfolding in the eurozone affect Britain? Weaker demand in the eurozone will shave a percentage point or two off growth in the next couple of quarters unless manufacturers can quickly find new customers in the rest of the world. Beyond the election, any attempts to rebalance the economy towards exports are bound to be affected by the lack of growth in the market that takes more than 40% of the goods sold by the UK overseas. It’s not great news to have the eurozone in permanent depression when you have a visible trade deficit running at around £100bn a year.

Britain is also importing more people from the eurozone than it is exporting. Inward migration is only to be expected given the difference in growth and unemployment rates: London is full of Polish, French, Italian and Spanish professionals looking for the job opportunities they can’t find in their own countries.

The politics of this are simple. Voters no longer see Europe as the solution to Britain’s economic problems. They are glad Britain didn’t join the euro. Many are unconvinced that Britain should be in the EU at all. The longer the euro crisis goes on, the bigger Nigel Farage’s grin will get.

Full article: The eurozone crisis – history is repeating itself … again (The Guardian)

Comments are closed.