Superb article by Anatole Kaletsky. Reproduced here since it will disappear at some point from the Times.From Times Online
April 21, 2010
Knives out. It’s the fatal flaw in Clegg’s plan
The Lib Dems are committed to joining the euro. Just look abroad – it would be catastrophic for Britain
If they want to skewer Nick Clegg in tomorrow’s TV debate on foreign policy, the two established parties should focus on one issue: not Trident, nor terrorism, nor Afghanistan, but a much more immediate threat to the country’s political independence and economic wellbeing — the euro. But to pin down the Liberal Democrats convincingly, Gordon Brown and David Cameron will have to do more than just point to the chaos in Greece and the 20 per cent unemployment in Spain.
They will have to engage Britain’s voters in a sophisticated argument that has proved too complex for many of Europe’s top businessmen and financiers — although this confusion may now be ending as a result of the events in Greece.
The Lib Dems’ official policy is clearly stated in their manifesto: “It is in Britain’s long-term interest to be part of the euro.” The manifesto then adds two politically convenient qualifications — that Britain should join only “when the economic conditions are right” and “if the decision were supported by the people in a referendum”. But these weasel phrases in no way detract from the Lib Dems’ analytical position, that they fervently believe the loss of monetary independence to be a national ambition.
This is a point on which the Tories could have a field day, but only by making an admission that Mr Cameron would find politically very tough. To explain why any British politician who still believes in joining the euro is either a committed euro-federalist or an economic ignoramus, the Tories would have to admit that Britain, under Gordon Brown’s economic leadership, has actually suffered rather less damage from the financial crisis than most parts of the eurozone. The loss of GDP and industrial output since the start of the recession, for example, has been slightly smaller in Britain than in Germany and unemployment here remains lower than in any other economy of comparable size.
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Worse still from the Tory standpoint, Mr Cameron would have to concede not only that the huge deficit run up by the Brown Government has helped to support the British economy through the crisis, but also that it will do no great harm in the long term, provided public spending is managed sensibly. By contrast, the government deficits in Greece, Spain, France and other eurozone countries, although they are actually rather smaller than Britain’s, are already squeezing the lifeblood out of their economies and will end up destroying their political independence.
Why is this so? The main advantage for any nation of having its own currency, at least since the gradual abolition of the gold standard in the middle years of the last century, lies in the ability to conduct independent monetary and fiscal policies — to set interest rates and to borrow money, without regard to external political constraints. This monetary and fiscal independence is a far more important national prerogative than just the ability to devalue the currency to make exports competitive or revalue to make foreign holidays feel cheaper. And it is the permanent loss of monetary and fiscal independence that clinches the argument against joining the euro, regardless of whether economic conditions are deemed to be favourable or whether a referendum has been held.
To give up the national currency also implies, in the end, giving up a nation’s independent ability to set taxes and public spending — an irrevocable loss of sovereignty on a par with ceding control of a large piece of national territory or disbanding the Armed Forces.
Compare the political and economic pressures exerted by the crisis on Britain and Greece. Both countries have government deficits of roughly 12 per cent of national income. But Greece is on the verge of national bankruptcy, while politicians in Britain can calmly engage in debates over whether to abandon planned tax increases and whether to start modestly reducing public spending in 2011 or the years beyond.
Why, then, are financial pressures so much more intense in Greece? Mainly because the British Government borrows in its own currency and can therefore simply print more money in order to repay its debts if required. This, in fact, is exactly what the Bank of England did last year, creating new money to the tune of around £170 billion. The ability to print money can create inflation if the Bank of England miscalculates; inflation rose to 3.4 per cent in March. But the independence of monetary policy gives the British Government a freedom to set taxes and public spending in response to the decisions of British voters, instead of the demands of international organisations or bond market investors.
For members of the eurozone — Greece today but, in the long run, also Spain, Italy, France and even Germany — the opposite is true. By abolishing their independent currencies, they have not just lost control of interest rates and given up their ability to devalue or revalue. They have also effectively ceded their tax and spending decisions to the European level.
This is most obvious in the case of Greece, which has no control of the euros it needs to borrow and can no longer raise them on financial markets without guarantees of support from other EU countries and the IMF. German politicians are now openly stating that Greece will have to pay for these guarantees by giving up control of its domestic policies.
But the gradual loss of fiscal sovereignty is also visible in Spain, where the government deficit of 10 per cent of GDP is only slightly smaller than it is in Greece and where deflationary policies demanded by the eurozone “stability pact” have already raised the unemployment rate to 20 per cent.
In the end, even Germany, the paymaster of the eurozone, will suffer the loss of fiscal control implied by monetary union. The Greek experience shows that the single currency can only survive in the long run if all member governments share responsibility for each other’s debts.
Although such “burden sharing” is explicitly ruled out by the European treaties, it was always envisaged as a consequence of monetary union by Jacques Delors and the other instigators of the euro project.
Most likely the burden sharing will eventually be achieved through a vast expansion of the EU’s ability to borrow money in its own name and then lend it on to national governments — in the same way that the US federal government issues Treasury bonds and uses the proceeds to offer conditional support to the states. While the mechanism whereby Europe will adopt a federal fiscal policy is not yet clear, the outcome is unavoidable. And that will mean Germany, as much as every other euro country, losing control of its economic destiny. If that is also Mr Clegg’s objective for Britain, he should say so.