Friday, 14 November 2008

Euro recession? Yes and no.

It's official: the Eurozone is in recession. But is it? The BBC tells us it is and then tells us Germany and Italy have contracting economies, Spain looks likely to follow but France doesn't, at least in the short term. It made me wonder about something at the heart of the Euro experiment.

Looking at the UK alone, the spread of industry around the country gives rise to inevitable conflicts of need. Manufacturing industries which use imported raw materials and sell predominently at home benefit from a high-value pound, whereas those using domestic raw materials and selling overseas would benefit from the opposite. There is no way economic policy can be ideal for both, so a balance has to be struck. Urban populations can operate pretty well without great use of private motor vehicles whereas scattered towns and villages are heavily dependent on them. Petrol and diesel taxes will hit the latter much more than the former. In all areas a single economic policy for the whole country throws up conflicting benefits and detriments. In some fields there are ways of easing the burden for those hit hardest by a policy which is generally beneficial but this cannot always be done, particularly where there is an international element and no scope for different rules for different parts of the country - exchange rates are perhaps the most obvious example of this.

When you gather a number of disparate countries together and operate a single currency with a single exchange rate and a single bank base rate the problems are multiplied. Manchester and Chichester have very different needs from economic policy, it is so much more so for Germany and Greece. When recession bites the UK you will still find some areas where people say it simply does not affect them because the business they are in is cushioned from the buffetting that other industries face. The government must do what it can to counteract the effect of recession in those areas that are hit and this might have adverse consequences for the areas not affected. It is difficult enough in a single stable country but the bond of stability and nationhood allows it to be done without rioting in the areas for which the cure is worse than the disease. Is there anything holding Germany and Greece together such that measures required to help Germany will just be accepted in Greece even if they do damage? Why should the people of Greece put up with such a situation when independent economic management would avoid it?

Maybe the bond of Euroness is stronger than I think. Maybe the smaller countries feel they get a benefit in good times which outweighs both the lack of self-determination and any adverse impact in bad times. Or maybe there will be cries of "why should we?" when they are forced to make sacrifices that their own national position does not require.

In the next few months it will be interesting to see how France reacts. If they stay out of recession and are forced to swallow bitter pills because the Germans and Italians are in trouble I can see our beret wearing chums getting a bit uppity. And it will all be so totally unnecessary. The whole Euro experiment is totally unnecessary. You don't need a single currency in order to trade effectively between countries, you don't build stability into diverse economies by policies which actually suit no one particularly well and you don't have room for swift and effective local action if everything is decided by a committee operated like a supertanker with fifteen competing captains.

We can all learn from how other countries do things and make the right decisions for our own country by combining our local knowledge with our observation of how particular policies have fared elsewhere. The concept that a single policy can be suitable for such diverse economies as Spain, Finland and Slovenia seems utterly absurd. The Euro experiment will now be tested as it has not been tested before, with any luck the lesson learned will be "small is beautiful".

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