I have never been one for grand conspiracy theories except in one area, the European Union. Even then I don't go for the more sinister accusations about the intentions of our friends in Brussels (then Strasbourg for a few days and then Brussels again). I cannot accept that the intention of (most) of those behind the EU project is to create a brutal totalitarian state, rather I think they probably believe that political and economic integration based around a single bureaucratic, not democratic, Europe-wide government will be of benefit to the little people. In order to seek that end the grand pooh-bahs of the European integration project have lied about their intentions since those intentions were first formed.
Across the English Channel lying is part of the normal currency of business and personal relations. Here in blighty it is generally looked on somewhat differently, as the conduct of a scoundrel. The French know their politicians lie all the time and don't care because they don't consider much wrong in the telling of an untruth. We know our politicians lie all the time and it raises our blood pressure because we believe it makes them unfit for office yet still they get big salaries.
That is not the topic of today's meandering, I just wanted to say it. Today's topic is not about how they seek to impose their hidden agenda but about something much more fundamental - the structural problem that undermines the whole concept of EU economic integration and the Euro in particular.
It is a problem that affects the UK as well and can be illustrated by manufacturing. Although manufacturing industry has taken quite a battering as developing countries have been able to undercut the prices UK producers need to charge to break even, we still make a lot of stuff. In fact I recall reading somewhere that we are the ninth or tenth largest manufacturing economy in the world, it didn't sound right to me but it might well be because we have a lot of small factories producing specialist stuff and a few big manufacturing plants remain and what we sell tends to go for quite a high price (if it didn't we couldn't afford to produce it).
Those that use predominantly home-produced raw products and sell predominantly to the home market are affected almost exclusively by domestic economic conditions. Those that import raw materials and sell in the home market want the pound to be strong against the currency in which they must pay for their supplies. Those that use domestic raw materials and mainly export want the pound to be weak so that their goods can be sold cheaper overseas and undercut competitors. Those that import raw materials and sell overseas will be less affected by the pound rising or falling in value - a rise makes materials cheaper but sales more difficult and the reverse is seen when the pound is weak. Within England there exist thousands of businesses that want a strong pound and thousands that want a weak pound. It is impossible for both camps to be satisfied all the time. So it is also with interest rates. Some businesses benefit from rates being high and others can only survive if they are low. You can't keep everyone happy all the time.
If there were a government for a county that is heavily dependent on imported materials it would be reasonable to expect it to aim for its currency to be strong (so that things manufactured there for export will be cheaper for the customers). By contrast the government of a county heavily dependent on tourism would want Johnny Foreigner to come in droves, so it would work towards a currency that is weaker than its rivals in order to maximise the chance of attracting business. As it is, within the UK we have massive differences between different counties and a single currency, the pound, applies to all. Some gain and some lose when the pound falls or rises in value compared to other countries. We put up with that because what ties us together as a single country is much more than economic interests.
Not so, the Euro zone. No matter how much each country tried to manipulate its interest rates, exchange rates and trade cycles to try to find common ground with other Euro zone countries before joining the club, fundamental differences between the various national economies would always remain and will change as time moves on - some will become more dependent on manufacture, some more dependent on services, some more dependent on leisure and so on. Just as strains arise between different areas of the UK in certain economic conditions so they arise between Euro zone countries. The difference is that cultural and historical ties exist to keep the UK as the UK (until we have the good sense to let Wales and Scotland free to spend only their own money) whereas the only ties binding the Euro countries are those created by the Euro itself.
The collapse of the Greek economy illustrates a consequence of the structural problem behind the entire Euro experiment. In a sane world Greece would allow its currency to fall until it found its natural level - the level at which those who do not trade with Greece will find it attractive to do so thereby allowing the Greek economy to stabilise. It might also need a bail-out from the IMF, or the US, or China, or David Beckham because its governments have been absurdly profligate for years, but it would not be constrained by its currency having an international value that simply does not reflect the reality of Greece's position. That constraint will continue for so long as it is in the Euro zone because the exchange rate of the Euro is determined not just by how the rest of the world sees Greece but by how it sees the whole package of Euro zone countries.
More importantly, the rise or fall of the Drachma would have influenced Greek economic policy and might (it is no more than a possibility) have prevented the collapse we have seen recently. The Euro bureaucrats had no way of sending a message to the Greek people that things were going wrong and no inclination to do so because the very existence of the Euro project has always been more important to them than the Euro's effectiveness as a currency.
Having a single exchange rate and "official" rate of interest does not suit each county in the UK let alone each country and province. It is tolerated for reasons that have little if anything to do with economics. Having a single exchange rate and official interest rate for all Euro zone countries cannot work in the long term because the time will come when it will not be tolerated by those whose financial position suffers beyond the limit of political endurance.
We might be getting close to that point, the sooner it arrives the better. With any luck it will expose the whole EU project as the political equivalent of the Euro.
Across the English Channel lying is part of the normal currency of business and personal relations. Here in blighty it is generally looked on somewhat differently, as the conduct of a scoundrel. The French know their politicians lie all the time and don't care because they don't consider much wrong in the telling of an untruth. We know our politicians lie all the time and it raises our blood pressure because we believe it makes them unfit for office yet still they get big salaries.
That is not the topic of today's meandering, I just wanted to say it. Today's topic is not about how they seek to impose their hidden agenda but about something much more fundamental - the structural problem that undermines the whole concept of EU economic integration and the Euro in particular.
It is a problem that affects the UK as well and can be illustrated by manufacturing. Although manufacturing industry has taken quite a battering as developing countries have been able to undercut the prices UK producers need to charge to break even, we still make a lot of stuff. In fact I recall reading somewhere that we are the ninth or tenth largest manufacturing economy in the world, it didn't sound right to me but it might well be because we have a lot of small factories producing specialist stuff and a few big manufacturing plants remain and what we sell tends to go for quite a high price (if it didn't we couldn't afford to produce it).
Those that use predominantly home-produced raw products and sell predominantly to the home market are affected almost exclusively by domestic economic conditions. Those that import raw materials and sell in the home market want the pound to be strong against the currency in which they must pay for their supplies. Those that use domestic raw materials and mainly export want the pound to be weak so that their goods can be sold cheaper overseas and undercut competitors. Those that import raw materials and sell overseas will be less affected by the pound rising or falling in value - a rise makes materials cheaper but sales more difficult and the reverse is seen when the pound is weak. Within England there exist thousands of businesses that want a strong pound and thousands that want a weak pound. It is impossible for both camps to be satisfied all the time. So it is also with interest rates. Some businesses benefit from rates being high and others can only survive if they are low. You can't keep everyone happy all the time.
If there were a government for a county that is heavily dependent on imported materials it would be reasonable to expect it to aim for its currency to be strong (so that things manufactured there for export will be cheaper for the customers). By contrast the government of a county heavily dependent on tourism would want Johnny Foreigner to come in droves, so it would work towards a currency that is weaker than its rivals in order to maximise the chance of attracting business. As it is, within the UK we have massive differences between different counties and a single currency, the pound, applies to all. Some gain and some lose when the pound falls or rises in value compared to other countries. We put up with that because what ties us together as a single country is much more than economic interests.
Not so, the Euro zone. No matter how much each country tried to manipulate its interest rates, exchange rates and trade cycles to try to find common ground with other Euro zone countries before joining the club, fundamental differences between the various national economies would always remain and will change as time moves on - some will become more dependent on manufacture, some more dependent on services, some more dependent on leisure and so on. Just as strains arise between different areas of the UK in certain economic conditions so they arise between Euro zone countries. The difference is that cultural and historical ties exist to keep the UK as the UK (until we have the good sense to let Wales and Scotland free to spend only their own money) whereas the only ties binding the Euro countries are those created by the Euro itself.
The collapse of the Greek economy illustrates a consequence of the structural problem behind the entire Euro experiment. In a sane world Greece would allow its currency to fall until it found its natural level - the level at which those who do not trade with Greece will find it attractive to do so thereby allowing the Greek economy to stabilise. It might also need a bail-out from the IMF, or the US, or China, or David Beckham because its governments have been absurdly profligate for years, but it would not be constrained by its currency having an international value that simply does not reflect the reality of Greece's position. That constraint will continue for so long as it is in the Euro zone because the exchange rate of the Euro is determined not just by how the rest of the world sees Greece but by how it sees the whole package of Euro zone countries.
More importantly, the rise or fall of the Drachma would have influenced Greek economic policy and might (it is no more than a possibility) have prevented the collapse we have seen recently. The Euro bureaucrats had no way of sending a message to the Greek people that things were going wrong and no inclination to do so because the very existence of the Euro project has always been more important to them than the Euro's effectiveness as a currency.
Having a single exchange rate and "official" rate of interest does not suit each county in the UK let alone each country and province. It is tolerated for reasons that have little if anything to do with economics. Having a single exchange rate and official interest rate for all Euro zone countries cannot work in the long term because the time will come when it will not be tolerated by those whose financial position suffers beyond the limit of political endurance.
We might be getting close to that point, the sooner it arrives the better. With any luck it will expose the whole EU project as the political equivalent of the Euro.
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3 comments:
Very well written and clear post, FB - I agree completely. Incidentally, the only reason Britain remains as the the ninth or tenth biggest manufacturer is - or was - because we assemble some foreign goods here. Cars are the obvious ones, but there are also less obvious ones like processed foods (e.g. a "British" produced ready meal which consists of Turkish chicken, Kenyan sprouts and Lithuanian potatoes).
Cars which consist almost entirely of foreign raw materials and manufactured parts and packed foods that consist almost entirely of foreign grown meats and vegetables "count" as manufactured in the UK, but don't actually do much for our own industrial or agricultural base.
"If there were a government for a county that is heavily dependent on overseas sales it would be reasonable to expect it to aim for its currency to be strong (so that things manufactured there for export will be cheaper for the customers). "
Good article, but surely above should be: '...aim for its currency to be weak...' ?
Thank you Mr Gervais, you are absolutely correct and I have amended accordingly.
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