The European Parliament debates a Mechanism for Euro Stability

As the European Parliament in Strasbourg finishes a debate about establishing a permanent crisis mechanism to safeguard the financial stability of the euro area, I am minded of the last time I blogged on the euro.

The first thing to say is that the recent problems in some of the euro-countries is that their economic problems were caused to a large extent by factors unconnected to the single currency.  For example, Ireland’s difficulties were mainly brought about by an overheated property market, a bubble not unlike that experience in the United Kingdom.  Greece, a country I have visited on many occasions, was beset by historic problems, some of which were explained to me when I met various politicians and journalists in Athens shortly after Greece joined the euro.

The current economic problems in Europe are therefore not all about the euro per se. The situation is rather more complicated than that. In addition, the British economy is closely linked to the euro and the eurozone. It is simply no good pretending otherwise and taking a little England, ostrich head in the sand view of complicated economic and financial issues. We in Britain are linked directly by trade, finance and interest rates, to name but a few, to the European currency.

The interest rates question is informative.  Interest rates as set by the Bank of England were 3% on 25th Nov 2008, and dropped steadily to reach 0.5% in March 2009, since when they have been unchanged. Interest rates set by the European Central Bank (ECB) were 3.25% on 25th Nov, and dropped steadily to reach 1% in May 2009, since which they have been unchanged. It can therefore be assumed that in the last two years interest rates in the UK would not have been very different had we been part of euro.

Given that Bank of England and ECB interest rates are virtually identical, and have been for the last 18 months, it is, I believe, fairly safe to say that UK interest rates would not vary greatly one way or the other in relation to the euro, though this does, of course, depend on unknowns such as demand led-inflation resulting from any economic recovery, spikes in commodity prices etc as against decreases in wage inflation caused by austerity measures etc.

I must also point out the obvious but often ignored fact that the euro is now 10 years old (not to mention the fact that Britain has been in the EU since 1973). The euro is still in one piece and measures such as the one debated in the European Parliament this morning are fully intended to keep it that way. All those concerned know that that if the euro were allowed to fail it would lead to massive economic problems in Europe, including millions more unemployed and rising inflation.

I firmly believe the euro will emerge from the current crisis stronger rather than weaker. It most certainly will not fall apart. The new measures will enforce greater fiscal prudence as it is now clear that those currently used are not sufficient and will allow in future for those eurozone countries with severe economic to be bailed out without the kind of crisis we are now seeing.

So does UK really profit from being outside the single currency? We in reality are so heavily linked to the euro and the eurozone that we have very little room for manoeuvre. Our interest rates are almost identical to those set by the European Central Bank and, to cap it all, we contributed very significant sums to the Irish bail out. Ultimately any currency is only as good as the economic conditions of the country or countries concerned. The pound fell through the floor on Black Wednesday 1993 when speculators traded pounds for dollars for the simple reason that the UK economy was in bad shape. The eurozone, it is true, is not so good at present, but neither is Britain. We are in for a penny and in for a pound and a pound is not so far removed from a euro.

1 Comment

Filed under Labour Party

One response to “The European Parliament debates a Mechanism for Euro Stability

  1. Daniel Oxley

    It was good to read that things are so hunky dory in Euro Land and that the few local difficulties are all down to nasty foreigners beyond the borders of our beloved EU homeland.

    Profligacy is of course an alien concept of our EU way of doing things but many EU Sceptics in their deranged wickedness will keep on pointing out that the EU can’t tell us what they did with 92% of all the great mountains of money we gave them last year. This seemingly ridiculous state of affaires will no doubt be rectified before too long. The EU has been trying to balance its books for 16 years now and surely it can’t be that far from coming up with a few answers which will satisfy all those Moaning Minnies and Little Englanders who will go on and on about all tax they have to pay to their Imperial Masters in Brussels.

    Don’t they realise that they now have a President and a Government in Brussels without their having had to bother themselves with going to the polling station to vote? Their ingratitude is breath taking! How would they like it if the lived in the USA not the EUSSR, they would have had to make choices and get themselves involved in the whole thoroughly un-EU business of accountability, representation, democracy and voting!

    It won’t be long before one these whiners starts asking why the EU Parliament is trying to come up with a mechanism for Euro stability when we are being told that things are stable in Euro Land. They are so ungrateful to our federal institutions that they will probably ask if it would not have been better if the Eurocrats had thought about a Euro stability mechanism before introducing the Euro not after it.