10 February 2010

Told Euro So

Smugness is never an appealing characteristic, but I think we Greens are sometimes a little too reticient in taking the credit for being right. On our political wing discussions about the imminent collapse in the financial system were everywhere for a good five years before it happened. And recent events across Europe have shown that we were right about the euro as well.

The central case for the UK not entering the euro was that we would lose political control over our economy, if we gave up the ability to control our national currency. Entering a single-currency area would require us to accept the interest rate of the most powerful economy in that area, in the case of the euro that would mean Germany.

The disasters that have befallen especially Ireland and Greece have arisen from them having to take the euro interest rate, which was much to low for their economies during the last decade, leading to housing-market bubbles and speculative inflation in their economies. Now that the bubble has burst they are having to accept an interest rate that is too high, whereas in the UK our central bank has been able to reduce the cost of borrowing money to a mere administrative charge, giving the economy the best possible chance of recovery.

The lesson is not that we are prudent and the marginal Greeks and Irish are feckless. Rather it is that in global capitalism size matters, and that controlling your own currency matters most of all. Greece's deficit is 12.7% of its GDP, way beyond the euro limit of 3%. But the UK's is already 7% and that takes no account of the potential banking liabilities we have taken on, nor the off-balance-sheet debts represented by PPP contracts.

And beyond these special cases, the wilder baying of the market hounds is, as the Spanish government has claimed, an irresponsible attempt to change investor sentiment. While they are untrammelled by political controls, speculators will seek to gain market advantage by artificially increasing or decreasing the value of currencies and national bonds. Whatever we think of the situation of Greece, the Spanish economy is not demonstrating any inability to make good on its debts: its debt-to-GDP ratio is below the EU average, less than that of the UK and well below the 60% allowed by the European Central Bank.

The conclusion should surely be that what counts is not the view of the bond traders or the power of the markets, but our courage to stand up for ourselves. Greece will come out of this crisis better than Ireland - with fewer cuts to services and wages - because the Greeks have the courage to exercise their democratic freedoms and go onto the streets. The Irish, by contrast, seem to have believed the myth about the battle between capital and labour over economic value as being something historical. In fact, the power games between Europe's politicians, the central bankers, and the speculators is being played out daily in our news bulletins.

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