6 June 2016

Vote Remain and lose the pound

By

The Euro currency unit lies at the heart of the European project. The Brexit campaign should focus more on this basic fact. Currency arrangements, like the Single Currency, are imposed by geo-politics and disposed by economic reality. The Eurozone will be forced by its economic inefficiencies to become a ‘transfer union’, involving future centralised budgetary control. In short, far closer fiscal and political union are essential next steps to achieving the goal of economic and monetary union (EMU). The role of the Euro was deliberately accelerated by politicians after the 1989 Fall of the Berlin Wall. 19 out of the 28 European Union members have since adopted the Euro: that number will rise and if Britain votes ‘Remain’ the Single Currency will inevitably include the Pound Sterling, at some future date.

The Eurozone blends together a disparate mix of high and low productivity economies. Economists loosely speak of ‘optimal currency areas’, but the non-optimal Euro is a Murphy’s Law equivalent. Two decades of Euro experience show that it has led to economic divergence across Europe and not convergence. Capital productivity rates across the major core economies, such as Germany, have halved over the period, but in Spain, Portugal, Greece and Italy they have plunged into the red. Even France, at one time a key member of this core group, is now struggling to hang on. Italy has already been lost. In short, the Eurozone is bad economics writ large: the rich European countries get richer and the poor get poorer. This simple fact explains the scandalously high youth unemployment rates across Southern Europe, and perhaps also Germany’s wish for still more cheap labour from outside.

The risk lies not with the integrity of the Euro currency. The odds of it breaking-apart remain dismally low, but with its very operation which straightjackets too many members into economic decline. These stumbling economies require increasing amounts of fiscal support from the rich core, thereby turning the Eurozone into a massive income support mechanism. To cap the rising flow of ‘handouts’, taxpayers in the rich economies will demand spending limits that exercise centralised pan-European budgetary control. The Euro will be the accounting unit behind this control. The economic weight of a future Eurozone Treasury and the practical reality of common accounting make it inevitable that even ‘standalone’ Britain, if she remains, will be sucked into the mire that is the Euro, whatever some claim.

Michael Howell is managing director of Cross Border Capital