The EU’s efforts to save the failing euro will cost Britain dear if we vote to remain

 
John Redwood
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The broken structure of the single currency has left countries like Greece in a straitjacket (Source: Getty)

In the Eurozone, austerity rules. The poorer countries are kept in straitjackets, stopping the state from spending more and the banks from increasing lending to boost their economies. Half of all young people are out of work in Greece and in Spain. A quarter of all working age people have no job in much of southern Europe. Greek incomes have fallen by a quarter on average since 2007. There have been pay and pension cuts in Portugal and Spain as well.

Much of this is down to the euro. If they still had their own currencies, these countries would devalue, pricing themselves back into world markets that way. Then they could export more, import less, and produce more of their own needs at home. If they still had control of their own banking systems, they could take more action to fix their banks and get them lending again to stimulate activity.

Instead Greece, Portugal, Spain and Italy have to live with an overvalued exchange rate which keeps unemployment high. They have to accept the European Central Bank’s strictures that their commercial banks need to lend less and raise more capital. Their governments are not allowed to borrow more and spend it in the public sector, to make up for some of the lack of jobs and incomes in the private sector.

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All this matters to the UK because, as members of the EU, we are being dragged into the financial consequences of the economic failure of the euro in large parts of the Eurozone.

In a normal single currency zone, there are regions that find it difficult to export at the common exchange rate, and there are parts of the zone where bank lending may be weak or where there needs to be more public spending.

To deal with the tendency for poorer regions to get poorer in such situations, there are large transfer payments made from the richer to the poorer areas. There are also single currency-wide policies to keep benefits and wages to a common level or standard through public intervention. In the UK, most public service workers are paid a nationally-agreed common wage. Benefits are set at a national level and money is sent to the places that need it to meet the bill. Large sums are transferred through the system for financing local government, where poorer areas are sent much more money per head than richer areas to help balance things up.

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Little of this happens so far in the Eurozone. There are EU regional policies which provide some cash support for those suffering most from the currency. There are various investment loans through European institutions.

But the main means of keeping the structure together has been for the richer countries led by Germany to deposit their large surpluses at the European Central Bank, so the poorer countries can borrow from that same institution. Greece has borrowed so much that no-one thinks she can repay what she owes. Painful negotiations lead to lower interest rates, subsidised loans, and to longer repayment schedules, as the creditors extend and pretend that the loan still is a loan and not a grant.

The euro has no formal separate Treaty. Rather, it is a crucial part of the EU and its Treaties. The UK says it has reassurances that we will not have to pay some of the bills for this unfortunate currency, but it is difficult to see how we will avoid being sucked in. We will be round the table when they discuss beefing up regional transfers and extending regional policies. The UK is being dragged into the banking controls the European Central Bank thinks it has to impose on euro-area commercial banks. The next phases of development include a full banking union and a political union.

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I wish the euro well. It represents a huge investment of political capital, and the single currency is at the heart of what most on the continent understand the EU to be about. But it requires much larger transfers of money from richer areas to relieve the poverty, unemployment and misery of the poorer parts of the zone. That in turn needs strong political backing for the currency area from a government of the EU and higher tax payments by the richer low unemployment areas.

The UK is not going to be able to keep out of all the consequences of the euro if we stay in the EU. It is a pity that the single currency needs the powers, laws and money of the EU to keep it going and to help it to a better future. All the time that remains true, it is difficult for a country to be in the EU but not in the currency.

After all, last summer, despite all the promises, the UK did have to join in an emergency short-term loan for Greece. That was a harbinger of things to come.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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