It sometimes appears as if the euro was designed to fail

Allister Heath
REMEMBER those debates about whether the Eurozone was an optimal currency zone? Everybody knew it wasn’t when the euro was launched, yet the EU’s politicians disregarded the economics and went for it anyway. They then compounded their recklessness by expanding the Eurozone’s size, bringing together increasingly disparate economies under the European Central Bank’s one size fits all interest rate regime.

As a result of these differences, a single monetary policy helped trigger booms in some nations – such as Ireland and Spain – while repressing other economies. In theory, this could have been overcome: fully flexible economies with deregulated markets and workers willing to migrate for work can cope with a single currency. But with the exception of Germany, which underwent an internal devaluation to make itself more competitive within the single currency, the other economies weren’t serious and are now paying a crippling price for their decision to join the euro.

JP Morgan Asset Management has crunched the numbers in a tongue in cheek report assessing which countries would make the best fit were we seeking to create yet more monetary unions. The market economies of Latin America would form the most optimal currency union. Remarkably, next best would be a union made up of the UK and its English speaking ex colonies – strikingly, not our European neighbours. Less good but still decent would be Central America, Gulf Co-Operation Council countries and the ex USSR nations.

What of the euro? It ranks as the least compatible of all possible unions. It does even worse than a reconstitution of the Ottoman Empire. Incredibly, a random grouping of countries starting with the letter M (Mozambique, Madagascar, Myanmar and so on) would make a better union than the Eurozone. Just as absurdly, a monetary union made up of all countries at the fifth parallel north latitude would also comprise a more optimal currency than the Eurozone. No wonder it is slowly unravelling in front of our eyes.

Once again, Nick Clegg has got it wrong. The Deputy Prime Minister said at the coalition’s relaunch event in Essex – which he attended with David Cameron – that there was a moral duty to “wipe the slate clean” to make sure future generations were not saddled with debt incurred by us, their parents. “We have a moral duty to the next generation, to our children and grandchildren, to wipe the slate clean for them,” he said. “We have set out a plan, it lasts about 6 or 7 years, to wipe the slate clean, to rid people of that dead weight of debt that has built up over time.” If only.

Clegg’s description of the coalition’s plan is shockingly false and misleading. He doesn’t understand the difference between the deficit – the annual increase in debt – and the national debt – the total debt owed by the state (and hence by all of us and our unborn descendants). The national debt is still shooting up. Nobody is planning to wipe the slate clean (and repay all the debt); the argument between Labour and Tories is by how much to increase the debt, and how quickly. The official, on-balance sheet national debt has already rocketed from £905.3bn in 2010-11 to over £1.039 trillion. By 2016-17, the year Clegg thinks the slate will have been wiped clean, the national debt will have reached a record £1.479 trillion – and that is based on fancifully optimistic growth forecasts. Clegg needs to study some economics and statistics – and read his own Budget. It is unbecoming of a deputy prime minister to spout such nonsense.