We recorded an exclusive interview between Merryn Somerset Webb (editor-in-chief) of the magazine, and Bernard Connolly, author of The Rotten Heart of Europe. The interview took place yesterday and will be published in two parts next week.
It was an absolute coup for Merryn to get Bernard in the office yesterday for a 45-minute discussion of his view on the EU, the euro and Britain’s future. Charlie and I chatted with them both for another 20 minutes afterward. It was probably the only place within three square miles where four financial professionals agreed that Britain should leave the European Union.
But if there was one point I took away from it, it’s this: when you’re in a currency union, a collapsing credit bubble hits economic demand hard. The one-size-fits all interest rate policy makes it hard to use rates to stimulate growth where it’s needed. Meanwhile, it creates bubbles in places where rates ought to be higher.
The flaw is obvious
This flaw in the design of the euro is either poor design or it’s deliberate. The flaw is obvious. The economic solution to collapsing demand (from a burst credit bubble) is an increase in exports. You do that by currency devaluation. Demand gets rebuilt as debts get paid off and savings accumulate.
In a currency union, you can’t re-stoke domestic demand through export competitiveness. Greece can’t devalue to grow. It has to do what Germany wants. And Germany wants tighter government spending, which is all well and good. But when you have households and business deleveraging at the same time, where does the growth come from?
From nowhere. And that is precisely the problem the eurozone has right now, with 0.1% projected inflation. Government deficits remain high and so does unemployment.
Connolly wrote his book in 1995. It’s all played out pretty much the way he thought it would. And all for a reason that Charlie Morris made in his letter on Brexit in January: the flaw in the design of the EU project is only a flaw if you’re judging it in economic terms. In political terms, if your goal is centralisation and a federal Europe, the design is not a flaw. It’s a feature.
If you can’t control your own money, your own laws or your own banking sector, you’ve effectively surrendered political control to Brussels. The EU could never get member states to do this through a European Constitution or a referendum in which you knowingly and willingly surrendered political control. So it did the next best thing: it used economic power and the currency union to get the same result.
Deficit is in the sky
Britain isn’t in the currency union, of course. But as a member of the trade bloc, it finds its economic future hitched to an economy that isn’t growing. Trade figures released today from the Office of National Statistics (ONS) showed that the UK ran a £10.3 billion deficit in goods trade in January. The biggest contributor to the deficit was British trade with the EU.
The January deficit with the EU was ÂŁ8.1 billion, the highest since the ONS began keeping data in 1998. Over the last three months it was ÂŁ23 billion, with UK exports to the EU falling to their lowest level in six years. And the ÂŁ32.7 billion in exports from the UK to the EU in January were the lowest since 2009.
It has become a refrain among the “stay” campaign that half of British exports go the EU. Thus, British trade would collapse, or the trade deficit would balloon, on Brexit. But maybe the EU is the problem here, not the solution.
Britain manages to run a trade surplus with other major economies. If it had trade deals in place with the US and China – something the EU does not formally have yet – how would it do? We don’t know. Because British trade deals must go through the EU.
Riddle me this, then: if the key benefit of EU membership is access to Europe’s common market, yet Britain runs a chronic trade deficit with the EU because the EU is mired in a deflationary and demographic debt deflation/depression, how is that good for Britain’s future?
The obvious answer is this: it’s not
But when discussing trade, the debating tactic is to change the subject and not talk about goods trade but to talk about services, specifically the City. You can see how the issue is shaping up. The current deal is good for financial interests. They are fearful of leaving a good deal for them. They’re giving voice to that fear.
The current deal, in economic terms, is quite obviously less good for the rest of the economy, at least in terms of exporting British goods to the Continent. Maybe a little creative destruction is just what the British trade relationship with the rest of the world needs.
Category: Brexit