The most extraordinary feature of the Euro crisis is the reaction of those parts of the British government with responsibility for financial and economic affairs.  Prime Minister Cameron and George Osborne, Chancellor of the Exchequer, have both stated that although Britain is not part of the Euro-zone it is in Britain’s interest that the Euro overcomes its difficulties because, as the mantra goes, “half our trade is with Europe”.

In fact something like 50% of our trade has been with the EU countries for 25 years, long before some of them joined the EU and seventeen of them merged their currencies.  The very same people who now express hopes that the Euro will survive (i.e. every economist, commentator and corporate business leader who appears on TV) were in favour of Britain’s replacing Sterling by the Euro in 1999.  Only the reluctant promise to hold a referendum on the issue, extracted from the three main political parties in the run up to the 1997 general election, prevented that happening. 

Effects of a break-up of the Euro 

The Euro was and is a political project designed by Eurocrats to provide the penultimate step to a single European state, which they so ardently desire.  European peoples’ profound desire to retain their countries’ independent status counts not a row of beans with them. 

What are the economic realities which the single currency flies in the face of – or rather doesn’t fly?  The most important reality is that while the Euro-zone is roughly in trading balance with the rest of the world, the balance is made up of a large surplus generated by Germany and a roughly equal deficit generated by the other sixteen. 

Despite a lot of flannel talked by commentators on TV, when a country generates a trade surplus over a wide range of goods and services (as Germany does) it means that it is better at making these products than other countries are.  Those countries have to pay for their deficits on trade by borrowing cash or by selling assets, which is precisely what the United Kingdom and the United States have been doing for a long time.  (Britain’s huge external trading deficit is the elephant-in-the-room whenever the government’s internal deficit is discussed.) 

In trade terms Greece has very little to offer the world other than its magnificent climate and wonderful antiquities.  Its over-valued Euro currency prevents it however from getting full economic benefit from these assets.  If Germany and Greece were free of the Euro, what would happen?  Germany would revert to the Deutsche Mark – something longed for by its people – and Greece would revert to the Drachma.[1] 

When the single currency began in 1999, 1.95 Deutsche Marks were translated into 1.00 Euro.  If Germany were freed from the Euro at its joining rate of 1.95, it would immediately rise.  Nobody can be sure where the new Deutsche Mark would settle out at, but in the 1990’s it was around 0.85 Swiss francs, which is today trading at about 0.91 Euros (£0.80)[2].  Allowing for the fact that the Swiss franc has been pushed up recently by foreign money seeking a refuge from the financial turmoil, the trade balance rate for the D Mark could reasonably settle at around 80% of present day Swiss francs, an appreciation on its present day Euro and Sterling values of around 30%. 

Economic Consequences for Britain

Such an appreciation of Germany’s currency would be an unqualified benefit to Britain – a benefit which would swamp any short-term costs due to repricing.  For starters, it would make the current Siemens bid for the £1.6 billion Thames Link railway rolling stock contract rise by £0.5 billion, making it unviable.  Germany’s cars and machinery would all be 30% more expensive in Britain and in Britain’s export markets.  Britain’s huge £12 billion trading deficits with Germany and China could well be eliminated, with all that means for British jobs.  In response Sterling would of course start to rise again – ultimately finding a new level against the D Mark and, less dramatically, against other currencies. 

In Germany, the factory workers and engineers who power Germany’s economy would get to spend some of the trade surplus which is at present spent by its government and banking system on propping up not just Greece, but Portugal, Spain, Italy, all of whose Euro currencies are over-valued. 

In a phrase “industrial reality will impose itself on politics once again”. 

The Political Consequences of the Demise of the Euro 

When Germany signifies its intention of withdrawing from the Euro, what will happen?  It is unlikely, but not impossible that France, whose project it always was, will try to continue with a smaller Euro-zone of which it would be the undisputed leader.  Maybe amid their rejoicing at their new-found freedom, the German people would agree to underwrite (i.e. pay for) Greece’s Euro-denominated bonds as a form of not-to-be-repeated severance pay – better surely than a never ending series of bailouts. 

For Britain, not only would the economic benefits be huge (as noted above), but the demise of the Euro would put an end for ever to the Euro State project – an unqualified blessing allowing our political system to concentrate on the three overwhelmingly important issues facing it in the 21^st century, namely earning our living in the world, administering effective controls against tidal waves of immigration beating on our doors, and developing the human and technological systems for caring for the likely six fold increase in over-eighty-fives during this century.

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