It would be easy for the UK to stay smugly on the sidelines as the euro collapses. After all, Britain had to struggle not to join the single currency when it was launched. And it had to put up with years during which European politicians warned that the City, and the vast earnings it brings into London, would be finished as a result. You hardly need to be German to think the word schadenfreude might describe the response of many people on this side of the English Channel. But that would be the wrong reaction.
The troubles of the euro are getting too severe even for its most enthusiastic proponents to ignore. The Greeks going bust was one thing. They fiddled their way into the system, and made no attempt to play by the rules. They should never have been allowed in – and, once inside, should have been told to reform fast, or get out again.
But Ireland is something different. It was one of the most successful economies in the world before it joined the euro. It did everything that was expected of it, cutting wages and public spending with a ferocity that no other country has matched. Yet it still ran out of money. With two out of 16 euro countries needing to be bailed out, it is hard to see how the single currency cannot be blamed. Nor is it going to stop here. Portugal will be next, then Spain, and probably Belgium as well. After that, it is merely a question of whether the bond markets take France or Italy down first.
For the UK, that matters hugely. We are on the hook for a large chunk of the Irish bail-out. This country will contribute around e8bn to the bail-out package for the Irish government. Royal Bank of Scotland and Lloyds, the two partially state-owned British banks, have billions in exposure to the Irish economy. If Ireland goes down, it will cost the UK very dearly.
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But it doesn’t just end there. The Spanish banks – most notably Santander – have a massive presence in the UK. Should Spain be the next euro domino to fall, we may soon start to regret allowing a bank from that country to end up owning such a large chunk of the British financial system. Likewise, if Portuguese, Belgian, or French banks get caught up in the crisis, that will have terrible consequences for our own banks, and for the City generally.
And, of course, the eurozone is Britain’s main trading partner. It is no use thinking we can simply be a spectator at this drama. The UK needs to get involved in trying to shape the way these consequences play out.
Of course, as an outsider the UK may struggle to be listened to. Against that, perhaps it is precisely our foresight in staying out that may give us a voice. After all, the architects of the euro, who assured us the single currency would protect Europe from chaos in the markets, are looking fairly foolish right now. And, in addition, Britain is one of the largest economies in Europe. All of that gives us a role to play. So what should the UK be arguing for?
The first and most important point is that the UK should be pushing for an orderly break-up of the euro. The subject is still taboo in Brussels and Frankfurt, which is crazy. There is a real risk the euro may collapse amid chaos and turmoil. If confidence in Spain goes, it might happen very suddenly, taking France and Italy with it. After all, the exchange-rate mechanism, the precursor to the euro, fell apart over the space of a few days in 1992. The euro could do the same. It would be far better if there were a calm and measured debate now about how to unravel it. Sensible decisions are rarely made during a few hours of fevered debate with the global markets in freefall.
There is plenty of talk about creating a northern and southern euro – a ‘neuro’ and ‘sudo’ (or the ‘medi’, as one Morgan Stanley analysis called it). That would fix some of the problems. The peripheral countries could devalue as a bloc against the stronger economies of core Europe. The two zones would be more compatible than the one that exists at the moment.
But will there really be any appetite for another monetary experiment after the failure of the euro? Probably not. Nor is it clear that the two zones would work much better than the one we have right now. France has been losing competitiveness steadily against Germany. It might struggle to stay in the neuro. The sudo would be led by its largest economy, Italy. How much confidence would the markets have in a currency zone led by the Italians? Even the Italians probably wouldn’t want to join.
The best solution would be to return to the national currencies. But it would be worth keeping the euro as a parallel currency – which is in fact what the British proposed when the euro was launched. The European Central Bank could be jointly owned by the states of the EU, and the currency would be legal tender in every country. Over time, some of the smaller states might abandon their own currencies and just have the euro. But it would happen naturally, and from the ground up – not from the top down.
That would serve Britain’s interests best. But it isn’t going to happen unless we start arguing for it.