The Treasury, according to reports this week, has started studying the likely impact of the euro’s demise on the UK economy. No surprise there – just about anyone can see the single currency is going through a crisis that may prove terminal.
It’s only sensible for the government to start planning for the moment when it comes crashing down. But what should the plan be? What are the likely consequences for the City and the British economy? Is there anything we can do now to get ready? The answer to that last question is: plenty.
No one can say for certain yet whether the euro is going to pull through this crisis. Maybe the EU’s leaders can find a way of bailing out Greece, getting its economy growing again, calming fears about Spain and Italy, and creating a fiscal union that distributes money around the continent in a way everyone feels is fair and equitable. It’s not impossible. But you wouldn’t want to bet very much on it. This crisis is about to start dragging into its third year and it gets worse with each passing month. If there was a plan to fix the euro that everyone could agree on, I suspect we would have heard something about it by now. So the odds are rising all the time that the euro won’t be around in three or five years from now – at least not in the form we know it today. Quite possibly it won’t even make it through to Christmas.
That may well be catastrophic for Britain. The leaked details of the Treasury plan certainly seemed to indicate as much. It warns of the huge risks a collapse would pose to an already fragile economy. No doubt that is correct. If the euro implodes, our biggest trading partner will go into a deep recession. Banks may well go under, so will currencies both new and old. Investment will freeze up. Unemployment will soar. There is no way Britain is going to escape from that unscathed.
Whether the euro survives will not have much to do with us. No one particularly cares what the British think. If the thing is unworkable, we can hardly fix it now. Still, as any bridge player will tell you, there is no point in complaining about the cards you are dealt. You can either play them well or badly. I think there are four steps Britain could take to position itself for a post-euro Europe.
First, strengthen the banking system. In a post-euro world, the City should be much stronger. It will be the only major financial centre in Europe – apart from Zurich – not caught up in the mess. That will put it in a powerful position. But first it has to emerge unscathed from the inevitable crash.
The Bank of England needs to make sure British banks, asset managers, hedge funds and brokers have cut their exposure to a euro collapse to as close to zero as possible. That means they shouldn’t be holding peripheral nation debt. They shouldn’t be holding French and German debt either: both markets will collapse. They shouldn’t be selling insurance against sovereign defaults, and they shouldn’t be taking speculative positions in it either. The only way to survive in the event of a collapse is to be out of the game. The banks may not like it, but that’s tough. They have been bailed out once already. The last thing Britain needs is another banking crisis.
Second, capture the currency markets. We don’t know what the post-euro monetary system will look like. It might be a north/south euro. It could be a core euro (Germany, the Netherlands, France and Austria) with peripheral currencies around it. It could be a full-scale return to all the national currencies. One thing is for sure, however – currency trading within Europe is going to be big business again. London is its natural home. The City should be getting ready now to host that business.
Third, renegotiate the treaties. Britain has always been a minor player in EU politics. It joined too late and too reluctantly to have much say in the architecture of the union. From agricultural policy to employment law to industrial policy, much of what the EU does is not particularly in Britain’s interests. But post-euro, everything will be up for grabs. The EU will change course dramatically. Federalism will have been dealt such a massive blow if the euro doesn’t work that it will take it a generation or more to recover. Britain – along with the other non-euro states – can seize the chance to create a more open, free market, small government EU.
Fourth, prepare industry for a fire-sale. If the euro does collapse, there will be turmoil across the continent. Values of assets will fall dramatically, regardless of whether the underlying business is any good or not. In contrast, sterling will strengthen as a relative safe haven. Britain has lots of big companies that are cash-rich right now – and their sterling will rise in value against whatever currencies emerge in the rest of Europe. Encourage them to take a one-off opportunity to expand across the continent.
Clearly, a euro collapse will be huge blow for Britain’s economy. Any hopes of a swift recovery will be blown away. But there will be opportunities there as well – and Britain may as well get ready to take them.
• This article was originally published in MoneyWeek magazine issue number 558 on 7 October 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.