In the saga of stress and strain in the UK’s perception of Europe and what it wants it to be, there is at the heart of the matter a critical issue: the Euro. The Euro is the elephant in the room, because everybody breathes a sigh of relief that we did not join. Yet if you leave aside emotion and sovereignty and all of that, most of our economic ills can be traced to the fact that we are not in the single currency. There is evidence that had we joined our economy would today have the strength of that of Germany. The reason for that analysis is the fact Germany’s greatest benefit from the Euro was the long term devaluation of its hard currency, making everything German competitive instead of expensive. The same would have applied to Britain.
The chronic problem with the UK economy, which never goes away, is that it is consumption based on mostly imported goods, financed by borrowing secured by inflating assets. Manufacturing, once the driver of the whole British Empire, now accounts for very little in the UK economy; in the immediate post war years it was nearly 50%, now it hovers around 13%. Manufacturing creates new wealth and provides well paid skilled jobs for a mass workforce. It turns deficits into surpluses at every level. It oils the economy with new money which does not have to be borrowed and it allows imports to be at least balanced by exports. The UK has the highest deficit as a percentage of GDP of any industrialised country and is significantly in deficit in its trade with the EU.
When it comes to high end cars and aerospace industries the UK is a world player, but in all the value items that are consumed every day in our economy, we not only do not make them for home consumption because imports are cheaper, we cannot make them to export because they are too expensive. Why?
Because the pound is valued too high to make exports viable and cheap imports make it impossible for home production to compete for the domestic market. If we had been using the Euro not only would we be operating on an even playing field, but the whole balance of our economy would have been different. We would have less debt, a lower trade deficit (probably a surplus), higher productivity and a properly balanced economy. But we chose to remain independent for which we have paid a very high price. Nobody ever thinks of that. Maybe they should. The reason given at the time was that we wanted to retain control of our interest rates. But the Bank Of England has left them a fraction of zero for seven years. Moreover we are now in the ridiculous position of sterling having risen to choke off our export recovery, yet being unable to reduce rates to bring sterling down because they are already at rock bottom.
Of course it is true that the governance arrangements for the Euro are a near fiasco, but had the UK been involved that would not have been allowed to happen. This blog is not lamenting that we did not join, but I am pointing out that not to do so may not have been as smart as we think. It may also be that be that being in the EU but not in the Euro could be as pointless as buying a house and living in the tool shed. Either you believe in the notion of ever closer union and all the benefits that brings, including one currency and some federal governance to control it, or there is no real point in being there, because economically the EU gets more out of us than we do out of it. A single market cannot operate properly without a single currency. Not only are there trade imbalances, but there are migration imbalances. Benefits and wages from the UK sent home, buy a lot of extra Euros locally.
Nevertheless I am emotionally and by blood committed to the European family and as things stand I shall vote to stay in. But not because of the economic argument which is far from clear cut. The critical weakness in the Leave campaign is its woolly response to what would happen if we do go. Yes of course we could prosper but not on a whim and a wave of the hand. Leave need to answer those questions. So far they have not done so convincingly. Until they do, the majority will opt to stay in, simply because, with all its muddles and imbalances, at least they know what they are in for. To that extent Cameron’s much vaunted demands or whatever he calls them are irrelevant. They only tinker at the margins even if he gets them all.