The eurozone’s finances are covered in sticking plaster, but the wounds are not responding healthily. Moreover, while the remedies being pursued, with others proposed, may yet bring some normality back to financial markets, they leave a vital problem unaddressed: the prospect of rising and enduring unemployment does not seem to have been on the agenda.
So far, the countries which have landed in trouble have been given enough loans to recapitalise their banks and thereby save the eurozone financial system from collapse. The countries themselves are left heavily indebted. To reduce the prospect of sovereign default, taxes must be increased and government spending must be cut. This more or less guarantees depressed conditions for a long time to come.
The introduction of the euro was, in the view of some of us, certain to lead to this. But the enthusiasts did not listen although the reasons are clear enough.
The flaw was this: productive activity always tends to migrate to centres of economic success and prosperity. This tendency is inevitable and visible in every single currency area. Within a sovereign country that has its own currency, a large proportion of taxes raised by the government goes to benefit the less economically successful areas. This does not happen through regional aid, although this may help a little. It is achieved through wages paid to public sector employees, capital expenditure by central and local government and welfare-system transfer payments and so forth. Taxpayers tolerate this in the interests of social harmony.
In a single currency area, with no central economic government, as in the eurozone, there is no possibility of this. Structural regional aid in the EU is far too insignificant to compensate, and is anyway the wrong mechanism.
So the poor regions remain depressed economically, thereby encouraging enterprising citizens to leave and migrate to successful centres. This further reduces competitive strength. These tendencies would be present anyway, but when a crisis like the present one is superimposed, the position becomes irremediable. The risk of rising deficits was well understood throughout. But the stability and growth pact, designed to prevent this, was obliterated years ago by breaches including even by Germany.
Now, with far larger national indebtedness resulting from eurozone profligacy and the present restructuring programmes, the situation is infinitely worse. Thus the obligation to service and pay off very large sovereign indebtedness will continue to punish the countries concerned, and the result will be depressed economic conditions and rising unemployment.
The basic economics must have been understood by those who constructed monetary union. The vision was, presumably, that it would indeed force federation, with a central government redistributing tax revenues to the poorer regions of the zone. But the step was taken far too early. In the German states in the 19th century, the Zollverein (customs union) came into being in 1818; and economic convergence led from Prussia and aided by railway construction, progressed steadily. More than five decades later, political union was achieved and the single currency was only introduced after that.
The idea of dismantling the eurozone is forbidden territory at present. But the poorer countries, which now have to raise taxes and cut government expenditure, must be allowed ways to be competitive again and thereby start to earn their way back to growth and prosperity. Cutting nominal wages might be a way to do this, but in practice this is not usually possible on a sufficiently wide scale without a prior economic collapse. Devaluation of a national currency is a more practical proposition.
However leaving the eurozone, being against the rules, is a very expensive and disruptive procedure. Sovereign debt would be left denominated in euros while the new national currency would be free to depreciate, thus effectively increasing the debt burden, while the conversion of debit and credit balances would cause serious disruption.
However, if this is the only way to prevent the national economies of the peripheral countries becoming mired in failure, and save millions from falling into long-term unemployment, then it may begin to look like a price worth paying.
The clear message from Messrs Jean-Claude Juncker and Giulio Tremonti and many others, is one of political commitment to economic and monetary union and the irreversibility of the euro. This is a fine message no doubt, but their solution involves the taxpayers of the rich eurozone countries subsidising the poorer, and so far there is no sign of willingness to do this. It is time to put aside slogans and take into account how ordinary people behave.
Sir Martin Jacomb is a former chairman of Prudential