Tuesday, 15 May 2012

Osborne, the Little Englanders and the Euro crisis

The election of a Socialist president in France was one of the better pieces of news to emerge in recent weeks - if only because it bucks the narrative that there is only one route to economic salvation in a depression.  It also raises two fingers to Cameron and the half-witted apostles of austerity in this country, and creates a dynamic that restores progressive Europeanism to the centre of politics - undermining the Merkel-Sarkozy-Cameron axis of hysterical orthodoxy.

As the exit of Greece from the Eurozone unfolds, it will be fascinating to watch the response of the knee-jerk reactionaries.  Osborne, poor lamb, looks as though he is caught in a dilemma that cannot be resolved.  His paymasters' xenophobia and ridiculous sense of British superiority leads him to gloat over others' misfortunes, but the hard reality of a European depression would do even more damage to the British economy than even he has managed to inflict to date.

So far, so obvious.  A more reflective response might be to consider whether Britain has been the architect of the Euro's downfall.

The Eurosceptic nutters in the Tory party aside, there was at least some enthusiasm for the project at its inception.  However the tests that Brown forced on Blair at the outset of their occupancy of Downing Street effectively scuppered British participation - and therefore one of the stronger and larger economies was excluded.  Had there been a "northern triangle" including France, Germany and the UK, then this would have formed a strong and competitive core - added to by Benelux and Scandinavian countries.

The real problem has been the maintenance of the fiction that a single currency zone can exist with several economies at the periphery whose dynamics are different to the majority of the bloc, and where shoe-horning their policies leads to the kind of unbalanced unravelling that we are seeing in Greece and increasingly in Spain and Italy.  A much more visionary position would have been to adopt a core Euro area, with a "converging ERM" for countries that are moving towards the centre but not quite there yet, giving more leverage and fewer issues of credibility when policy needs to be rebalanced.

Osborne's simplistic and madly reactionary view will doubtless be that we have been better off out, which is an astounding counterfactual.  However, there is limited benefit in picking over mistakes that all parties have been engaged in - but there is a need for a fiscal and monetary response across the whole EU that promotes growth, investment and removing the cycle of decline that orthodoxy is inflicting upon economies.  Whatever happens in Greece, the weakness of the British and German responses to the depression has exacerbated the crisis.

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