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Euro Vision

Economics student Jonathan Hazell (2012) has won the 2014 Brian Riley Declamation Prize.

The prize was awarded after Jonathan impressed the judges at the annual event on Tuesday 18th November. Below is his speech, in which he passionately argues that the Eurozone has been an economic disaster and must break up as soon as possible. Our website also contains details of this year’s contest and more information about the prize itself.

Break up the Euro Now

Any discussion of Europe, right now, must surely start with economic calamity currently unfolding. Think, for a second, of its scale. The Greek economy is 2/3 of its size 6 years ago. 60% of Spanish youths are unemployed. Italy has been in continuous recession since 2008. Sure, these are just numbers. But they are also a human catastrophe. Greece can no longer be considered a developed nation. A whole generation of Spanish people, my age, may never find work. The average Italian today is worse off than in the 1970s. And if that weren’t enough, France, Germany, and the other so-called ‘core’ countries are also stagnating. Right now, Europe is facing 20 years of economic failure.

But why is this? Not due to the financial crisis. The US and the UK are fine, so are plenty of other countries. Fundamental difference is the euro currency. It is an institution that never should have existed in the first place, and it must be destroyed as soon as possible. My aim, today, is to explain why. I should be clear – I love Europe as much as any British person, and more than very many. I think the European Union has been a powerful force for good over the last half century. But Europe is right now suffering an economic catastrophe, and I that it is entirely self-inflicted, completely a product of the single currency.

To outline my argument. There are two important actors here. The first is the so-called periphery countries of the Euro, namely Portugal, Ireland, Greece, Italy and Spain. The second is the country that controls all of the institutions of the Eurozone, by virtue of being the largest – Germany. My first point is to discuss the reasons why the Eurozone has been such an economic disaster. Briefly, they are the intrinsic difficulties of a single currency area, but also the particular problem of the Eurozone, which is German hegemony. I’m then going to take a look at how the Euro might save itself, and show that it will inevitably fail, because of its inherent political contradictions between Germany and the periphery. Finally, it will then become clear that the only sensible course of action for those suffering in the periphery of Europe is exit, as fast as possible.

Euro 2

So first of all let’s take a look at what’s currently happening in the Eurozone, and why the Euro is so fundamentally destructive. In 2008, a global recession hit, meaning a collapse in demand worldwide, hence gigantic falls in output across most developed countries. But the so-called Great Recession hit the periphery countries of Europe – Portugal, Italy, Greece, Spain and Ireland – harder than anyone else. Why was this? There are two reasons.

The first reason why the recession hit periphery countries so hard is simply the nature of the Euro. Normally, when a big recession hits, central banks cut interest rates to zero and print money inject money into the economy, to boost spending. This is, essentially, what the US and the UK did – and broadly speaking, they are far the better for it. They are now both growing, and have had economic recoveries, if only tepid ones. Of course, peripheral countries do not have control of their own currencies, because they all belong to the Euro. So they were unable to deploy this essentially foolproof recession busting mechanism. The result, of course, was a complete collapse in output and unemployment across the periphery. As business and mortgage defaults spread across the periphery, the result was a banking crisis.

OK, so stepping back from the economics of the situation, let’s look at the politics. What price did Germany exact to help the periphery, to bail out their banking systems and prevent a further crisis? Let’s first look at what German didn’t do. The natural response might have been to increase overall demand levels in the Eurozone, by allowing Germany’s puppet, the ECB, to print money and cut interest rates. This was out of the question, for reasons I’ll attempt to explain alter. In return for assistance to periphery banking systems, Germany demanded two things. Austerity and structural reform. These are pretty words for brutal policies.

So the first policy demanded by Germany was vast cuts in government spending. What was the rationale? It’s not clear to me, other than the weird psychology of the German political class, based on a fetishistic desire other countries cut government spending, because debt is somehow, and for reasons unexplained, ‘bad’. Maybe the rationale is that financial markets dislike governments taking on too much debt, the so-called ‘bond market vigilante’ story. But this is clearly false. Interest rates on periphery bonds are extremely low, regardless of the level of their debt – and this is the expected outcome if markets don’t care about default.

The second demand by Germany was the class of neoliberal policies known as ‘structural reform’, policies designed to increase economic growth in the periphery. Concomitantly, these are the sorts of policies designed to lower wages to boost ‘competitiveness’ and output growth. They are the sorts of policies that erode workers’ purchasing power, and further reduce spending. They are the sorts of policies that are highly contractionary in a recession.

bank-note-209104_640

So overall, then, we see that German demands are responsible for the current dire state of economies in the periphery.

If this is the case, then what is the way forward? How might the Euro save itself? The answer is that it cannot, because the very structure of the Eurozone is so riven with political contradictions. There is literally no way in which periphery countries might boost their economies, and also remain in the Eurozone. On the one hand, while they remain inside the Euro, periphery countries are reliant on German help. They cannot support their banking systems and economies without help from the European Central Bank, which is, of course, fairly explicitly controlled by Germany. Suppose that periphery countries unilaterally attempted to halt structural reforms, or raise government spending? They would be blackmailed. We know this for sure, because it happened in 2011. Italy attempted to stop structural reforms. In response, the European Commission, at German behest, circulated a letter claiming that it would destroy the Italian banking system, by removing support. This much is clear. While they are in the Eurozone, periphery countries are at the behest of the Eurocrats at the European Central Bank and the European Commission, who are of course implicitly and explicitly beholden to the German political class. Would Germany allow or choose significantly greater support to peripheral economies? It is near-inconceivable. We know this because Germany has such an institutionalised fear of government debt, high levels of demand, even moderate levels of inflation, that it is busy running its own economy into the ground. It is currently also in a recession, even though it could increase government spending to offset this. Or, indeed, get the ECB to engage in widespread monetary easing. Who knows why? Many speculate that Germany refuses to ever engage in stimulating economies because of a mass fear of inflation dating back to the Weimar Republic. But for whatever the reason, Germany is immovable.

This uncovers the giant political contradiction at the heart of the Eurozone. Germany has offered meagre support to the helpless periphery, extracted a pound of flesh for it, and will not deliver any more. If the periphery cannot tolerate the vast human suffering it is undergoing from German policies, and Germany will not allow anything better, then the end of the Euro is inevitable. Already, we see it in politics. There are brushfire revolts across Europe, because of the powers that Germany and the ECB has usurped from periphery governments, and used to enact crippling reforms. Podemos in Spain, Five Stars in Italy, and Syriza in Greece all have at their centre plans to leave the Euro, and derive widespread popular support from this. Polling shows that if there were a referendum called in Italy tomorrow about whether to leave the Eurozone, it would vote yes. Under any democracy, such discontent with an institution is unsustainable. But in a darkly comic even the meagre support offered by Germany is considered too generous, too much for the German people. There is now a large movement, Alternative for Deutschland in Germany itself that wants to leave on the grounds that it is spending too much money on lazy Southerners. Neither side wants the status quo to continue. Neither side will countenance giving in. What else can the Euro do but collapse under the weight of its own political contradictions?

But the final point, most importantly of all, is that for the periphery, leaving will not be as costly as staying in. Indeed, at this stage it is hard to imagine that the costs of staying inside the Euro could be any higher. On the other hand, the gains from leaving are palpable. When the periphery leave, they will be in charge of their own currencies. They can reflate domestic demand. They can regain economic sovereignty. And this will, finally, allow them to return to growth.

So I suppose what I’ve tried to argue is that the Eurozone is doomed by its very institutional nature, that it must end one day. And so I say, why not let it end now? Why subject the youths of Spain, the unemployed of Italy, to years more of avoidable misery? Especially, when there is an alternative.

There will be costs to a break up of the Eurozone, and yes, they will be large. But they are one off. And they are inevitable. And so I say, why not bring this forward as much as possible, to avoid the needless and severe suffering. Yes it is a hard choice, but it is a choice that has to be made. Ducking it, avoiding it, is to simply kick the can further down the road, to confront the decision in two, five or ten years down the line.

Economic historians often talk about the gold standard, a system of gold-based fixed exchange rates amongst European countries, very similar to the Eurozone, which of course is the ultimate fixed exchange rate. These economic historians point out that the Great Depression was longer and harsher than it needed to be because of the gold standard. In the words of acclaimed historian Barry Eichengreen, Europe was being crucified on a cross of gold. And I contend that, right now, much of our great continent is being crucified on a cross of Euros. And this must end, ladies and gentlemen, this must end.

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