UK Independence Party Dorset North

Why the Euro project is the disaster it is

Jeremy NieboerJeremy Nieboer

At this time of turmoil and anxiety in Europe we need to understand why the Euro project, so improvidently embarked on 10 years ago, was bound to end in failure and enmity between States.

Whether a common economic and monetary union is good or bad depends on its capacity to absorb and adjust to economic shocks affecting one or more of its members but not all. To provide ‘shock absorbers’ there must be political union since without the power to direct spending and regulate taxation and interest rates there can be no economic union and any monetary union will collapse.

There are 5 shock absorbers. The exchange rate affects the balance of payments and cost of international trade transactions. A weak rate enables troubled economies to trade their out of unmanageable debt by exports. Such is the remedy for Greece but which the Euro project has denied her.

Interest rates govern both exchange rates and inflation. Interest rates in Ireland and Greece, set to suit Germany and France, have led to a forest fire of cheap unsustainable debt which is now consuming the earnings of their inhabitants. Borrowing at 4% and “earning” 20% on property inflation was too tempting.

Fiscal control (spend and tax) enables the governing power to encourage the economy to grow or contract as demanded by economic or political needs – high government spending can encourage growth (as in the USA during the WW2) – cuts in spending and tax can do the same (as is so urgently needed now).

Mobility of wages may also enable economic shocks to be absorbed (people earn less to keep staple industries in existence) but wages have not fallen in real terms since 1932: It is not uncommon for employees to refuse lower wages knowing that unemployment will result. The percentage of foreign workers in EU member states is still very low compared with migration of employment in the USA.

Mobility of labour enables workers to move from disaster areas to more productive industries – this occurred with the collapse of Michigan as the producer of US cars but ‘get on your bike’ is not an appeal that is effective. Then there are transfer payments mechanisms which may be used to relieve economic distress – for example the use of federal revenues to compensate the state of Michigan or the high level of benefit payments in the UK to the north east.

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