The Sin Bin • Re: Brexit watch

wotsupcas is correct, the EU did impose brutal austerity conditions on Greece. It forced severe pay cuts, pension age rises and tax rises on them. Given that the Greek public had just elected a socialist government on a completely different manifesto, you can argue this was a democratic deficit as an outside institution had gone over the heads of the Greek public to impose policies with drastic impacts on their own lives.

This was all linked to the Eurozone bail out fund. Greece was bust and had a major cash flow problem, couldn't pay its public sector workers or fund its public services without emergency loans. The Eurozone countries came up with the money (ie the taxpayer of the other Eurozone countries had to pay for it). The UK didn't have to pay for this as we weren't in the Eurozone.

However, if the UK had been required to contribute money for this, I think these brutal austerity measures would have been popular with the British public. We would have said, why are we giving money, for them to get pay rises that we don't get, to be able to retire younger than us etc? It would be like the international aid argument. Most Brits would have probably said if we are giving them money then we have the right to tell them to make some pretty strict changes.

The tale of Greece (and to a lesser extent the other southern European countries, Spain, Portugal etc) highlights a basic problem with the Euro. By having a single currency, a high productivity country like Germany gets an artificially weakened currency than it would have had if each country had its own currency, and lower productivity countries like Greece/Spain/Portugal get artificially strengthened currencies. So Germany has a huge export advantage because its goods are relatively cheaper than everyone elses and its cheaper for people in those other countries to buy German stuff than stuff produced domestically.

So the Germans have done well out of the Eurozone, by being the supplier to Southern European customers. But if those countries aren't producing enough of their own to pay for it, its all effectively being bought on credit. At some point, those customer countries are just going to get in massive debts, and then Germany has a problem, because it can't have its customers going bust, and also because a lot of the lending to those countries has come from German banks and their banking system can't afford mass defaults. So Germany has a vested interest in keeping them afloat which means German taxpayer (and taxpayers from other countries) chucking them bail out money, but also taxpayers in those bailing out countries won't accept a situation where they are working hard, with wage restraints, to be able to lend money to customer countries to buy the stuff they produce whilst lazing around in the Mediterranean sun. So they demand harsh austerity conditions which squeezes the public services in those countries.

The Eurozone will always be unstable while there are huge differences in productivity and in wage rates, tax rates, spending on public services, across these countries. Compare to the 'pound zone' if you like, of England, Scotland, Wales and NI, or the 'dollar zone' of all the US states, where those things are broadly similar throughout the zone. These currency zones are more stable.

So I always felt the Eurozone was a flawed project. The architects of the single currency knew the drawbacks and knew that it would only be sustainable in the long run if you had mass harmonisation of laws and taxes across the member states. By locking everyone in to a single currency they made that argument viable - look everything is unstable, the only way out of this is to harmonise everything. This was effectively the argument of the 1990s: Thatcher saw what was coming and said No, No, No; Major negotiated the UK's opt out of joining the single currency in the Maastricht treaty, and although Blair was keen on the idea of the UK joining, Brown (and Ed Balls who was working in his office at the time) and the Treasury officials, drew up rigorous enough tests of whether it was in the UK's interests to join that Blair saw it couldn't be met and dropped the idea (back in the day when we had evidence-driven policy).

In the long run, the EU is going to necessarily be a two-speed project. There will be an inner Eurozone, that converges towards the 'European superstate' that the Eurosceptics always warned about, then there will be a zone of countries like Sweden, Denmark and the Eastern European members, who are inside a broader 'single market' with similar product and service standards to allow for free and easy trade, but who don't have converged tax and spending rules.

The UK should really have been in this outer zone. Our influence would have diminished as we weren't in the Eurozone but it would have worked for the UK economy to sit in there with general sovereignty and our own currency. In defence of the much-criticised David Cameron, the deal he negotiated with the EU to put to the public in the referendum was looking at establishing the UK as an 'outer zone' country. The point on which it all floundered was on freedom of movement. Really the EU should have been willing to compromise and allow controls of movement or things like not being required to make welfare entitlements like tax credits equally available to citizens from all EU countries, for these countries outside the Eurozone. If they had offered Cameron that, the referendum would have been won by Remain easily - even as it is it was only 52-48.

Now at the moment, the EU will say if the UK ever wants to rejoin, it has to be all in, new members have to go in to the Eurozone etc. I do think though that over the next 10 to 15 years, there will be a clearer definition of this "two-speed" Europe and there will be a clearer model for other countries to join the outer tier. I think that gives the prospect for the UK to rejoin a form of EU which works better for the UK.