Brexit could leave the UK staring longingly at Europeby Anatole Kaletsky / May 19, 2016 / Leave a comment
Published in June 2016 issue of Prospect Magazine
“Shackled to a corpse” has become a favoured cliché among Brexiteers rationalising their aversion to formal links with the European Union. A variant of this grisly image among milder Europhobes has Britain delivering the mortal blow that will put Europe out of its misery. One way or the other, a diagnosis of EU terminal illness is now widely accepted by Britain’s dinner party consensus.
But what is the clinical evidence? Europe’s morbidity supposedly shows four main symptoms: populist politics; economic failure; geopolitical chaos on its borders; and inability to cope with immigrants and terrorists. But are these maladies connected to the EU?
Attributing populist politics to EU institutional failings becomes absurd once we consider recent political events in the United States or indeed Britain. However worrying the rise of the French Front National or Alternative für Deutschland, the possibility of Donald Trump as President is much more alarming and likely than any of these parties gaining power. And what about the prospect that Britain’s next Prime Minister will be either Boris Johnson or Jeremy Corbyn?
“Europe, far from staggering towards its death bed, is actually enjoying a growth spurt and now outpacing both Britain and the US”
The same goes for geopolitics and migration. Judging by the Trump campaign, many Americans are more incensed by multiculturalism and immigration than European voters. As for geopolitics, does anyone believe that American or British diplomats have been more successful than their EU counterparts in dealing with Iraq, Libya or Ukraine?
Which leaves economic failure as the only real intimation of mortality that can plausibly be connected with the EU. But focusing seriously on economics, we find that Europe, far from staggering towards its death bed, as portrayed by Brexit propaganda, is actually enjoying a growth spurt and by several measures now outpacing both Britain and the US.
In the first quarter of 2016, the eurozone’s 2.2 per cent annualised growth was faster than the first quarter rates in Britain (1.6 per cent annualised) or the US (0.5 per cent annualised). Since the beginning of 2015, the eurozone’s growth rate has averaged 2.0 per cent, the same as Britain’s and slightly ahead of the US. In terms of job creation, the eurozone’s 2.1 per cent annual growth is now almost double Britain’s 1.2 per cent. And even though EU unemployment is double the American and British levels, it has been falling more than twice as fast since the beginning of 2015 (by 1.3 percentage points against 0.5 in Britain and the US).
Even more encouraging than these statistical improvements is their underlying cause: a transformation of the eurozone’s management that has gone almost unnoticed in Britain. Since the beginning of 2015, the EU has been dismantling the obstacles to its economic revival: the misconceived rules for the management of the eurozone, rules that transformed some localised and manageable financial problems in Greece, Spain and Ireland into the worst economic depression for 80 years. These rules, imposed by Germany during the negotiations 30 years ago in the lead up to the Maastricht Treaty prevented the European Central Bank (ECB) from underwriting the government debts in the same way as the Bank of England or the US Federal Reserve, and banned mutual support between strong EU countries and those with weaker credit. These absurd restrictions were then aggravated at the height of the euro crisis, when Angela Merkel responded with panic to racist attacks on “lazy Greeks” in German newspapers by imposing tighter restrictions on public debts.
It was the economic illiteracy of these monetary and fiscal rules, not the concept of a single currency itself, that turned the euro into a self-destructive monstrosity. But the good news, hardly noticed outside the financial markets, is that the euro’s pernicious rules have been quietly abandoned and even reversed since 22nd January 2015.
On that day, Mario Draghi, the President of the ECB, who had been transforming the EU’s most important economic institution from an atavistic clone of the pre-Keynesian Bundesbank into a modern and creative central bank modelled on the US Federal Reserve, announced a programme of printing money or “quantitative easing” far larger than anything attempted by the Fed or the Bank of England. Draghi committed the ECB to buying bonds worth 250 per cent of the combined borrowing of all the eurozone governments. It meant that the ECB was monetising 100 per cent of government borrowing and was printing more than twice as much money on top to mutualise a large proportion of outstanding government debts.
In other words, Draghi found a way of circumventing the pernicious Maastricht rules against monetising and mutualising government debts that were mainly responsible for the euro crisis. As a consequence, the fear of a euro breakup vanished, interest rates in Italy and Spain converged towards German levels and an economic recovery quickly began.
The most important remaining step for the EU’s economic rehabilitation will be to overturn Merkel’s fiscal rules, which prevent the reduction in taxes and expansion of public investment and borrowing required to accelerate growth. Luckily, this reversal is occurring under pressure from economic reality, and as it happens, again with Italian leadership. Matteo Renzi, Italy’s Prime Minister and Pier Carlo Padoan, the only G7 finance minister with an advanced degree in economics, have begun openly defying calls from Berlin and Brussels to tighten budget plans and are cutting taxes and increasing public investment instead. As a result, consumer and business confidence in Italy have rebounded to the highest level in 15 years, credit conditions have improved and Italy is the only G7 country expected to grow faster in 2016 than 2015, according to the IMF. With a French election next year, the rebellion against German austerity rules is sure to spread to France and beyond to Spain, thus liberating the eurozone’s main economies.
In short, with German influence waning and economic growth accelerating, it will become clear that reports of the EU’s death are exaggerated. And if the British public are foolish enough to vote for Brexit, they will find themselves looking across the Channel envying the Continent’s economic performance, just as they did before Britain joined the European Community in 1974.