As the EU totters further into crisis it becomes more and more apparent that the political class is prepared to sacrifice anything to save the Euro, a course that will be disastrous for us all. The theory that the weaker members of the eurozone are running out of liquidity is both wrong and dangerous, as the solution of providing them with repeated loans to keep them afloat until austerity measures get their finances back in balance will inevitably fail. In reality their economies cannot pay their way in the world as they are fundamentally uncompetitive, due to allowing their cost bases to greatly exceed the levels attained by economies such as Germany and Holland. It is their lack of competitiveness which is the cause of their falling tax revenues and rising borrowing and social security costs and the funding policies pursued by the EU are never going to work because they offer no solution to this problem of competitiveness. Against a background of weak or non-existent growth in demand, rising taxes and increasing unemployment, they have no chance of success.
Loans may temper immediate crises but only at the expense of increasing the debt which will never be repaid. The cost bases of these economies could be made more competitive with heavy investment in new industry and radical changes in working practices, but to achieve stability, countries like Greece, Ireland and Portugal would have to reduce their costs by perhaps 30%, even with the assumption that there was no continuing improvement in the export competitiveness of countries such as Germany. Is it conceivable that these economies would manage to achieve at least 2% lower inflation rates on average than Germany, constantly for over a decade, or that their electorates would put up with the savage deflation which would be required for the whole of this period?
Despite these facts the policies of Brussels are aimed at providing financial aid rather than allowing any major restructuring, because the EU political elite are desperate not to see the eurozone imploding, which would put an end to their dreams of a single European state. These policies will become unsustainable as the electorates involved are not going to be willing to endure indefinitely never improving economic conditions and the bond markets will be unwilling to support the ailing economies. If the political situation deteriorates and the bond markets get more nervous, the ECB is going to be unwilling to continue to act as the lender of last resort and the stronger eurozone economies are going to be unwilling to go on supporting the weaker ones.
Obviously radical eurozone restructuring is essential, and there are overwhelmingly strong arguments for it to be done sooner rather than later, as every passing month sees the weaker economies becoming less able to compete, resulting from falling investment and rising costs, while simultaneously their cumulative borrowing goes up. It will be necessary for the weaker economies to devalue as, if not, the strain on Europe's banking system will become increasingly severe. The ECB has already committed as much as two hundred billion pounds to fund sovereign bond purchases and taken on other liabilities to support the eurozone. In the event of further delay the devaluations when they come will mean the losses the banking system will sustain will be so large that there will not be enough financial strength, funding capacity and political will among either the EU's sovereign states or the IMF to avoid bank insolvencies. Banks would to fail across the EU and the European economy would be in deep trouble.
Those countries which cannot pay their way must be allowed to devalue, as it is the only realistic way in which they are going to be able to get their economies growing again, exporting at a competitive level and avoiding unending balance of payments problems and continuing government bail outs and banking crises. It is the only way that they will they be able to stop tearing their social fabric apart with further cuts in public expenditure and to start reducing unemployment to tolerable levels. Restructuring the eurozone would be difficult but not impossible. There is no doubt that it would be extremely disruptive but the longer the status quo is allowed to exist, the worse the eventual disruption will be. To achieve the necessary changes those countries in the eurozone which are no longer able to compete with Germany would have legislate to make all euro currency and external obligations arising within their borders no longer equal in value to German bloc euros, devaluing their domestic euros by possibly around 40% in countries such as Greece, although less for other countries. All external obligations, including sovereign debt, bank and bond liabilities, and commercial and personal debts, would have to be written down by whatever percentage devaluation was selected while no euro notes from the devaluing countries would be allowed to be taken abroad. Meanwhile replacement currencies would be prepared and introduced.
It is obvious that parties of the democratic right, or at least their supporters, oppose the creation of a single European state, as they believe that the nation state best represents the interests of the people. However, despite the mistaken belief of some that the EU is some sort of socialist conspiracy, the reality is that an organisation supported by bankers, big business and Conservatives like Heseltine and Clark is in fact a capitalist club. It is therefore unfortunate, if not tragic, that nearly all the leaders of the mainstream centre left parties refuse to recognise the damage which supporting the euro is doing to social democracy and that therefore backing for their parties is declining across Europe, as their erstwhile supporters see the parties for which they used to vote abandoning public services, cutting public expenditure and favouring bond holders over working people. Indeed the whole of the EU's political class is losing credibility and the support of its electorate as it pursues essentially undemocratic policies which are not in the interests of the people who are suffering from their misjudgements. Alarmingly, as a consequence, voters are moving their support to extremist and undemocratic fringe parties. Fortunately in the UK there is a democratic alternative, namely UKIP.
Thankfully the UK is not a member of the eurozone as, if we had gone into the Single Currency with an exchange rate of 1.45 euros to the pound, as proposed by much of our own misguided political establishment, we would now be in much the same situation as Greece, Ireland and Portugal. Regretfully, we are not fully isolated from the unfolding eurozone crisis as, when defaults take place, both our government and our banks are going to be exposed to very heavy losses as a result of EU and IMF obligations, to which both Labour and the Coalition governments have committed us, and from many highly unwise commercial bank loans from British banks to eurozone countries. Far worse the losses will be eclipsed if the eurozone survives long enough for the debt crisis, when it eventually leads to defaults, to destroy major European banks and create a major recession. That would be bound to have a further major negative impact on the UK economy and on the world's prospects generally. Therefore many say that we should urge eurozone restructuring, with all its short term painful consequences, as early as possible, for the consequences of waiting until the Euro self destructs do not bear thinking about.
However, from the point of view of Eurorealists it could be argued that the stubborn refusal of the politicians to recognise reality might be the best means of ending our involvement with the European project. The Samson smash of the EU temple which the collapse of one of its main columns, the euro, will cause, should ensure that nothing remains of the putative single European state so perhaps the economic problems which would engulf Europe might be worth it in the long term. It illustrates just how far the peoples of Europe have been betrayed by the political class that such an outcome may be the only way to avoid the greater disaster of a continent wide bureaucratic monster destroying democracy and economic prospects for the future.