The Euro, the EU and Brexit: What's Next?

by Oliver Clark

The world has been in a constant state of change from the dawn of time, yet the last 6 months have arguably seen the greatest change in global politics since the turn of the century. The vote to leave the European Union, a President-Elect Donald Trump, and this weekend's Italian referendum (which could have ramifications greater than many dare to imagine). After my recent article detailing the wrestling related exploits of Mr Trump, I decided that I should focus on the former and latter of these 3 decisions, with the common topic of the future of Europe.

One of my main reasons in arguing to leave the European Union was the economic and political instability that is occurring on the continent. Much of this instability is down to one key factor: the Euro. A project of economic integration, a political project with good intentions of bringing Europe closer together, has had dire consequences for much of the continent. I feel that this turmoil has no single easy solution, and that the focus of the European Commission over the coming years will be to save their currency from falling off the proverbial cliff. It is unquestionable that the views of the non-Euro member states, including Britain, would have had near to no say over decisions (and subsequent consequences) in this period as the Euro project is put before all, and that is why I am still elated by our decision to Leave. But how bad'y is the Eurozone doing?

The answer? Very bad. The Eurozone as a whole has had near to no growth in 10 years, a lost decade in terms of economic growth (a key aim of the original EU project), there is on average 11% unemployment across the continent and horrendous youth unemployment reaching levels of near to 50% in countries such as Greece, Spain and Cyprus. This astronomical unemployment has led to rapid rises in inequality which further halts economic growth. Even Germany, the pinnacle of all EU success, in spite of its enormous trade surplus, has managed a mere 0.8% average growth over the last 8 years. A large proportion of these problems can be put down to the single currency ideology, and while the present is certainly bleak for Europe, the future is simply horrifying.

It really did baffle me when reading about the original ideas behind the Euro. How on Earth was a common currency going to help countries with such differing values, ideas, economic structures and priorities come together? In times of economic downturn, the ECB (European Central Bank) must decide on interest rates to charge. How can a single interest rate be compatible for the ambitions of 19 different countries? The simple answer is that it cannot. There is a fundamental lack of institutions within the EU to help the countries who do not benefit from the centralise policies. One country that comes to mind is Greece.

Greece, if you have been living under a rock for the last 8 years, is in a spot of bother. Large amounts of borrowing after being granted EU accession, followed by a large withdrawal of capital after the financial crisis (and subsequent fall in business confidence) has left Greece horrendously in debt. I need not remind readers of the state of poverty that Greece has experienced in recent years, but this poverty, caused by rash borrowing (and might I add, lending) of money, has only been exemplified by the ludicrous policies taken by the European Commission, the ECB and the IMF, collectively known as Troika.

Greece, being a part of the Euro, cannot print its own money in times of financial crisis. Being part of a currency fixed to 18 other countries, it could also not naturally correct its currency so as to stabilise the economy (it could alternatively lower its real exchange rate by reducing the price of exports, but this would almost certainly be founded by cutting labour costs). It must instead rely on the ECB giving loans to the country in an attempt to stimulate aggregate demand. However, as Joseph Stiglitz put so well in his most recent book detailing the problems of the Eurozone, ‘the power to withhold credit becomes the power to force a country to effectively cede economic sovereignty’. The people of Britain may have complained about the concept of austerity (cutting government spending and increasing taxes, reducing the budget deficit and so increasing confidence in the economy) used by George Osbourne, but the current conditions being enforced by the Troika is quite literally forcing poverty on the Greek people.

The problem does not end there. The talented workers of the country are rightfully pretty disgruntled by the economic problems of their homeland, and are therefore taking their skills elsewhere, benefitting from the EU’s freedom of movement rules. However, this hollowing out of the Greek workforce, where the country is losing the workers with the most potential for innovation, has two main problems. Firstly, the aforementioned drop of innovation and entrepreneurship in the economy. The future of a country does lie painfully with the opportunities for the youth, and so when these opportunities are not present, the youth simply leave and set up lives elsewhere with little incentive to return. Where does that leave the future of a country?

Secondly, the impact of this has been to forced the new austerity measures imposed by the Troika onto the remaining populous. As the population has fallen, this means that tax rates must in turn be higher for those still in the country, making up for those that have left. Yes, migrants now working in other countries are likely to send remittances back to family member, but this is ultimately offset by the high taxes and lack of spending as the Troika forces Greece to cut its deficit while ultimately sacrificing other goals of growth, development and employment. Would the economic problems of Greece have been spared, had they not joined the Euro? Probably not. However, the common currency ideology, with an unaccountable central bank making decisions that are forcing poverty onto the lives of millions, has not helped.

Mario Draghi’s bold claim of doing ‘anything it takes’ to preserve the Euro, will be put to the test to a greater extent, after the result of this weekend's Italian Referendum. The vote is on a number of reforms to the Italian political system, with Prime Minister Matteo Renzi declaring that he will resign if there is a ‘No’ vote. What is so bad about this? The 3 major political opponents of Mr Renzi are all in favour of Italy dropping out of the Euro. If one of these parties were to come to power, it would be a great step forward for the anti-EU movement that has swept the whole continent, ranging from the well known exploits to the National Front and Le Pen in France to similar less publicised waves in Austria, Bulgaria, Denmark, Hungary, the Netherlands, Sweden, and of course the UK’s recent decision.

A No vote in this referendum, from one of the founding EU member states, would be a slap in the face for all those who wish to keep the European Project alive. Bearing in mind that a relatively new condition for potential member states is that when joining, they must be aiming to join the single currency, this defiant vote against the continuation of economic integration could be fatal. What makes the vote significantly more important is the link that it has to the Italian Banking Sector (and back to the Euro we go!).

The Italian Banks are, like Greece, in a spot of bother. €360 billion of bad debts that are likely to never be paid back. That is quite a bit of bother. Shares in Italian banks have fallen almost 20% since the Brexit vote (in the worst case, Banca Monte dei Paschi has fallen 75% in the last year). The idea of banks being too big to fail and the hubristic consequences has led to this position, but according to a recent article in the Financial Times, the futures of 8 Italian major banks are now on the line. If this were to happen in Slovenia (no disrespect to any Slovenian readers), the consequences on the Eurozone may not be too bad. However, Italy is the 3rd largest economy within the group. The solutions to the crisis are complex, but in all circumstances it is likely that this will have a negative impact not just on the Italians, but on all other members of the Eurozone. Even in the event of a Yes vote on December 4th, the apparent daily rise in anti-euro sentiments is likely to cause significant uncertainty in the future of the economic prosperity of the Eurozone.

If there are further troubles for the Euro, with an out of touch Commission and unaccountable Central Bank with cumbersome policies which benefit the few and harm the many, I fear for the future of the European Union itself. As stated earlier, Euro-scepticism is growing across the whole continent. If you feel that the pro free trade, pro (controlled) migration and pro global outlook of UKIP is ‘extreme right’, I implore you to look at the flat out racist views of the AFD in Germany, to look at Le Pen’s protectionist ideology in France, to look at the 5 Star Movement in Italy. Things are looking incredibly bleak for the convergence aims that were the origin of the Euro. It can be argued that the Euro itself, and the accompanied surrender of national, political and economic sovereignty, known collectively as a democratic deficit, has led to this political divide that has led to rises on both the far left and right of politics.

And so now back to Brexit (as seems to be the trend of every economic or political point this year). As stated earlier, I am unbelievably optimist about the future of Britain. I am certain that Britain can prosper outside of the excessively regulatory and protectionist single market and customs union, adopting a new policy of free trade which can reach out to all corners of the world. Britain will continue to be an open and inclusive country, taking in migrants in areas of the economy where it is needed, and not flooding low skill labour markets.

Free movement is a difficult issue to discuss, as although it means that grammar school students can benefit from cheaper inter-railing holidays, and big multinationals can undercut wages due to the oversupply of labour, it does not benefit the countries from which migrants flee (as detailed earlier) and it also does not benefit the unemployed in the UK who cannot obtain a fair wage due to the aforementioned oversupply of labour. A fair universal migration policy, where we do not discriminate in favour of a economically failing trade bloc, would not only allow us to retain the economic benefits of migration, but, with a controlled approach, it would also lead to a social acceptance of immigration that many on the Remain side feared would disappear in the wake of a Brexit vote. I would also hope that an end to free movement of people would result in a higher prioritisation of those migrants who need it most, refugees fleeing for their lives from war zones such as Syria.

Recent forecasts have indicated that growth will continue throughout the next 5 years (with us being the fastest growing economy in the G7 this year) and an estimation of around 500,000 more jobs by the end of this parliament, far from the immediate Brexit armageddon that was anticipated and almost guaranteed by ardent Remainers. Companies such as Nissan and Google have committed to significant investment in the UK, and as far as I have seen, no company has outright fled the UK after the democratic vote of the people. One final consequence of Brexit, I hope, is that those at the helm of the EU, who have put neoliberal, corporation favouring policies ahead of the wellbeing of the people of the continent, shall look at the mess they have made and work out how to solve it. Unfortunately, I cannot give that answer yet.

The future is uncertain. In my first article on the EU, I was uncertain as to what would be best for the country, but ultimately concluded that unless David Cameron provided a positive message for EU exit, it would be a very close run debate. My second article was far more opinionated, with my arguments based on the ultimate direction of the UK, whether it was inside or out of the EU, but admittedly not knowing for certain whether my message was one of sense or fantasy. Now I offer this reflective article on the direction of the EU, not with a message of ‘I told you so’, but with information that I hope will intrigue and inspire those interested in economics.