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NOTE: This text was my contribution to a retrospective on the current crisis looking back from 2020. It was prepared for "Business Daily", the BBC World Service's main Business and Economics current affairs programme to be broadcast on Friday 12 August 2011 (play, click on 'The Euro In The Year 2020'). I put the “positive” scenario for. The other scenarios were: the euro breaks up; some members leave.
Just over a year ago, the first President of the European Union was directly elected by 450 million citizens – from 30 Member States – when they also elected the eighth European Parliament. Electing the President cemented the political union that accelerated after the great crisis a decade ago. The same plebiscite incorporated a balanced budget requirement into the European Constitution as a final step to make sure those debt problems could never happen again so that all EU members can feel secure in sharing a sound and secure currency.
It is good to see the EU reaping the full benefits of the gigantic shake-up produced by that crisis, even though it was very unpleasant at the time. The huge pressure to boost competitiveness paid off and we are now counting the results of more than five years of 3 per cent annual productivity growth – twice what was being achieved before. We all knew there was a lot of slack in our approach to productive activity, but the longer term benefits could scarcely have been imagined back then.
Our population is 50 per cent bigger than that of the US and that surge in productivity has gone a long way to closing the gap with US productivity. Add in the fall in the dollar after the famous “checks and balances” of the US political system failed to cope with the budget and external deficits, and the EU economy is now substantially larger than that of the US!
Amidst this good news, there is one thing that everyone is rather sad about. A few years ago, the UK decided it was not willing to go down this path to closer political union and voted to leave the EU. Regrettably, many EU members really did embark on a campaign of “murky” protectionism and the migration of industrial capital investment from the UK completely undermined its competitive position. As always, they tried the old policy of devaluing their way to prosperity but – as so often before - it failed and, at around £1.5 per euro, the UK is now economically fairly insignificant on the world stage. Very sad.
Next year, the European Union’s debt/GDP ratio should fall back below 60 per cent - the original Maastricht Treaty limit - because budget deficits were eliminated by 2015, as a direct result of the commitments made at the height of the crisis. To the astonishment of many commentators, these were actually delivered because of the new collective powers that were agreed then – the final practical step towards the political union[1]. Amazing what a few years of good productivity growth can do for you! Equally remarkable is what happens when you fail to control public finances – the US debt/ratio will soon be twice that of the EU!
Anyway, the change in “old Europe’s” standing in the world is quite astounding: the Chinese and other large holders of US debts bailed out of them once they spotted these trends. So it is good to see that the euro is now generally regarded as the world’s reserve currency. All this reminds me of the beginning of my career when that sudden disappearance of the reserve role happened to sterling. It proved to be a very slippery slope for the UK. The same seems to be happening to the US, but it is a little worrying that the EU has not been willing to take on the military role of the US… sometimes the world feels a rather threatening place.
[1] This process was explained in my book "EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?", published by Searching Finance.