In These New Times

Ian MacWhirter

Glasgow Herald

15th February, 2010

Hah! Shows that the whole idea of a single currency was a nonsense. It’ll never work, you know. Not without a superstate. You wouldn’t catch us in the farmyard with the Pigs – the unflattering acronym being used to refer to the Mediterranean economies of Portugal, Ireland, Greece and Spain. What basket cases!

Thank God we’re protected by the good old pound sterling. Except that, according to the International Monetary Fund (IMF), the Pigs should really be renamed the Pugis – Portugal, UK, Greece, Ireland and Spain. That’s because our economy is in a worse state than any of them. JP Morgan says that the British economy is sicker than at any time since 1976, the last time we called

in the IMF. As the group of 20 leading British economists who wrote to The Times this weekend have warned, the political parties are in denial about Britain’s debt mountain, and time for action is running out.

The Greek budget deficit is around 12%; the UK budget deficit is around 13%, according to recent IMF forecasts. At £1.5 trillion, UK personal debt is higher than any country in the world, even the United States. Then there’s the trillion-pound bank bail-out, the trillion-pound public-sector pension liability, the trillion-pound public debt and those off-balance-sheet private finance initiatives schemes. If you add up Britain’s real liabilities you find that the UK is heading for a total debt burden of several times its GDP.

So what, say the euro sceptics. At least we can devalue the pound, unlike those dumb farmyard economies in the euro zone. That will give us a boost and reduce the value of our debts. Clever old us! Except that devaluation isn’t a get-out-of-jail-free card. It is foolish to think that you can build a sound recovery on debasing the currency – it only works if there is a fundamental restructuring of the economy, which there isn’t. The Bank of England has been pursuing a policy of “benign neglect” toward sterling – ie printing money – without there being any corresponding reform in the wider economy.

In theory, devaluation should boost our exports because they become cheaper in foreign markets. But British manufacturing just had its worst year since records began so that doesn’t seem to be working. We don’t make much of anything any more, so the benefit of a cheaper pound is questionable.

On the other hand, letting the pound fall means imports become more expensive, and since we import most of our stuff, this leads to higher inflation. We keep being told of the dangers of deflation, as if falling prices are a bad thing, but the dreaded deflation never actually happened during the entire course of the recession. And this week, comsumer price index inflation is expected to rise to 4.2%, according to City analysts Investec. That’s more than double the Bank of England’s target.

What this does is impoverish older people on fixed incomes and rob anyone who actually saves money. We keep being told our economic problems arise from “decades of indebtedness”, our failure to save, our addiction to credit. But the Bank of England is pursuing policies which make mugs of savers. The return on most savings accounts right now is negative – anyone with money in the bank is losing around 3% of it ever year because interest rates are near zero and inflation is rising. The only thing that a devalued pound is good for is boosting house prices because foreign investors buying in euros see UK real estate as cheap. But anyone who still thinks that the rerun of the house price bubble is a good thing needs a one-way ticket to the funny farm.

OK, so it’s not good here. But it’s much worse in Europe, isn’t it? Thank God we’re not tied to the euro. Ha ha ha. Silly Pigs. Well, again, I don’t know if anyone has actually been to Europe recently – most Brits can’t afford to any more – but I have been right across the EU in the past year, and I can report that the standard of living even in the piggy economies is astonishingly high after a decade of the single currency. Britain is looking remarkably threadbare by comparison. Throughout Europe, the quality of life of the average citizen shames Britain. Even in countries like Germany and France, you can buy a large family house for around £200,000. The only people who are doing well in the UK are bankers.

This may be one reason why you don’t hear countries clamouring to leave the EU or vowing to dump the euro. I didn’t hear Greece calling for a return of the drachma so that it can devalue its way out of its spending problem. Ireland is cutting public-sector salaries by 20% and slashing public spending, but you don’t hear them calling for a return to the punt. This is because the EU, and crucially the euro, has been a bulwark of stability in the present turmoil, a shock absorber.

If Greece or any other EU country in difficulty dropped the euro it would be savaged mercilessly by international speculators. Have a look at Iceland, which is now desperate to join the euro.

But as well as stability, the euro imposes fiscal discipline on ­countries like Greece. This is precisely because the Pigs cannot take the easy way out through devaluation. Greece will have to get its deficit under control, by living within its means – it has no option. I seem to remember a British prime minister saying something rather similar about us in the 1980s. The trouble is that Britain is now the sick man of Europe, and when the bottom falls out of our debt economy, we can’t expect any help from the big economies of Europe. We sink or swim.

The prospects for the UK economy right now are not good. High inflation, bubbling house prices, high unemployment … The average UK household owes a staggering £60,000. The public sector is out of control. The private sector is flat on its back. We should stop crowing quite so loudly about the misfortunes of euro zone countries. For there but for the grace of God