Our parliamentarians continue their deliberations on possible amendments to the Government’s proposed Withdrawal Bill from the EU. Feelings are running high on all three sides of the argument – ie Remainers, Hard Brexiteers and Soft Brexiteers. Enormous time and energy has gone, and is going, into our departure from the EU.

Both leavers and remainers can, and do, take honourable positions which are to be respected. However being strictly accurate ‘remaining’ is perhaps a slight misnomer as the EU is on a stated path of ‘ever closer union’ – although quite what that means is opaque. It does mean though that we would not be remaining in a current settled state but remaining on a travellator that is on the move (eg to an EU defence force, the euro as the single currency of the EU). This aspect of the issue appears almost ignored in the current polarised debate.

The fundamental question may not be Brexit at all

Lord Rowan Williams (former Archbishop of Canterbury) has said he is unsure if the referendum was a good idea in that “it created confusion by the over simplification of the terms in which it was posed” Newsnight 8 Jan 2019. He is probably correct. The issues are far more complex than a simple ‘in’ or ‘out’. Some commentators are though now wondering if Brexit is actually the right topic we should be discussing! Perhaps the real issue that should be demanding much more of our attention on both sides of the English Channel is not actually Brexit at all but the euro which quietly celebrated its twentieth anniversary in January. The lack of a fanfare within the EU for the anniversary was both intentional and understandable. The intrinsic problem with the euro may well have spilt over into our thinking on this side of the Channel. Maybe without the euro crisis and the ensuing fall in our confidence in the EU leadership, the UK might not have voted to leave the EU.

The elephant in the room

The root of the problem is that the political will that drives EU integration is not matched by economic reality. This leads us into Tom and Jerry land when Tom is in mid-air kicking his feet for what seems like for ever until his inevitable crash to the ground occurs. This is the elephant in the room (the magical thinking) and is where we are sadly now with the euro. As Prof Otmar Issing, the founding chief economist of the European Central Bank now says of the euro “One day, the house of cards will collapse.” If an architect of the euro says it will not work we really are duty bound to listen.

A look back at history

To understand where we are now, it is probably worth looking at the historical context and in particular to German politics in the Cold War years after the end of WW2 and to their desire for a single European currency. Prof Otmar Issing says “One has to understand Chancellor Helmut Kohl [in power from 1982–98] was convinced that the final step to integrate Germany into Europe was a single currency. His views were strongly influenced by his experiences of World War 2 and the death of his brother, and he did not trust the future behaviour of Germans. The move was deeply unpopular in Germany. But Kohl took this risk – and I had some discussions with him on this – that Germany needed to be irrevocably bound to Europe.” This is an important piece of the jig saw for us to understand.

The deutschemark in the free market worked for everyone

Since the end of WW2, the German economy has prospered as the Germans have worked incredibly hard. Germany are world leaders in engineering for example and many in the UK love driving brilliant German cars. Germany deserves its success. The deutschemark inevitably became a strong currency but there was feeling in Europe that this gave rise to Germany’s overbearing position in Europe. If the deutschemark was removed, so went the flawed logic, then Germany would be cut down to size. (Thus both Germany and other European countries were happy to move to a eurocurrency but for different reasons.)

But this was poor economics. As the deutschemark grew in strength so other countries with weaker currencies became more competitive. This allowed the free market checks and balances to work well and the deutschemark was a currency for good. Subsuming the deutschemark into the euro removed this natural free market equilibrium. As part of the Eurozone, Germany then sold its luxury products into markets (in eg southern Europe) which could not really afford them. But with the debt denominated in euros, French and German banks lent money to the poorer Eurozone members confident that with euro denominated debt their money was safe from devaluation.

Enter Greece, suddenly centre stage, onto the financial world markets

Eventually though the bills have to be paid and without the possibility of devaluation (which is intrinsically impossible with a single currency) the only other option if the debts can’t be paid is default which is exactly the problem caused with the Greece crises which threatened to bring down the euro. The sensible and sound economic answer was to allow Greece to leave the Eurozone but EU political ideology would not countenance this. The European answer to the problem was to kick the ball down the street and to lend, in this case to Greece, yet more money whilst forcing the country into impoverishment by cutting wages, pensions and forcing a huge rise to the rate of youth unemployment.

As Yanis Varoufakis, the former finance minister of Greece, puts it: “In summary, after having bailed out French and German banks at the expense of Europe’s poorest citizens, and after having turned Greece into a debtor’s prison, Greece’s creditors decided to declare victory (in the Aug 2018 bailout). Having put Greece into a coma, they made it permanent and declared it “stability”: they pushed our people off a cliff and celebrated their bounce off the hard rock of a great depression as proof of “recovery”. To quote Tacitus, they made a desert and called it peace.”

The politicians broke their own rules and defied economic reality

The euro crisis was both predictable and widely predicted. The basic well known flaw is that monetary union needs political union for it to work. Our European political leaders have chosen to defy this economic reality. To be fair, the architects of the euro realised this and so established a set of rules to make the euro work despite the lack of political union (but it was thought political union would eventually come). These rules were (probably inevitably) broken in a number of ways, such as:

  • The euro required convergence of unit labour costs. But Portugal broke this and in the first eight years of the euro allowed its unit labour costs to rise by 30% compared to Germany.
  • Both France and Germany violated the Stability and Growth Pact in 2003 which came out of Maastrict without consequence. This enabled other countries to say that if the rules did not apply to the big nations, why should the smaller countries bother following them.
  • Only countries with a deficit of under 3% were allowed to join and Greece with a deficit of 8.3% was thus ineligible to join. However the numbers were manipulated by conjuring and so Greece was allowed to join. (In the commercial world, the politicians who agreed to this ‘fraud’ would have been put in prison).
  • Spain and Ireland went on a construction boom that was so big that their banks had to be bailed out by their respective governments.

A breakdown in trust

In his brilliant book ‘The End of Alchemy’, Lord Mervyn King speaks of ‘moral hazard’. There are hazards in banking and there need to be consequences if those hazards are ignored. The euro is, sadly, fatally flawed and it is flawed fundamentally by the very politicians who are its keenest supporters! King writes “Confucius emphasised the crucial role of trust in the authorities: ‘Three things are necessary for government: weapons, food and trust. If a ruler cannot hold on to all three, he should give up weapons first and food next. Trust should be guarded to the end: without trust we cannot stand.’” ― Mervyn King, The End of Alchemy: Money, Banking, and the Future of the Global Economy. The loss of trust in the political elite should be of deep concern to each of us.

The euro’s problems are still unresolved

In 2019 the euro still faces two major problems:

  1. We are observing herd behaviour where the inherent risks the euro is facing are simply being ignored.
  2. There is still a belief that governments will bail out the banks.

The markets still believe that national governments will always come to the rescue of the banks. We all need to learn that the rules matter and when the rules are broken there are consequences. So when Greece became the financial basket case of Europe, it should have been taken out of the euro. A significant devaluation would have occurred in creating the new Greek currency (the new drachma) and although painful at the time, Greece would have been able to be competitive again. Indeed it might have re-joined the euro at a later date.

As Prof Issing eloquently puts it, the euro is like the creation of a no-smoking club where some of the members decide to smoke. Either the smoking members are ejected or the rules of the club are changed. It is a nonsense to continue as a non-smoking club with smoking members but that is effectively the position currently in the eurozone.

For once the bankers are not to blame

The bankers who set up the euro did so with the utmost care and used the best brains available. They created a euro that could work as long as the politicians played ball. Unsurprisingly, the politicians have not done so and now cannot do so without being voted out of office. Who will willingly vote for painful adjustment? Not only have the politicians been carried away with their magical thinking but the voters in euroland have believed that magic. There is though a hard day of reckoning to come. The longer we leave that day, the more painful it will ultimately be.

I suspect that some of us, on this side of the Channel, have observed the machinations in Europe and have been singularly unimpressed. It has led to the thinking that we would be better off outside the EU altogether. The EU is very keen to remind everyone of its inviolable rules around the Single Market (and now the inviolability of the Backstop in the Withdrawal Agreement). Some observers note, more in sorrow than anger, the hypocrisy at the heart of the EU – rules are enforced when it suits and ignored when they do not suit. Culturally, the British do not think like this hence the joke that we gold plate EU legislation that we voted against!

Magical thinking needs to be replaced by sound economics. The sensible rules set up by the brilliant minds that created the euro need to be actually followed but their logical conclusion is a single EU super state that is not wanted by the voters of Europe. This probably means that the euro project needs with sadness to be abandoned as it will never work despite its worthy ideals.

So back to Brexit

Our MPs are perhaps reflecting on some of this as they come to vote on amendments to the Government’s Withdrawal Bill and decide on the right place for the UK in the life of Europe in the coming years. Their decision really matters but whatever they decide may it be for the good of both of the UK and also the future shape of the EU. We all wish our MPs the wisdom of Solomon in their deliberations.


This blog is intended to be a modest contribution to discussing some issues around the EU. Brexit is a huge issue for our nation (and for so many SMEs who export to and import from the EU) and the more in-depth conversations we have the better. In researching this blog I have come to see how fiendishly complex are the issues of running Europe. The mechanisms at the heart of Europe are sometimes inaccessible and incomprehensible to many people and thus often go unchallenged. A current example of this is ‘transnational lists’ (whereby an additional class of MEPs is created who are voted in by EU citizens voting for candidates from across the EU who offer themselves through pan European political parties) which is a development that may or may not make the EU more democratic. Transnational lists is a major change for the EU with significant and potentially far reaching implications (for good or for ill) but the concept has received little public debate so far within the EU.

Some cogently argue that holding together so many nations in a common endeavour with a common currency (which is EU policy) is not possible without full political integration which we are told the peoples do not want. The logical outcome may therefore be that in time if the euro is not dismantled then the EU itself ultimately will need to be as countries break away as the UK is now doing. What seems remarkable is the scant debate in Europe as to why the UK voted for Brexit. It might have been thought that losing a big player such as the UK might have been pause for thought in Brussels but apparently not.

The world will continue to change and our structures must change as well. Perhaps many years from now a different model of holding the nations of Europe together in peace, prosperity and honesty will emerge.


Articles and interviews by:

Lord Rowan Williams – Newsnight 8 Jan 2019


Prof Otmar Issing – Interview with Central Banking


Lord Mervyn King – Review of The End of Alchemy


Prof Yanis Varoufakis – Marketplace interview  and Professional adviser interview


Roger Bootle – Daily Telegraph business article


Ambrose Evans-Pritchard – Daily Telegraph business article 


Three visions, one direction. Plans for the future of Europe as laid out in President Juncker’s State of the Union, President Macron’s Initiative for Europe and Chancellor Merkel’s Plans for European Reform. Published by The European Commission