What happens if a country can’t devalue its currency to regain competitiveness? The EU’s intentions may be fine but are they leading to the outcomes it intends? Why has stressing the economic dangers of leaving the EU not persuaded a UK majority to remain? Would another vote on EU membership settle the matter?
Fiat Money
‘Fiat money’ is not what Italians might call their national currency if Italy ever leaves the eurozone (EZ). ‘Fiat’ derives from the Latin verb facere,“to make or become”; ‘fiat money’ is not tied to a commodity like gold or silver but it can be used to buy stuff, provided the issuer is trusted.*
What happens in a normal, sovereign country when debt piles up too far? The country prints more banknotes and inflation rises so that the debts are eroded without huge sacrifice. Of course lenders become reluctant, so the country raises the yield on its new borrowing to tempt them back. In some cases this is a regular cycle, Argentina is a prime example but in the past Spain and Italy were others, if on longer cycles. Timing it right can be very profitable for investors and currency speculators, getting it wrong can be a disaster.
Countries that can’t do this include emerging economies that must trade using recognised currencies like the US dollar over which they have no control; they also include EZ economies. Their remedy is internal deflation – spending less on wages, pensions, public services and investments. However this shrinks the economy so that the debt grows relative to what the country produces. Taxes are harder to afford, which encourages the black economy. Without defaulting or devaluing the country cannot regain competitiveness, its people are stuck with a gloomy future.
Britain devalued the pound when it abandoned the gold standard in the thirties but suffered far less than the USA which didn’t abandon it for another 40 years. Britain devalued again in the sixties when Harold Wilson famously told the people that the pound in their pockets and purses hadn’t devalued; he was ridiculed but he was right so far as UK-sourced products were concerned though imported ones cost more, but that was part of his solution to the ‘balance of payments crisis’ he was facing. In the nineties it happened again when on Black Wednesday the UK left the European Exchange Rate Mechanism. Each of these events gave the country time to adjust and recover. So far Britain has never actually defaulted so retains some trust. Most of the world has learned its lesson and avoids fixed exchanged rates to allow natural adjustment but EZ members are stuck while they remain in it.
*The Cambridge English Dictionary defines fiat as “the giving of orders by someone who has complete authority”. The Greeks have learned what fiat money means, the Italians are learning.
A Meretricious Union?
Meretricious – ‘apparently attractive but having no real value‘.
In our view the EU was inspired by a worthy ambition but then chose the wrong target and an unworthy method of achieving it. It has since achieved nothing of great importance and nothing at all that could not have been accomplished by better methods. Meanwhile it has inflicted great and unnecessary damage to many of its citizens and undermined proven, superior models – democracy and balanced collaboration for example. Some nations, groups and individuals have gained but at the expense of others; Britain as a whole has not gained.
The ambition was peace in Europe, the method was by the rule of ‘philosopher kings’* who knew better than ordinary citizens, and the target was a single nation, despite this not being a proven route to peace and harmony (other than by popular approval, perhaps).
The EU itself did not create or sustain peace, it wasn’t needed and indeed it seems now to be causing instability that may prove dangerous. Nor has it achieved extra wealth overall. The standards and cooperative bodies that have been of benefit were either adopted from other bodies and relabelled as its own or could have been achieved with a lighter hand in a better form of union.
The evidence and arguments for our assertions are given in previous posts. Here are some of them:
Brexit – a Brief Summary, An Alternative for Europe, EU: Greatest Hits,
More High and Mighty, All our yesterdays, On the Other Hand,
* Plato’s description (‘aristoi’ in the Greek); they should have sufficiently high moral values to put the interests of the state above self-interest.
Plus or Minus?
It seems plausible that the core beliefs of most Remainers and Leavers are equally driven by idealism – either that working together across nations is a virtue that will ultimately lead to good outcomes, or that freedom from remote autocracy is in the best interests of citizens (provided the alternative is not a local autocracy or something worse). From these starting positions both sides will tend to look for confirmations; Remainers will highlight successful collaborations (as they see them) while Leavers will point to rules, regulations and judgements that appear overbearing or unfair.
What is interesting though is that the anti-Brexit arguments tend to focus on the economic dangers of leaving the SM/CU far more than on the positives – the economic and political successes to be expected. Currently the dangers and fragilities within the EU are approaching a high point, in contrast to the situation at the time of the previous (1975) referendum, so we hear about the downsides of leaving more than the upsides of staying.
Numbers Game
We’re in the current messy situation because, instead of leading, Theresa May has been led by opposing factions and by the EU. She has tried to square the circle and has found the answer is never-ending, like pi.
Many ‘experts’ are wet blankets, mired in detail, much of which could be managed with vision and determination. Remember the ratios of bombers, battleships, frigates or fighter planes and consider who were favourites to win when Britain was the last nation still standing against Germany in July 1940? Numbers alone did not enable us to predict outcomes.
We know that opinion polls are unreliable [1] so we present this one with caution. The result suggests that a large majority of Britons have a lower opinion of the EU than ever, regardless of whether they believe their country should stay or leave the EU. If that’s true how might it affect a potential ‘people’s vote’? More importantly, many will not be reconciled if we remain or leave with a poor deal, the issue will not have been resolved.
[1] Snippets-2: Devious in Davos
This EU Won't Work 