If I were a German Taxpayer, I'd be Spitting - 19th November 2011

If I were a German taxpayer, I would be outraged by what has happened to the Euro, and at the prospect of having to pay for it. Little wonder that German politicians are responding to the voter outrage and, at least for the present, refusing to do anything of the sort. It was not always so. I recall visiting Germany in 1976 and being astounded that the enormous anxiety and resistance to the idea of abandoning the Deutschmark was not reflected in any way by the discourse of politicians as they carried on regardless. I put it down to their bizarre voting system whereby anyone serious about getting elected needed to address the concerns of Chancellor Kohl and the party leaderships rather than mere voters.  Now the politicians have started listening to what the voters are saying, perhaps they recognise that the people were right all along.

The Germans were assured that the financial stability that the Deutschmark stood for (and, of course, all that had created it – like relatively high taxes, industrial discipline, and sheer hard work), would equally be a virtue of the new currency. They certainly didn’t imagine that they were opening a joint bank account with their impecunious southern neighbours, but that is how it looks to have turned out. All the promises about financial discipline, the stability and growth pacts, came to very little. A blind eye was turned to those countries that were allowed to join having fudged the figures and without actually meeting the entry criteria. Their habits didn’t change and the markets from whom they need to continue to borrow are punishing them with ever higher interest rates, seriously challenging their ability to pay.

We may crow ‘we told you so’, and yes, we did. I remember the dire warnings from William Hague in the run up to the 2001 election about the consequences of joining: he likened it to being stuck in a burning building with no exits.  At that time the other two party leaders were resolutely in favour of joining the Euro. I am certain that Tony Blair never pushed it to a referendum because of the risk posed by the Conservative Party remaining outside the cosy establishment consensus, unlike the stitch-up of the 1975 Common Market referendum when we were bullied by all three political parties campaigning on the same side.

Interestingly, it still remains official Labour policy to join the Euro when the ‘time is right’ and one of of George Osborne’s first duties as Chancellor was to close down the Treasury section charged with planning for our accession to the Euro. We must not get carried away however, contemplating our good fortune and good sense, we should remember two things. First, we were as impecunious as the worst of them: long before the banking crisis Britain was stoking up Billions and Billions of debt every year -even at the height of the economic boom- just like Greece and the others. Our only saving virtue is that we have now implemented a plan to eradicate our deficit in which the markets have such confidence, that we are able to borrow from them as if we were virtuous Germans. Second, despite being outside the Euro zone, the chilling effect of its crisis has snuffed out our economic growth, and with it the export led increase in employment that was such a feature of our recovery only a year ago. If the Euro collapses it will take us, and the rest of the world economy with it. Those euro-sceptics who gloat at the disaster facing the euro need to focus a bit more on what it would do to us.

We believe that the cure is for the European Central Bank to act like the Bank of England and stand behind the Euro as a ‘lender of last resort’. Germany, haunted as it is by the experience of hyper-inflation when in 1922 the Reichsbank printed money to solve their problems, does not care for the idea. The alternative is to use real money which –now that the Chinese have declined- means European money most of which will be German money, which brings me back to my starting point. We wait as Rome burns. At the eleventh hour Germany will have to decide which is more important to it, saving the Euro, or their beliefs about the proper role of a central bank.  Persuading and waiting may be frustrating and damaging – but can you blame them?