By Tim Worstall Economics Last updated: May 9th, 2012
The euro is doomed to fall apart: no, not because I'm some nasty man in UKIP but because the basic idea was such a terrible one. Our chart above (from JP Morgan Asset Management, which you can see more easily by clicking here http://www.theatlantic.com/business/archive/2012/05/the-funniest-graph-ive-ever-seen-about-why-the-euro-is-totally-doomed/256793/ shows just how terrible it was. It would, in economic terms, have been better to have a new currency for all countries beginning with the letter M than for the eurozone. Or for all countries that have the 5th parallel North passing through them.
Yes, of course, we all know, the euro is the bright new dawn, the vital step in stopping Germany from invading France. Again. No one seems to have noticed it that they managed it last time and having experienced the place seem to have no desire at all to go back. So this might not be a problem that needs a solution.
However, let's look behind the political posturing and ask ourselves whether, in economic terms, the euro was a sensible idea. The structure we need to help us decide is Robert Mundell's concept of an Optimum Currency Area. We should look at things like language barriers, labour mobility, capital, the similarity between economies, their reaction to external shocks – essentially what has been worked out for us in that chart.
And, as you can see, it's a blitheringly stupid idea to try and push countries into the same currency just because they happen to be next door to each other. People would have been better off if we'd insisted that the c. 1800 Ottoman Empire had the same currency again: Tunisia, Turkey, Israel and Greece. Which is a real indication of how dumb it was to try and get Greece and Germany into the same currency.
So a very silly thing done by those Very Serious People who have decided they'd like to rule us.
There is one further thing. It is possible to take an area which is not an optimal currency area and make it more so. This is what Lord Mandelson is talking about when he parrots the line about a "fiscal Europe". The idea is that if the rich areas send money to the poor areas then the effects of being lumbered with the wrong currency can be mitigated. As indeed they can: London sends vast amounts of money to the north of England and Scotland and this helps reduce the impact of the Pound Sterling itself not quite being such an optimal area.
Over larger areas and numbers of people, the US is regarded as a good example. However, it is worth looking at quite how much money has to be sloshed around America to achieve a single currency. Some would argue that it's the welfare state bit of the Federal government, perhaps plus the military, that does this. That's about 5 or 6 per cent of US GDP. Others argue that it's the whole of the Federal government that does it, around and about (outside current blowout deficit times) some 20 per cent of the entire economy.
Which is fine if that's your sort of thing. But now try and move this over to the European scenario. The US government, all levels of it, takes some 35 to 40 per cent of GDP. That's two fifths of everything that everyone produces in a year. And this is after they've done that fiscal sloshing around to make up for having a single currency.
Here in Europe, governments take 40 to 50 per cent of GDP, two fifths to one half, before they've started to chuck the cash around to pay for the vanity project of the euro. We'd have to take in tax another 5 to 20 percent of everything produced and ship it off to the poor countries to achieve what the Americans have: a single currency that doesn't cripple those poor areas.
Five per cent of the UK's GDP is £75 billion or so: that's more than all council tax and all business rates. Twenty per cent is £300 billion: more than all VAT plus all income tax.
Can we see any possible future in which we (or the Germans, the Finns or the Swedes) agree to pay such taxes so that we can build a Common European Home – or, if you like, to subsidise the countries which we really shouldn't have a common currency with?
No, quite. I can't, either.
Look at that chart again. The UK and its English speaking offshoots: the US, Canada, Australia, New Zealand and so on. They make up a more logical single currency area than the eurozone. The euro was and is an insane economic idea balanced on the nonsense upon stilts of a very silly indeed political ideal.
And, let me remind you, just because you want to ignore economics does not mean that economics is going to ignore you.
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