Back to the Fiscal Future


I’m old enough to remember the Drachma and the Franc. So here is some history off the top of my head… The EU has previous form when it comes to money matters. If we want to talk about financial disasters and economic impact of leaving, perhaps it might also be worth a glance at the past for a hint (if form is anything to go by) at what we might expect if we remain in the EU. Money management and financial acumen? Sorry it’s boring, bear with…

The Exchange Rate Mechanism (ERM). The EU wanted monetary union really badly. So as a first step they invented the ERM and a virtual currency (no not bitcoin that is a real currency). The ECU; remember the ECU I thought it was an antipodean bird. I think the idea was that all European currencies would be measured against the ECU and the individual exchange rates for each real currency had to remain with in a margin fixed against the ECU. You are not alone. This is such a bad idea and everyone knew it at the time but we all got caught up in this ever greater union idea. You can’t fix exchange rates it’s artificial and artificial effects always have unpredictable and unintended consequences on complex systems like the world. Well nobody understood the ERM except some smart guys in the city who saw the ERM as an opportunity to make money on the currency markets. If you know the price of a commodity cannot move past a fixed point it sure makes betting on its future price easier. So we got in a terrible mess and the UK was ejected from the ERM. Black something-or-other day and 15% interest rates, howdya like them mortgage rates?

Next the Maastricht Treaty, yes I remember that endlessly filling the newspapers too. The single currency was supposed to accelerate the integration and levelling of the different economies in the EU. Arguably expansion had already gone too far but we plough on determined to absorb the eastern European countries whether it’s good for them or not and plough on with the single currency idea even though the ERM had already failed with a less diverse set of economies. One problem with the Euro is that it throws away an important fiscal weapon, the exchange rate. Yes the ERM was bad enough trying to artificially restrain exchange rates, the single currency removes them all together, genius. Governments previously had the ability to dampen shocks by effecting changes to the exchange rate. So removing that made things a bit tricky for starters.

Despite that things might still have been OK but the EU is bad at following or enforcing its own rules. The fragility due to lack of exchange rate was probably sure to cause a cluster poo storm like the crisis we see in Greece because the EU ignored the other bits of Maastricht like requiring a budget shortfall less than 3% of GDP and public debt less than 60% of GDP (I had to look that up, I’m not some weirdo who remembers this boring detail I just remember there was a thing). Greece and Portugal were just waved through and, big surprise, deficits. Yes the thing that now fills our newspapers. Deficits above the Maastricht target have led to gimongous public debt. => Euro crisis. No bailouts is another Maastricht rule now festering in the slurry pit.

So at the time it sounded crazy to try to merge such diverse economies. How does it sound now? Looking at the current list of member states I dunno the economies still look quite different to me.

Euro, what’s he talking about we are not even in the Euro. No, but we are affected by it because if our trading partners suffer, we suffer. But at least David’s new agreement guarantees we will not pay for Euro bailouts directly. Not so fast, I’ve already posted about David’s agreement.

With hindsight economists now pretty widely agree that perhaps the Euro was a step too far.

So what great idea will be next? Just guessing… Closer and closer union, single army, single taxation…. Whatever it is it might be a good idea or it might not but we will never know because the smoking gun of past performance tells us the EU will push it too fast mess it all up and then take too long to fix it.

Put down the fiscal pistol and step away from the money. Please.


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