“The Government doesn’t have a hostile attitude to the single currency. It was a slip of the tongue.”

Kenneth Clarke 1997

We are faced with the prospect of the leading countries across three continents plunged simultaneously into crisis by attempts to fix currencies: Europe, China and the United States.

All done with the best possible intentions: namely, formation of the Eurozone, and China’s locking its currency against the US$ for so many years. But the outcome is the same and, in the final reckoning, it’s not just economic: it undermines international stability itself.

This week, as we approach the Brexit vote - which is but one small outcome of these wretched attempts to fix world currencies - we look at why currencies must be allowed to float freely.

Possibly the first rule of economics to be explained to any student is the way that imbalances of supply and demand are brought back into line by price movements. 

The most significant outworking of this rule for international relations is how currency exchange rates allow those countries which are naturally best at delivering supply to be balanced with those which generate excess demand. Hence until the 1990s, when the Exchange Rate Mechanism (ERM) was put in place, Germany saw continual rises in its Deutschmark while Italy always saw continual devaluations of its Lira.

Meanwhile, when China became the powerhouse of world production, the Renminbi should have risen in value against the US$ as the balance of trade started to become one-sided.

Of course there are very good reasons why the currency fixers thought better: the European Union project was driven by devastating 20th century European wars, and China’s drive to shake off its Third World status, which had impoverished its citizens for so long, seemed to provide justification for fixing its Renminbi.

But the time of reckoning has now come, and it’s come all at once. Fixing currencies within single political control is fine - Government can move resources and work from stronger regions to weaker regions – but, as Sir Martin Jacomb wrote in 1996, if there is no single political control such a project is doomed to failure.

In Europe, that failure is driven by migration and unemployment: hence Germany, Italy and now France are all beset by populist political extremes which have had enough. In the UK, Brexit is often seen as our problem, but it has also been caused by that same forced and premature introduction of the Eurozone: because migration and unemployment in the Eurozone was also the main driver for our own referendum result.

Formation of the Euro has literally ruined the European Union project.

The titanic trade war struggle between the United States and China, which is so unsettling world markets at present (see our commentary on 26th November), may actually be an escape valve which will stop Trans-Pacific relationships becoming much worse. Whatever other lessons are drawn from the Trump presidency, history may yet show that, in seeking to address the huge trade imbalance caused by fixing the Renminbi, still worse outcomes may have been avoided.

Throughout this year this commentary has been arguing that getting the United Kingdom out of Europe might allow European political integration to emerge, albeit belatedly, in order to allow central control of the Eurozone imbalances. So only one month ago on 5th November we proposed that the next referendum should be across the EU (excluding the UK), for a directly-elected president.

However the riots in France are proving that this may be wishful thinking: it looks as if it is already too late to save the Eurozone. The now deeply unpopular President Macron has been the only major political leader who understood the need for integrated political control, and it now seems that he also is holed beneath the waterline.

We should not, therefore, be surprised to see the whole structure of the Eurozone begin to disintegrate in the near future and perhaps, rather than seeking separation, we should turn our attention to helping to rebuild a looser, less bureaucratically run, family of European nations: such as that which existed at the time we joined the European Common Market in the 1970s. If Brexit is thwarted over the next few days, perhaps we should turn our attention to an orderly break-up of the Eurozone, in order to allow the European Union to re-stabilise.

If politicians fail the people, business and markets with a social conscience can take the strain. The UK, and London in particular, is blessed with some great economic strategists, and we will need every bit of those insights to cope with the massive economic disruption which will see us return to national currencies in Europe.

So, if these are the death throes of the currency fixers, prepare to let markets take the strain.


Gavin Oldham

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