We need to be out of the Single Market before the euro blows

We need to be out of the Single Market before the euro blows

Bob Lyddon is author of The Euro currency cul-de-sac, published this week by Global Britain.

Retaining a share in the cost of saving the euro from its inevitable decline will be the price Britain has to pay if we chose to stay in the EU’s single market. Seventeen years into the life of the euro, all the other 27 EU Member States who are either in it, committed to joining it or pursuing policies in exact alignment with it, have foregone all semblance of pursuing orderly economic growth with full employment within the context of price stability: the euro formula.

Instead it is a scramble at the member state level to kick off so-called strategic investments – meaning very large projects funded through the EU itself and the European Investment Bank, in both of which the UK carries a major slice of risk. This programme is called the European Fund for Strategic Investments but there is no fund, just more borrowing and a political agenda to spend a lot on infrastructure that may or may not lead to economic growth in the long term.

In the short term the very large cost of these projects gets added to today’s Gross Domestic Product, creating a semblance of stability and/or growth. The loans – not borrowed directly by the government – disappear into the haze of Eurozone secondary public sector debt.

The European Central Bank’s contribution is to fund commercial banks against collateral of questionable quality (bonds issued by private companies, illiquid, rated as low as BBB-), since these banks cannot fund themselves through deposits (private savings creation is non-existent) or interbank deposits (other banks won’t lend to them).

The ECB is also maintaining an invisible bailout mechanism through its payments system, TARGET: Eurozone debtor states borrow back on an overnight basis what they have paid out (usually to Germany). This is structural long-term funding but is contracted on a day-to-day basis because the amount – €600 billion – exceeds the size of any of the formal bailout mechanisms (European Financial Stabilisation Mechanism, European Financial Stability Facility, European Stabilisation Mechanism) and would not be agreed if it were done overtly.

All overdrafts within TARGET are secured but again the security quality is compromised because the ECB allows the Eurosystem members – the National Central Banks – to secure their loans according to the ‘A’ and ‘B’ collateral lists that were spurious even at the time the Euro was launched:

Type ‘A’ is government and government agency bonds of any Eurozone member, eligible as collateral at any Eurosystem member: Ireland, Italy, Spain, Portugal, Cyprus etc still count as Eurozone members, so the central banks of these countries can borrow by pledging the government and government agency bonds of their own country; also, loans are made without a meaningful haircut, and without recognition that the borrower and the collateral carry the same credit risk, called correlation;

Type ‘B’ is eligible only at the Eurosystem member for the country in which the collateral is created. In France this type of collateral would include unused French postage stamps and – unbelievably – Paris metro tickets.

These are appalling aberrations for a central bank to indulge in to keep the ship afloat. The EU line is to reinforce these measures with public efforts to avoid stagnation turning into recession and depression – although that is actually where the Eurozone is. “Price stability” has been achieved by prices initially rising to the highest common denominator and then stagnating.

Eurozone inflation is well below the ECB target of 2% and in some countries there is nominal deflation. GDP growth is even lower than inflation in many Eurozone countries – they are in recession in real terms. There is no hint of “balanced economic growth”, or “full employment”, the other promise of the euro. Indeed unemployment exceeds 10% in many Eurozone countries, and youth unemployment is catastrophic.

The UK had a choice as to whether to remain embroiled with the euro, and to implement a continuing legislative programme whose aims are inextricably linked to the protection of the euro. We chose to get out. The euro is a disaster waiting to blow and the quicker we de-link the UK the better.