If eurozone member states such as Greece have allowed their domestic costs to rise and their economies to become uncompetitive, there is a long hard road back to competitiveness again. Reforms are needed in their labour markets, and there are many inefficiencies in transport, energy and services that need to be dealt with. All this has to be done against the background of a fixed exchange rate,
Countries outside the eurozone, notably the UK, have the option of easing the path to reform by devaluing their currencies. The pound has slumped in value by around 30 per cent since the financial crisis first broke. Devaluation is not a route to prosperity – it makes everyone poorer! – but it can make some of steps back to prosperity a little easier to take.
If the euro did not exist, many more countries would have the devaluation option available, but, contrary to what Daniel Hannan has suggested, that that would make matters worse. This is for two reasons.
First, any change in exchange rates is in itself a cost. Imagine if the foot fluctuated against the metre, or if the number of minutes varied in the hour. The change in the relative value of money between two countries has the same kind of effect. Trying to restart economic growth by loading new costs onto business would be counterproductive.
Secondly, while a one-off devaluation might improve the international competitive position of the devaluer – as it has for the UK – it harms, by definition, the competitive position of its trading partners. So if every country is trying to gain an advantage by devaluing, all that results is that every country does harm to everyone else. Daniel Hannan’s notion of devaluation all round is simply impossible to achieve, and would be mutually damaging to try.
The 1930s were characterised by competitive devaluations of this sort; in the current economic crisis, that strategy has, fortunately, been rejected so far in favour of interdependence and coordination, but for how much longer?
The BBC reports that the Swiss government is holding an emergency meeting to discuss the recent rise in the Swiss exchange rate. The Swiss franc is up 30 per cent in a year against the dollar and also against the euro, which is very bad news for Swiss exporters. Switzerland’s Federation of Small and Medium Businesses is even reported as calling the situation a “crisis”.
Were it not for the euro, many more European countries would be contemplating the Swiss problem, and planning how to do harm to their neighbours in retaliation for harm that had been done to them. For all the problems that Europe is facing right now, at least we are spared that one.