Why isn’t Britain in more trouble?

Paul Krugman

An interesting piece by Paul Krugman here compares the economic situations of Britain and Greece. The fact that Greece is in the euro and Britain is not makes the British path to economic recovery rather easier. We can devalue, and we can run a looser monetary policy: Greece can do neither.

Paul Krugman concludes: “Really, that should be Gordon Brown’s slogan: “He kept us out of the euro.” And that’s the saving grace of the situation.”

But why is Greece the comparator? There are plenty of other countries in the eurozone that do not have economic crises tearing them apart. Why should we assume that Britain must have matched the worst that Europe has to offer?

The case for Britain joining the euro was not merely about reprinting the banknotes with different symbols on them. It was about adopting a different model of the economy less prone to booms and busts and bubbles, an economy less dependent on financial services and the City of London and more balanced across sectors and regions of the United Kingdom.

Following the same deluded and mistaken policies as we did, while also a member of the euro, might well have led to more serious trouble than we have now. But the cause of the trouble remains those deluded and mistaken policies against which advocates of euro membership have also complained.

And let’s think about these so-called solutions. What good would devaluation do? Not as much as you might think.

The theory is that the cost of British exports will fall in foreign markets so boosting the volume of those exports. But how much will those exports fall in price? There was an interesting example published in the Daily Mail earlier this week, revealing how much of the content of the British-made JCB digger is in fact made abroad. (Read the whole article here.)

In 1979, 96 per cent of the content came from the UK; today, it is only 36 per cent. That leaves the remaining 64 per cent to be imported at a higher price (devaluation pushes the cost of imports up just as it brings the cost of exports down) before it can be re-exported.

As this blog has noted about Greece, there is no substitute for addressing the economic fundamentals. That is what membership of the euro requires a country to do. In the case of the UK, the necessary tasks include rebuilding a balanced and sustainable economy and not spending money that has not yet been earned and cannot be paid back. It is odd that people who style themselves as Conservatives are the ones who reject a policy framework that would force the country to face facts.

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