The eurozone isn’t going to fall apart – yet

I went to listen to Peter Oborne talking about his new pamphlet, Guilty Men, last week. He likes a bit of a rant of course, but he makes some good points too.

For much of the last decade there has been a general consensus among the political and media classes that the euro is a good thing, a consensus which the BBC, most columnists and most business organisations all signed up to. It is also true that in many cases, those putting the other side of the case were treated not as sensible sceptics, but as “xenophobes and madmen.”

Take Diane Cole, former economics editor of The Independent and now vice chair of the BBC Trust. In 1999, she claimed that “the defenders of sterling are in the main a group of elderly men with more stake in their past than our future. They clothe their gut anti-Europeanism and Little Englandism in the language of rational economic argument.”

Johann Hari – an Independent columnist now more famous for fabricated research than anything else – took it further, accusing sceptical Tories of “Hun-bashing, frog-thrashing xenophobia.” Nice.

But everyone saved a particular nastiness for William Hague (the same William Hague so praised by George Osborne yesterday). He sprayed “generalised errors that long ago stopped even attempting to connect with the truth,” said Hugo Young in 2000. They also went for poor Iain Duncan Smith who was regularly connected to “a string of extreme anti-Europe groups” and at one point even the Ku Klux Klan.

However, while it may be the case that the media lost sight of both its manners and its ability to question the political consensus clearly, it is also worth remembering that whatever the nation’s columnists may or may not have thought, Gordon Brown clearly agreed with William Hague: he was the one who made sure that sterling survived to tell the tale.
I also wonder if it is worth spending too much time worrying about all this. After all, what can we learn from it? It reminds us that conventional wisdom is very often wrong. But so has almost every event of the last four years (I give you the banking crisis, the gold price, the sovereign debt crisis, the fact that getting Vitamin D3 is more important than keeping out of the sun, and the 19% fall in the FTSE 100 in the last ten years just for starters). That’s the way of it.

Oborne also tells us we should “cherish eccentricity,” on the basis that it is the single currency supporters who turned out to be cranks and Hague who turned out to be sane. But most of the eccentrics I know are irritating attention seekers. The likes of Hague were simply ordinary politicians being mis-represented.

Oborne offers a few more lessons along the lines of “it is time for the euro supporters to apologise” but the one I think that he most thinks we should learn is this: “Karl Marx was right – economics trumps politics.”

However, I suspect that in the short-to-medium term this is a pretty dangerous assertion. Oborne, along with many other euro-sceptics, now thinks that we should let the eurozone break up. “Let Greece go,” he says. But this is madness. He might be right that the euro should never have been invented and we should not be where we are. But now that we are, going backwards just isn’t that easy.

If it was just about Greece (as Argentina’s default was just about Argentina) that would be fine. Greece makes up around 2% of total eurozone GDP, not enough in itself to take down the eurozone. But as surely everyone must know by now, it isn’t just about Greece. The stakes are far higher than that.

A default in Greece within the eurozone might be priced in. But Greece leaving the zone? How? There’s been a run on most Greek banks already (who’d keep their money in euros that could soon be drachmas?) but the second there was a hint that Greece might be ‘let go’, there’d be a run on every other bank in Spain, Italy, Portugal and probably France as well (BNP, Soc Gen and Credit Agricole have all seen their share prices fall by 40% plus this year – probably for good reason).

The resulting meltdown of the European and probably global banking system would be thoroughly unpleasant. Bungle it, says Liam Halligan in The Sunday Telegraph, and it won’t be long before spooked creditors “pull the plug on some big eurozone government leading to non-payment of wages and benefits, serious social unrest and a single currency break up.” A very serious shock indeed.

Note that nothing has happened yet and already the odd bank is in trouble. I don’t imagine that Oborne imagines that letting Greece go would mean there’d be one-time middle-class old ladies and children begging on the streets of Madrid. But there probably would be.
However, the truth is that if not over the long term, certainly for the medium term, politics can trump economics. Governments can give their central bankers the right to print money, they can leverage rescue funds a hundred times, they can place capital controls around all sovereign borders, they can introduce more kinds of financial repression than we have yet thought off; they can actively encourage inflation (leveraging up the European Financial Stability Fund (EFSF) is just another form of quantative easing (QE) says Halligan).

And while a good many people might think they shouldn’t – and we all wish we weren’t where we are – that is what they are most likely to do. The eurozone doesn’t make rational economic sense and it will fall in the end. But for now I reckon politics are likely to trump economics. They often have before.