photo © The Prime Minister's Office
Petros Fassoulas is the Chairman of the European Movement UK. He also published this article in The European View and the New Statesman.
Another quarter, another set of negative GDP figures, another drop back in recession for the British economy. The much talked about but yet elusive recovery seems to be slipping away from our grasp once again.
Many, especially those on the left side of the political spectrum, will tell you this was inevitable. No surprise. Nor is it surprising that the government has been quick in coming out and blaming everyone else for the state of the British economy. That is what politicians, of all political colours and predispositions, do best.
According to the script, what is really to blame for the economic predicament we are in is the sovereign debt crisis in the eurozone and the economic crisis it has generated. With our main trading partners in economic contraction our chances for recovery are significantly reduced, the story goes. Not to mention that the rising cost of raw material is pushing our inflation rates up. While the global banking crisis is forcing the Bank of England to print money and inject billions in the British banking system. At the same time, the printing of money is reducing the value of our currency, making imports of German cars, Japanese DVDs and American smartphones we love so much more expensive. And all the above together is making the Bank keep interest rates in levels so low that are starting to become unsustainable.
So much for the cherished economic, monetary and fiscal independence of Britain. The fact of the matter is that the government is, to a large extent, right. Most of what a very open but small and peripheral economy does is affected (and often dictated) by events that take place elsewhere.
The value of our GDP, the level of our inflation and interest rates, the very health of our economy are, by the government’s own admission, dependent on outside, European as well as global, factors. All we can do is tighten our belts and hope people will keep lending us money in affordable terms (their words, not mine).
As a result it is a bit disingenuous for the current (and previous) government to go on exclaiming the need to maintain our economic and monetary sovereignty one moment and the next admitting that the very notion of ‘sovereignty’ is void of meaning in the context of the internationally integrated economy Britain is plugged in.
We are not just affected by the state the European economy is in. We are the European economy, an integral part of it at least. Our trading inflows and outflows, our financial services sector, our supply chains and the source (as well as destination) of investment are one with that of the EU’s. And for good reason, this is the biggest market in the world and one of most mature and sophisticated economies. Britain prospers when the EU economy does well and it suffers when it stagnates.
The plot really thickens when one keeps in mind that the EU has engaged in a process of monetary integration, soon to be coupled with fiscal and political union. No matter what the immediate and short term problems of the eurozone (and its institutional architecture) are, the eurozone and its single currency are so systemically important for the EU (and global) economy (and the investment made and benefits created so great) that it is a matter of when rather than whether the eurozone will sort itself out and continue its path towards becoming a global reserve currency.
Before the sovereign debt crisis in Greece and the burst of asset bubbles in Ireland and Spain the euro had become the most held currency and the de facto second reserve currency. It has maintained that status throughout the financial and debt crisis of 2008 and 2010 and it has also kept its value, while global powers like the US and China have verbally and practically shown their confidence in the euro.
As a result we will soon find ourselves in a world where the global economy will be dominated by 2, maybe 3, currencies, the US dollar, the euro and the Chinese renminbi. A situation that according to academic research will contribute to the re-balancing of the global economy, away from the unipolar and destabilising current system and towards a more sustainable multi-polar system (Reforming the International Monetary System, CEPR, http://bit.ly/oQHoNy).
The question is what happens to small and peripheral economies like Britain’s, with a freely floating currency like sterling, when they get caught up in the headwinds of those 3 global reserve currencies and the enormous economies that underpin them.
Some people are forecasting that Judgement Day is approaching for the Eurozone. But the Armageddon they are predicting (or hoping for) is not going to take place. It is actually Britain that will have to make some important judgement calls in the not so distant future about how it wishes to welcome this brave new world. On the side-lines, affected by the elements of economic weather but unable to have an effect on them. Or as part of a strong and global currency. The sooner we start discussing the merits of that question the more prepared we will be for when the time comes to make this decision.