The future of economic governance in the the EU - European Union Committee Contents

Memorandum by Sir Martin Jacomb, Canary Wharf Group (EGE 13)


  While we remain interested "bystanders" as the Euro evolves, developments within the EU concerning the regulation of the financial sector have become matters of vital interest to the UK.

  Everyone can agree that the creation of the EU single market in goods and services was "a good thing", whatever view is taken on the more fundamental question: whether the UK should be a member of the EU or not.

  This paper does not address those questions; but is written on the assumption that the UK is and will remain a full member of the EU and that the single market of the EU will not be undermined or limited by trade restrictions.

  The introduction of the Euro, however, has not yielded the anticipated advantages. It has, on the contrary, inflicted an inevitable loss of competitiveness on the Eurozone as a whole.

  I attach two articles I wrote 14 years ago, before the introduction of the single currency, which explains why this was inevitably going to be the case. Please bear in mind that these were written for a Sunday newspaper's readers not familiar with the subject; so they are in popular, somewhat elementary language. However, they do explain why, without the option of devaluation, an uncompetitive national economy within the Eurozone can never overcome this problem of competitiveness.

  There are highly competitive and successful countries within the Eurozone; but there are some which are not, and whatever is done by way of financial transfers from the former to the latter these, will not make the latter competitive, but will merely alleviate hardship temporarily. Indeed, the process will thereby discourage moves towards competitiveness.

  So we were right not to join. We needed, and still do, the ability to devalue our currency to remain competitive, there being no other way of reducing real labour costs in a democratic society.

  Whether the Eurozone will be dismantled to overcome this difficulty is unknown and unforeseeable. The economic desirability of this is great, but the political imperative against the course of action is also powerful. A crisis is brewing at the moment, but the outcome still remains uncertain.

  Our national policy ought to be to encourage the dismantling of the Eurozone, because it is overwhelmingly to our advantage for all EU countries and the EU internal market to be successful (since half our exports go there). But our voice on this point carries little weight.

  It is important to note that defaults and subsequent restructuring of national indebtedness by governments of Eurozone countries can, and will probably, occur; but writing down or eliminating sovereign debt will not make the debtor country concerned competitive. It will merely alleviate distress temporarily. Moreover, treaties to limit fiscal deficits and discourage bad economic management will fail, just like the Stability Pact did, because national political realities will prevail, even if there are financial sanctions for treaty breaches.

  The introduction of the Euro was a political act, and the outcomes which have occurred were seen as possibilities by its proponents. The idea was that because of this, the pressure for "federation" of economies, and hence nations, would become irresistible and that national sovereignty would be subordinated to government by the combined successful Eurozone nations.

  This is, however, now irrelevant. We should face the reality of the future, and lean towards whatever course is likely to make the Eurozone and the EU as a whole more competitive, bearing in mind that the real competitive pressure comes from the developing nations, the BRICs in particular.

October 2010

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