Maggie Thatcher, Hard ECUs, and the Eurozone shambles

House of Commons, 30 October 1990 –

Mr. Terence Higgins (Worthing)  Will my right hon. Friend [the PM, Mrs Thatcher] take time between now and the conference in December to explain to her European colleagues what any first-year economic student could tell them, which is that the imposition of a single currency, as opposed to a common currency, would rule out for all time the most effective means of adjusting for national differences in costs and prices? Will she explain that that in turn would cause widespread unemployment, which would probably exist on a perpetual basis, and very serious financial imbalances?

The Prime Minister Yes, I agree entirely with my right hon. Friend. It would do just that. It would also mean that there would have to be enormous transfers of money from one country to another. It would cost us a great deal of money. One reason why some of the poorer countries want it is that they would get those big transfers of money. We are trying to contest that. If we have a single currency or a locked currency, the differences come out substantially in unemployment or vast movements of people from one country to another. Many people who talk about a single currency have never considered its full implications.

But wait, there’s more.

The Prime Minister: I think that I would put it just a little differently from the right hon. Gentleman [Tony Benn], although I recognise some of the force of some of the points that he makes. When the Delors proposals for economic and monetary union came out, it was said immediately by my right hon. Friend [ Nigel Lawson ] the then Chancellor of the Exchequer that this was not really about monetary policy at all but about a back door to a federal Europe, taking many democratic powers away from democratically elected bodies and giving them to non-elected bodies. I believe fervently that that is true, which is why I shall have nothing to do with their definition of economic and monetary union.

We shall continue the co-operation that we have come to establish, as nation states. The Act that enabled us to go into Europe was passed on Second Reading by eight votes and it was made very clear then that we would not surrender our national identity, that it was a matter of co-operation. It was on the strength of that that many people went in. I am afraid that it would be quite different if we went for a single European currency and a central bank and for their definition of economic and monetary union.

Mr. Churchill (Davyhulme): Will my right hon. Friend tell the House how far she believes that, when the moment comes, Germany will be prepared to see the transfer of its monetary policy from the Bundesbank to a European central bank on which it will have one voice out of 12?

The Prime Minister: I think that it is wrong to think that all the Twelve have similar votes or influence in these matters. I think that some in Germany—only some—are backing the scheme because they know that the dominant voice, the predominant voice, on any central bank would be the German voice. If we did not retain our national identities in Europe, the dominant people in Europe would be German. The way to balance out the different views of Europe, as we have traditionally done throughout history, is by retaining our national identity.

Part of the background here was the Tory government’s CRAAAZY proposal that there might need to be a period of a common currency (the “hard ECU”) and national currencies circulating side-by-side to facilitate macroeconomic adjustment and clarify the rules of the game under which the common currency — the future Euro — would be adopted.  Totally nuts, right?

21 years ago, this was being debated in the House of Commons.  It all seems to be news to the Eurocrats now.  Perhaps it got lost in the fact that Saddam Hussein was occupying Kuwait at the time.  That was back in the day when governments could handle two crises at once.  If we do end up with a northern Europe breakaway currency circulating with the Euro, should we call it the “Maggie?”

31 thoughts on “Maggie Thatcher, Hard ECUs, and the Eurozone shambles

  1. Great stuff. I can very honestly say I never agreed more with Lady Thatcher. Which is pretty easy, since I can’t recall agreeing with her on much of anything.

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  4. I was just about to type “and I bet she did explain Terence Higgins’ point to them at very great length.” However she was out of office within a few days of this.

    Yes, us Eurosceptics saw it all coming years ago.

  5. If the euro splits in a ‘strong’ part and a ‘weak’ part, where not even France joins the strong part, then barring some hard intervention à la suisse, the value of the ‘strong euro’ (essentially a new DMark) relative to the dollar and especially relative to the ‘weak euro’ will rocket and destroy the current export advantage of the strong euro countries, sending them into recession (and possibly prolonged stagnation like Japan, for similar reasons). This rebalancing of exchange rates would be good in the long run if it happened gradually, but such a shock will cost the Germans much more than a big bailout while the eurozone is still intact (and of course a bailout now will cost a lot more than it would if it had happened a year ago). Plus, a big bailout wouldn’t be a dead loss to Germany if it could leverage that money into political influence over the periphery in future negotiations on the structure of the EU/eurozone.

    The Germans have to decide if they want to play more of a British game (stay aloof, don’t gamble their money/sovereignty) or more of a French one (try to assume a position of leadership and steer Europe towards their interests). Both have their pros and cons.

  6. What a load of nonsense!

    -Unelected bodies? Do they mean the Bank of England Board? or the that of the FSA?

    -Unemployment? Is it bigger in europe than in the UK? Nope.

    -Transfers of money? Are they talking about the Pound (the Blair?) being at 1.5 Euros three years ago and the Pound (The Cameron?) being 1.1 Euros the last time I looked? Or are they talking about nominal GDPs per capita, having euro countries grown on average 50% more than the UK since that speech by Maggie? (For previous commenter Thomas, please look at GDP per capita in Ireland and UK in 1990 and today and…. well… and keep laughing) Did the eurosceptics really see this coming? It would be really sad that they saw an impoverished Great Britain with a collapsed financial system and gladly chose that option.

    http://tinyurl.com/5tpkm2k

  7. What Colin Reid said.
    Plus, a general point:
    While a single currency makes the problem of adjustment more obvious, this problem would exists also wtihout a single currency.
    The point is that there are some “stable surplus” nations (the “northen EU”), whose economy and politics seems to me dependant on continuous exports:
    While german workers are very “productive” (that is, generate a lot of “added value”), they consume less “value” than they produce.
    The difference between the consumption (wages) and the production (gross national product) makes up the profits of german businesses.
    Germany can keep a low unemployment only as long as profits stay positive, but barred big public deficits, this means that businesses cannot reinvest the profits in their home market (because profits are what remains after the demand generated by wages has been already subtracted).
    So german businesses reinvest the “excess” profits on financial stuff, that ends up financing extra consumption somewhere else (in this case, in southern Europe, say in Italy).
    But this means that Italian debt has to grow indefinitely, or else if it shrinks german profits would turn negative.
    Now suppose that Germany goes back to the DM, and Italy to the Lira.
    German business have still to sell to italians, but can chose to ask payment either in Lire, DM or $.
    a) If the payment is in DM or $, Italy debt in foreign currency would go up, and Italy would sooner or later default anyway.
    b) If the germans accept payment in Lire, Italy would simply devalue the Lira instead of going bust, but this would be a big loss for the german creditors, akin to a partial default.
    Note that the b) case is basically the same thing of devaluing the Euro (or targeting an high inflation in the Euro area).
    So the problem for “stable surplus” countries is still the same, with or without the Euro, whose presence only makes more obvious the politic problem of choosing to devalue or not the currency.
    In facts, this problem has always existed, but was hidden as long as the “total of debts” could grow more or less without interruption (mostly, IMHO, beacause of american policy).

  8. «So german businesses reinvest the “excess” profits on financial stuff, that ends up financing extra consumption somewhere else (in this case, in southern Europe, say in Italy).
    But this means that Italian debt has to grow indefinitely, or else if it shrinks german profits would turn negative.»

    Ahhh this is so close to a description of what has been really going on.

    The real situation is that the French and German political and business elites have been quite deliberately cooking their books by encouraging what is essentially vendor financing to some countries that then spent that on imports. Just like Japan has been doing to the USA with their ZIRP and carry trade, and Saudi Arabia by buying USA debentures. China has been doing that too on a staggering scale, but for a much much better reason (subsidizing USA companies into moving their productive capital to China, rather than merely subsidize underemployment).

    The political elites of Greece (and some other countries) have been obviously well aware of the vendor financing nature of the loans they received, and how desperate the lenders were to support their export industries, and never had any intention to pay them back, using “can’t pay won’t pay” as the loans went into consumption instead of productive capital (whether public or private), so they really don’t have the income to pay them back.

    A thoroughly cynical policy on both sides, veiled by stupid moralizing posturing like “ant like germans” and “cricket like greeks”.

    The underlying problem is that first world economies have been in a recession since the 1980s (even if first world capital markets have been driven into a series of bubbles to compensate for that) and there is a lot of underemployment masked by vendor financing.

    BTW Spain and Italy are very different cases from Greece etc.; Spain just bet everything on a housing bubble, and Italy has just been mismanaged into low growth and an expansion of internal parasitism, and there is nothing that broken with it.

  9. «It would also mean that there would have to be enormous transfers of money from one country to another. It would cost us a great deal of money. One reason why some of the poorer countries want it is that they would get those big transfers of money. We are trying to contest that.»

    That happens between the regions of Italy (north to south) and Germany (west to east). It also happens in a much smaller fashion in the UK, where the northeast has got 50% more unemployement than the average and government spending is about 60% of the region’s income.

    The idea is that if you have a long term plan, the UK may finance Spain today, and Spain will finance the UK if in the future positions are reversed. What Thatcher was saying was in effect “we’ll stand alone now because we think we will always want to do that, so no point in being generous to strangers now if we will not not want them to be generous to us were we to need it”.

    Usually the long term plan happens a lot more easily if there is more of a sense of a “shared destiny” and that usually happens when people from far away regions die together in war.

    «If we have a single currency or a locked currency, the differences come out substantially in unemployment or vast movements of people from one country to another».

    Here she is describing the USA experience, where there is some nationwide government spending and welfare system, and in any case people move across states to chase jobs in fairly massive numbers, and in any case different states have widely different unemployment rates and standards of living.

    Note however that currently «vast movements of people from one country to another» has become part of government policy, in particular to encourage lower wages for NHS menials and in general those who are a cost to the “middle class” (the usual example is expensive plumbers, but that’s just one particular case, it is mostly low wage people — good help is so expensive nowadays), and in any case within the EU that’s already a right (the numbers of EU people working in the UK are way larger than asylum seekers or illegal immigrants).

    Also, there were vast movements of people anyhow, e.g. large turkish, italian, spanish, east european immigrant communities in Germany even before the EU, or from Ireland to the USA.

    Of course she refers to the latter, people actually moving driven by poverty in one country and job prospects in another, not merely having the right to do so. But then within the UK this happened in vast waves (Scots to London, Northeners to London, Irish to Glasgow, Liverpool and London, …) at different crunch times in the local economies. As to that if my french or german or dutch or danish were better…

    Another interesting detail seen in hindsight:

    «I think that it is wrong to think that all the Twelve have similar votes or influence in these matters. I think that some in Germany—only some—are backing the scheme because they know that the dominant voice, the predominant voice, on any central bank would be the German voice. If we did not retain our national identities in Europe, the dominant people in Europe would be German. The way to balance out the different views of Europe, as we have traditionally done throughout history, is by retaining our national identity.»

    This has changed a bit in the recent past, the UK (and some other countries) rather than merely «retaining our national identity» (ha! how many?) have tried to undermine French/German leadership by enlarging the EU as quickly as possible to East European countries (in particular Poland) to dilute French/German weight.

  10. The Soros articles is interesting, and it has two key moments.

    The first is a glaring omission. First it says:

    «In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns.»

    Here he refers to a liquidity crisis, which is caused by risk being underestimated a bit and then overestimated a lot. I guess his point is that this is not a liquidity crisis, so it is not ordinary, and indeed he develops the following discussion implicitly assuming it is a big solvency crisis instead, without ever, very diplomatically, saying it explicitly.

    But a solvency crisis can only be resolved with cramdowns or bailouts (which are someone else’s cramdown), and he then argues that the only way to finance a bailout is to raise taxes, and as to that he then writes this astonishing phrase:

    «There is no alternative but to give birth to the missing ingredient: a European treasury with the power to tax and therefore to borrow.»

    Not only taxes have to be raised, but by a supranational power. Obviously Soros realizes that there is no chance of that happening, or at least that happening in a short time. And if miraculously a new treaty is rammed through national parliaments on an EU tax body, without direct voter debate and participation, that will be end the end of popular support for the EU.

    By saying that the only possible solution is something very very unlikely («To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable») he is really saying, again very diplomatically, that there will be a cramdown, the cramdown will wipe out the capital of major French and German banks and really hurt pension and insurance funds, and there will be a massive run on Spanish and Italian ones; and this may imply that French and German vendor financing will end removing support for employment in those countries, and EU governments will go in high inflation mode after brown/blackshirt movements of unemployed men arise and start burning greek and portuguese owned shops and beat up people with olive skins and curly hair.

    Let’s hope that it doesn’t happen.

  11. «political and business elites have been quite deliberately cooking their books by encouraging what is essentially vendor financing to some countries that then spent that on imports.»

    I forgot to mention that lending to foreigners drives down the exchange rate, which also helps exporters, even if that does not result directly in vendor financing.

    Some countries, probably most obviously Japan, have been using their ZIRP and the yen carry trade mainly to keep their exchange rate down, rather than hoping that Usians would specifically buy Japanese products (they did a lot of that of course).

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  13. Blissex wrote, ‘What Thatcher was saying was in effect “we’ll stand alone now because we think we will always want to do that, so no point in being generous to strangers now if we will not not want them to be generous to us were we to need it”.’

    You are conflating our interest in retaining democratic sovereignty with our being “isolationist” or “lacking generosity”. Also, if you read the transcript again, you’ll see that Mr Churchill’s question concerns not OUR generosity but the willingness of German’s to foot the bill:

    “how far…Germany will be prepared to see the transfer of its monetary policy from the Bundesbank to a European central bank on which it will have one voice out of 12?”

    The PM’s answer is that Germany will de facto enjoy more than an equal share of political power, so she implicitly accepts this matter is primarily about Germans being generous. She doesn’t offer an opinion about the UK being generous.

    In other words, you are commenting on what you suppose she may have thought in private, not what she actually said on this occasion (or ever as far as I know. But please do point us all to the relevant speech/book etc. if she did state her opposition to generosity towards our European neighbours. Can you do that? Thought not.).

  14. Unelected bodies? Do they mean the Bank of England Board? or the that of the FSA?

    At the time of that speech, UK monetary policy wasn’t being set by the Bank of England. That was brought in by the Labour government in 1997.

  15. Further, at the time of the speech, UK monetary policy was in fact effectively controlled by the Bundesbank and we did in fact have a locked currency.

    We had only joined the ERM a couple of weeks before that speech. Even before that, between 1987 and ERM, we were pursuing a D-Mark exchange rate target at a parity that required higher-than-Taylor-rule interest rates and occasional central bank intervention whenever the Bundesbank increased its policy rate.

  16. «The PM’s answer is that Germany will de facto enjoy more than an equal share of political power, so she implicitly accepts this matter is primarily about Germans being generous. She doesn’t offer an opinion about the UK being generous.»

    So when Thatcher said the following, in “cost us a great deal of money” and “we are trying to contest that”, she intended “us” to be interpreted as “Germany” and “we” as “the German government”:

    «It would also mean that there would have to be enormous transfers of money from one country to another. It would cost us a great deal of money. One reason why some of the poorer countries want it is that they would get those big transfers of money. We are trying to contest that.»

    as she is not speaking of the UK at all as being against being generous to “the poorer countries”.

  17. Look at this graph of who owes money to who:

    http://www.zerohedge.com/news/european-sovereign-debt-cant-we-all-just-net-along

    Now ask an eurosceptic about transfers of capital and all that jazz.

    As it happens Germany owes more money Ireland than Ireland to Germany, Uk net debt is 15 times that of Ireland and so on with many other cases. Great Britain is the most curious, it has a negative balance with absolutely every country of the chart, except Italy.

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  19. The funniest thing of it all is that if you would like to join the euro now it would cost you 50% more. That is how much the Pound has plunged since the euro exists. All this sounds like one of those La Fontaine’s fables. The one about the Grapes and the Fox. I think you guys should set a limit to when will you recognise what an huge mistake you made. I don´t know, how about when the exchange rate is 2 pounds for a euro? or 5 pounds for a euro? That gives you some leeway for some years but at least we will know there is an end to this nonsense:

    http://www.worldtrading.net/currency/valutagraph.html?code=GBP&desc=Britain%20Pound&country=United%20Kingdom

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