Europe could halt UK growth
Joe Wright, 8 October 2014
In August, the great German machine posted a 4 per cent drop in manufacturing output, the steepest drop in production since 2009. It sparked worries that Germany will enter recession. Some have pointed to a shift in holiday timings from July to August to explain the dip, particularly the 25 per cent fall in auto production during August which led to simultaneous shut downs at plants. Nevertheless, the average for both months remained 0.7 per cent below the second quarter and continued a longer term trend in production since January.
What has caused this stumble and what are the implications? The trade sanctions on Russia have undoubtedly played a role with energy now more expensive in Germany. More importantly, Germany’s biggest trading partners, France, Italy, Brazil and China, have all experienced slower economic activity this year, stifling demand for German goods. The IMF predicts the slowdown in Chinese growth will continue, perhaps falling below 7 per cent for the first time since the early 1990s.
Considering that Germany is the workshop of Europe and many Eurozone members remain weak after the Euro crisis, there are huge implications in this: the IMF estimated a one-in-three chance of the Eurozone entering another recession this year, the highest of any region (Japan was given a 25 per cent chance, the US roughly 14 per cent). France and Italy have been flat lining and teetering on the edge of deflation, and with Germany – responsible for 29 per cent of Eurozone output – now performing well below capacity, the fears seem very real.
Britain has managed to stimulate its economy through quantitative easing (the Bank of England buying government bonds from corporations at inflated prices to get more money into the economy), something Eurozone countries have unable to do because of Germany having to foot the bill and because of historic fears of inflation. There are signs attitudes are changing.
Option one if Germany does slide into recession is to allow the European Central Bank to print money (somewhere in the region of a trillion euros). Option two is to drop austerity targets, ignoring the Stability and Growth Pact which demands member states’ deficits must not exceed 3% of GDP and public debt not exceed 60% (more than a third of EU countries exceed the targets and France wish to break with SGP altogether). Calls for infrastructure spending to stimulate growth have long fallen on death ears in Brussels and Berlin. It is unlikely that a slowdown in German production will convince the Chancellor to budge on this, especially given that most expect only a temporary reduction in production. Domestic demand in Germany remains strong, inflation is low and wages are rising, which will harden German resolve.
What does this mean for the UK? It is widely acknowledged that the UK needs an export-led recovery to inject stability into its economy. Following 2009 it was argued in Parliament that without exports, there would be no recovery. Either way, the Eurozone remains one of the UK’s biggest markets, for the obvious reasons of proximity and demand for higher quality goods. No recovery in the EU means a big barrier to that export-led recovery the Government still hopes for.
There is no mystery about what is happening in the Eurozone. The Euro is a bird which will never fly in the long term because it is based on an absurd premiss, namely, that 18 countries of vastly differing size and economic capacity can use the same currency without political institutions which create an overarching federal power that not only decides on fiscal policy, including the shift of money from the richer to the poorer parts of the Eurozone but has the practical means of enforcing its will even against states as powerful as Germany and France. As such overarching powers will never exist in practice the Euro is doomed.
The problem from Britain’s point of view is that the doom may be quite some time coming because of the Euroland elites’ religious devotion to the idea of a United States of Europe and, more practically, because of the Euro’s status as the second largest reserve currency in the world – see http://livinginamadhouse.wordpress.com/2013/08/07/sorting-out-the-mess-after-the-euro-collapses/
Britain cannot meaningfully influence what the Eurozone does or is except in one regard, she can leave the EU. Although not a Eurozone member, the sheer size of Britain’s economy plus the political shock of one of the major members of the EU leaving could push not only the Euro over the edge, but even better lead to the break up of the EU.
Such turmoil would not be without substantial short term pain for Britain because of the still considerable part of her trade which is done with the EU, but Britain as an independent state with its own long established currency would be in far better shape than the Eurozone members who would face an horrendous task unravelling the Euro (especially the complications of its status as a reserve currency) with utterly discredited political elites.
Such a scenario – the EU collapsing – would also mean that Britain would not be subject to a hostile Europhile supranational elite after deciding to leave the EU. Nor would the British Europhile quislings have anything supranational to try to tie Britain back into, as surely they will try to do if the EU exists after Britain votes to leave.
Even if all Britain’s departure did was destroy the Euro, that would largely emasculate the EU elite for some years because of the immense upheaval the reintroduction of national currencies would involve. (Such a reintroduction would also feed nationalism throughout the Eurozone members). Consequently, if Britain voted to leave she would be able to do so with far less harassment than could be expected if Britain left and the EU remained intact because the EU elite would have too much to worry about elsewhere.