When the UK exited the old European Exchange Rate Mechanism (the precursor to the euro) in September 1992 it was seen as a humiliating decision taken in a hopeless situation, likely to lead to further ignominy and economic disaster.
How similarly hopeless some of Europe’s leaders must feel today with their economies teetering and unemployment rising. Having ceded their ability to manage their own interest rates and currencies, they have only limited and very blunt tools at their fingertips, largely involving decision making around public spending and taxes. What to do?
Well within months of the UK’s exit from the ERM, it had become apparent that this single act was the catalyst for an unprecedented period of growth in the British economy. At a stroke it freed up British policy makers to manage our own interest rates and currency, the two strongest economic tools in any armoury and the basic building blocks of economic policy. Equally importantly the markets got it. In fact, having dropped like a stone on Black Wednesday when fear took hold, within hours the markets were rallying, interest rates were cut, the pound floated lower and Britain was off to the races. In short, the market rewarded rational economic policy and brave decision making; it abhors today’s prevaricating politicians trying to shore up flawed economics with words of string.
And what of Spain, one of the sick men of Southern Europe? Mariano Rajoy, the new Spanish Prime Minster must feel like a matador all alone in the economic bullring with no weapons at his disposal: no picador to supply quantitative easing to the bottleneck of toxic property assets; no banderilleros to prick his unaffordable bond yields; and no sword to apply the coup de grace to unemployment. How jealous he must be of our Mr Cameron, who can rely on the independent Bank of England to manage interest rate policy and bond issuance, provide doses of QE and float the pound to a competitive level whic,h combined with a tough stance on public spending, has provided a golden period of low interest rates and low bond yields, without which the UK would be a really serious Eton Mess.
Rajoy will of course be tempted to employ the old age Spanish mantra of manana, manana; why do today what can be put off until whenever? He does have the luxury of time unlike Sarkozy, up for election next year. But 20% unemployment (over 30% in some Andalucian provinces) is not a luxury.
Why is Spain a good example of a nation that should exit the euro as soon as possible? With a significant food and wine export sector and a mighty tourism one, what she needs more than anything else is a sensibly priced currency to boost these two traditional engines of her economy (facts which the metropolitan political class has conveniently forgotten). Moreover, both industries are significant seasonal employers so that the impact of policy charges are likely to be swift and impressive. And yet with her currency ridiculously strong relative to such an overextended economy, how easy is it for Latin American fruit and veg and Antipodean wine to undercut her.
Her largest source of tourists, the UK, still sends millions every summer, but their spending power has diminished massively as has that of the half a million or more British ex-pats living on the costas who rely on sterling pensions. Many of the latter living on the Costa del Sol perversely travel up to an hour to Gibraltar, where they can do their weekly shop and fill up their right hand drive motors at Morrisons using the good old pound.
Similarly rich German tourists may be more inclined to stay at home or go somewhere further afield to spend their euros, rather than head South to the no longer cheap as chips Mediterranean – as they too have cottoned on that one overvalued euro only buys one overvalued euro, rather than numerous pesetas.
So Spain and any number of other European nations might like to ponder these lessons from history and come to realise that they should be less fearful of exiting the euro. Political fall out there would be, economic melodrama certainly, administrative and technical difficulties aplenty to overcome, but by regaining their power of economic management Rajoy would give his unemployed masses a chance of work.
The only possible downside would be Sarkozy’s cold shoulder.