Jake's View

Hindsight will show that the Brits have done the right thing by exiting the EU

The European project has been adrift of its own rules

PUBLISHED : Monday, 27 June, 2016, 3:45pm
UPDATED : Monday, 27 June, 2016, 6:01pm

Last Thursday, in the course of a single day, 17.4 million British people tore up the foreign and economic policies that have been crafted over half a century. In the cold light of Friday morning few had yet realised the extent of the self-inflicted harm done in the course of 24 hours.

David Dodwell

Back to Business, June 27

I disagree with you on this one, David. What I have in mind is 24 years, not 24 hours, and the self-inflicted harm done on the other side of the Channel.

It is now 24 years since the countries of the European Union signed the Maastricht Treaty, the key provision of which is that member countries are obligated to restrain their government debt to no more than 60 per cent of gross domestic product and their fiscal deficits to no more than 3 per cent of GDP.

The trouble with the EU is that it doesn’t listen to its own people and doesn’t obey its own rules

The latest figure for average government debt to GDP across the EU, however, is 90.7 per cent. It has never been less than 65 per cent since Maastricht and some members still run much higher ratios, for instance Greece -179, Italy -133, Portugal - 129, Belgium -106, Spain - 99, France - 96.

But, you know, oh well.

The average in fiscal deficits has been brought back below 3 per cent at last, thanks to a fiscal surplus in Germany, the giant of the system, but the usual culprits all still show deficits of more than 3 per cent and have rarely, some never, brought the figure under 3 per cent. Even this assumes that they are telling the truth. Greece has shown that such trust may not be wise.

These percentage limits were enacted at Maastricht so that fiscal strain should not threaten the new euro that the new European Central Bank was tasked with introducing. It was specifically provided that the ECB concern itself only with the soundness of the euro and turn a deaf ear to government pleas for debt relief.

But at the first whimper the ECB folded and became a welfare dispenser to profligate member governments that had driven themselves into fiscal trouble. It adopted American style quantitative easing with enormous injections of liquidity to keep interest rates artificially low.

“We’ll do whatever it takes,” became the motto of ECB chief Mario Draghi.

As a result the governments of Spain and Italy, among others, are now able to roll over long term borrowings at less than 2 per cent although they have no plans for getting out of their fiscal swamps, nor show any inclination to do so.

But this does not matter to the speculators who bought their debt. What matters is that Mario Draghi had given them a so-called “risk on” assurance that the running yields on these bonds will go down and their prices consequently go up for a tidy speculative profit.

This is a madness that can only end in disaster. It’s like dousing a fire with gasoline. The longer it goes on the bigger the ECB bets must become and if it goes on much longer the inevitable explosion will destroy the euro. Why does Europe still tolerate this man at the helm of its key institution?

The answer, I think, is that the bureaucrats of Brussels have long stopped their ears to advice from anyone outside of their own small coterie.

That treaty of Maastricht, for instance, was rejected in referendum by 63 per cent of Dutch voters, 55 of French voters, and 52 per cent of Irish ones. The Irish were told to vote again and the French and Dutch voters were simply ignored, with Maastricht provisions they had rejected sneaked into the later Treaty of Lisbon.

The trouble with the EU is that it doesn’t listen to its own people and doesn’t obey its own rules. These economic policies that were so carefully crafted over 50 years are as easily abandoned in just as many seconds. In Brussels everything stands to be sacrificed to the immediately expedient.

Which makes me think that in a few years time British voters will say, “Whew, we got out of that one just in time, didn’t we? Imagine what would have happened to us if we were still in there when it blew up.”