Surviving the euro

We need an orderly end to the EU’s disastrous economic experiment

The eurozone crisis threatens the world’s economic stability, but not for the reasons people think. The crisis was predictable and predicted, but schadenfreude is neither appropriate nor affordable. The task now is to extricate ourselves from this mess, and to learn its lessons. This means identifying the factors behind the debt crisis, and deciding how best to bring the calamitous eurozone experiment to an end.

The economic threat comes from a further weakening of an already enfeebled western banking system, as a result of unwise lending and borrowing on a massive scale. Why did the West borrow so much? It has become fashionable to blame China’s huge surplus. The West’s debt problem, it is argued, stems from China’s excessive savings, which let the West borrow cheaply on a vast scale; until the Chinese start to spend more, there is little the West can do. The most recent expression of this theory was in a speech given by the Governor of the Bank of England, Sir Mervyn King, in Liverpool a fortnight or so ago.

I have the highest regard for Sir Mervyn, whom I have known well for many years, and who has proved an excellent governor during the most testing time within living memory. But on this issue I believe him to be mistaken. As he put it: ‘What were the causes of the unsustainable build-up of debt in Europe and elsewhere? They lay in the continuing imbalance between those economies running large current account surpluses and those running large current account deficits… Surplus countries, a group which includes three of the world’s largest four economies [Japan, Germany and China], share a responsibility to respond to our present dilemma by expanding domestic demand.’