Saturday, March 19, 2016

Quote of the day 19th March 2016

It's not all that often that I find myself agreeing with Ed Balls, but this passage from an article about  a seminar on the Blair years when Balls was one of the speakers so thoroughly hits several nails on the head that it has to be a quote of the day:

"There have been frequent occasions in the past when a political consensus has formed on an economic question and it has turned out to be a catastrophe."

The attempt to maintain the Gold Standard, repeated devaluation crises and the decision to join the exchange rate mechanism.

"Putting politics before economics could destroy you."

(Extract reflecting one of the contributions from Ed Ball's from a report by John Rentoul in the Independent of a special seminar on why the Blair government eventually decided against scrapping the pound in favour of the Euro which was held at the Treasury this week.)

Balls was talking about the potentially disastrous consequences of taking the economic decision to scrap the pound on the basis of a political aim for a united Europe. He was later  asked about Sir Nick Macpherson's view that, if Britain had joined the euro, it would have "blown up" the currency, and responded:

"We would have had a boom and bust. We weren't confident enough to say at the time that it would have blown up the euro, but looking back it is clear that it would have done."

Asked if he could imagine the UK joining in the next 30 years, Balls said:
 
I used to say it won't happen in my political lifetime – I've had to drop the 'political'. It won't happen in my lifetime. Can you imagine a cross-party consensus that it was the right thing to do? We are a long way from there being a consensus, on really good grounds."
 
I have one further comment on this insight. The article is right that it does not just apply to the Euro.
 
I became a Eurosceptic in the moment when I heard a German politician defend the monetary arrangements for German unification on the basis that the political necessity had had to over-ride economic objectives - an attitude which had resulted in dire economic consequences and not just in Germany - and realised immediately how much worse the consequences for Europe would be if a single currency for Europe was created by people with that mindset.
 
I would also argue that it isn't just the supporters of European integration who need to be aware that taking a decision with potentially massive economic consequences on purely political grounds can be disastrous. Supporters of separatism - Scottish, British or any other - as well as integration need to think the implications through very carefully.

2 comments:

Jim said...

I dont think that attempting to maintain the gold standard would have been a bad move at all, In fact i think it would have been a very good move.

The problem was after the War the UK did not try to "maintain" it, they tried to cheat it. The old saying goes "you can not cheat an honest man", and gold is, well, its as good as gold.

So when we had to leave the gold standard, in order to devalue the pound to help fund the war. If we had rejoined the the gold standard at a rate which was consistent to which the pound had been devalued, then it would indeed have been maintained, and it would have been a very savvy move. However, this is not what we did, for some unknown reason we attempted to re-implement the gold standard at the same rate it was at the time we left. This of course is the problem, we attempted to cheat gold, and gold does not cheat.

Chris Whiteside said...

Certainly the level at which they tried to maintain the Gold Standard, as well as the fact, was part of the political consensus which contributed to economic disaster.

I don't think it was so much an attempt to cheat the system as that the exchange rate for gold was not seen as a price to be set at the level which put the market in balance, but instead as some kind of national virility symbol which had to be kept as high as possible as a sign of strength.

You still see echoes of that attitude today whenever a downward movement of a currency is interpreted as a sign of weakness - which may or may not be correct but is always deeply damaging if it leads to an attempt to keep the currency at an unrealistic level.