



The problem is that creating a monetary union is a little bit like invading Russia. At first, there is rapid progress, as the French troops, Napoleon or the Wehrmacht found when they stormed the country, taking large tracts of land without much resistance. Then slowly, as the heavy winter sets in, the Cossacks and the Russian partisans start blowing up your convoys. Eventually you end up with blood on the snow and a hasty retreat. Recall the 1920s – after the Great War the Gold standard had created ‘the Roaring 20s’. Similarly, when Mexico and Argentina pegged their currency one to one on the US dollar, there was a flood of capital coming from the major surplus country - the United States - into Mexico and Argentina, creating the feeling of triumph, growth and investment. It was exactly the same in the Eurozone.





"The EU's greatest achievement is the Euro", said Michael Portillo on the BBC's This Week programme last Thursday.No, Michael, it isn't. It is the EU's worst mistake.As Yanis Varoufakis entertainingly explains in an interesting lecture published in the Australian Journal of Political Economy, the creation of the Euro led inexorably to the buildup of unsustainable debt - both private and public - in the Eurozone periphery countries:Every one of the examples Varoufakis gives ended in disaster. Blood on the snow, and a hasty retreat. A debt deflationary collapse, and a protracted depression. A sudden stop, followed by debt default and painful restructuring. The European dimension of the 2007-8 financial crisis and the Eurozone sovereign debt crisis (which are the same crisis, really), followed by the Great European Depression.The inevitable response of the European elite to the problems caused by the Euro is to force economic convergence by fair means or foul, and to call for "deeper integration". But as the Eurozone contracts down in an attempt to heal its wounds, causing suffering across the periphery and rising anger among austerity-hit populations, it becomes ever more inward-looking and defensive. And the growing dominance of the Eurozone in EU policymaking - inevitable, because the focus of European elites is on repairing the damage caused by the Euro crisis - alienates countries that are not members of the Euro. The largest of these, by far, is the United Kingdom.I don't think the European elites realise how hurt and angry many people in the UK feel about their behaviour. But I have become aware of it in the debate preceding the UK referendum on EU membership. There is a shortage of rational discussion, and many of the comments are personal and nasty. Emotion, not sense, is ruling the roost.But why are people so angry, and so despairing? There are many reasons, but a common theme appears to be the feeling that Britain is losing control of its own affairs. "Take Control" is the slogan of the Leave campaign. It resonates with many.My own father has been a lifelong supporter of the European Community. In 1975 he campaigned for the UK to remain in what was then known as the European Economic Community (EEC). But now, he intends to vote to leave.I asked him why. "It's the Euro," he said. "Britain will never join the Euro. But unless we do, we will be sidelined in European policymaking. Our voice will not be heard, because the Eurozone will dominate. We will inevitably have policies imposed on us that we do not want. We have no choice but to leave if we wish to retain any real control of our own affairs."I have heard this now from many people. A belief that democratic policymaking - flawed though it is - is being slowly replaced with decisions by an unelected, bureaucratic elite which is only interested in furthering the creation of a United States of Europe against the wishes of the common people. And a growing sense that the UK's voice in Europe is fading as the Eurozone becomes ever more important.And yet, when I attended the European Summit last week, this was not what I heard. Much of the conversation at the summit was about Brexit, of course. The participants seemed genuinely bemused by it, and distressed that the UK might choose to leave.Kristalina Georgieva of Bulgaria observed that the UK's voice was - and still is - extremely significant. The UK has often been crucial in forcing through necessary reforms. If it leaves, the UK will be sorely missed.But of course, she would say that. The UK was instrumental in obtaining the commitment to EU enlargement that enabled her country to join. And not just her country, but others - including the Czech Republic, which hosted the European Summit.Prague, the capital of the Czech Republic, is a wonderful place. It is, in many respects, the historic heart of Europe. And it is a lively, modern, cosmopolitan European city. Yet when I was young, the Czech Republic was behind the monstrosity known as the Iron Curtain, a pariah country uncomfortably allied to the Cold War "enemy" - the USSR. Even after the dissolution of the USSR in 1991, the Czech Republic, like other former Iron Curtain countries, stayed out in the cold. It separated bloodlessly from Slovakia in 1993 and suffered economic distress in the Russian crisis of 1998. It did not join the EU until 2004. It could not, because the EU did not until then agree to admit the former Iron Curtain countries.After the creation of the Euro in 1999, many in Western Europe wanted deeper integration of the existing members around the single currency, rather than widening of the EU to admit (among others) former Iron Curtain countries. The UK at that time was under considerable pressure to join the Euro. But the UK never wanted a deeply integrated EU, and it did not want to join the Euro. So it fought for widening, not deepening, of the union.Eventually, the EU agreed. Ten countries, most of them former Iron Curtain countries, joined the EU in 2004. Two more - Bulgaria and Romania - followed in 2007. The EU today encompasses almost the whole of Europe from the Atlantic Ocean to the border of the old Russian empire.* Even some countries (Ukraine, Moldova) that were historically part of the Russian empire have asked to join.This, not the Euro, is the EU's greatest achievement. Admitting the former Iron Curtain countries to the EU has brought together the sundered parts of Europe and helped to heal the deep wounds left by the Cold War. The UK should be proud of its part in this remarkable example of cooperation for a far-reaching common good.But sadly, many in the UK have forgotten about this. Enlargement of the EU resulted in large migration flows from East to West, flows for which the EU, with its open borders and commitment to unrestricted movement of people, was ill-prepared. And the years of stagnation and austerity since the financial crisis have caused growing worry about immigration. Migrants from the EU are blamed for falling wages, insufficient school places, failures in the health service, choked transport systems, shortage of housing. Most of this is unfair - the evidence is that migrants have little adverse effect on any of these, and their contribution is a net benefit to the UK. But it is easier to blame "them" than admit that the real problem is the UK government's history of under-investment and its determination to impose on its population the cost of the banking crisis.More recently, terrorist threats and the EU's abject failure to deal adequately with massive flows of refugees from the turmoil in the Middle East have increased the fear factor. Now, there is a loud clamour for the borders to be closed and immigration severely restricted.Few would disagree that large unstable flows of people are a considerable problem. The Schengen agreement which ensures open borders is already effectively suspended in many EU countries due to intolerable pressure on domestic resources from refugees and migrants. The UK, which is not a signatory to Schengen, wants to be able to restrict the right of people from other EU countries to come to its country to live and work. One of the "four freedoms" of the EU, freedom of movement of people, is under attack.Another of the "four freedoms", the free movement of capital, is also under attack. Large uncontrolled flows of capital are like floods. They sweep away everything in their path, leaving disaster in their wake. The EU was just as unprepared for the enormous capital movements arising from the creation of the Euro and the financial crisis as it was for the enormous migration flows arising from EU enlargement and the refugee crisis. Two countries in the EU and one in EFTA have had to impose outright capital controls to stop capital flight. More subtly, macroprudential measures imposed on banks since the financial crisis amount to a type of capital control, discouraging cross-border lending funded by short-term cross-border wholesale borrowing. Balkanisation of the banking system has made it safer, but it has also made it less effective. The protracted depression in part of the Eurozone is to a considerable extent due to severe restriction of bank lending.Restriction of capital flows and the migration of people both have consequences for trade. For there to be trade at all, capital must flow: capital controls severely interfere with cross-border trade, as Iceland could tell you. And where capital flows, people inevitably follow, since capital investment generates jobs, and people generally migrate in search of work. Production and trade are both enhanced by the free movement of capital and people.Restricting the movement of capital restricts both trade and migration: but the restriction operates in the other direction too. Where trade is restricted, capital will not be invested: and when people are prevented from migrating to certain places, those places eventually suffer investment failure as capital moves to places with an unrestricted supply of people to fill the jobs created. At its most extreme, restricting the movement of capital, people goods and services is autarky: and as North Korea shows, autarky impoverishes.So there is a conundrum. The EU's "four freedoms" are theoretically beneficial to the peoples of Europe. But we now know that complete freedom of movement of capital and people can be destructive. How should the EU re-frame its "freedoms" to ensure that member states can protect themselves when necessary, while benefiting in general from those freedoms? The "safety brake" in David Cameron's "deal" is nowhere near adequate: it is not yet ratified, and since it would only apply to the UK it seems likely that it would be challenged on legal grounds."Freedom" is not really freedom if its effects are destructive to others. The "free movement" of capital, people, goods and services must have limits. If it remains in the EU, the UK would have an important role to play in defining what those limits are and how they would apply in practice.And the UK has an even more important role to play. A two-speed EU in which non-Euro members are systematically sidelined cannot be sustainable. The UK, as the second largest economy in Europe and by far the largest of the non-Euro countries, should lead the reconstitution of the EU into a multi-currency area in which countries have the right to use their own currency or the Euro as they decide. A sovereign bankruptcy procedure is needed, along with a formal exit procedure for the Euro: the UK, which has been friendly to Greece and other distressed countries throughout the crisis, is well placed to campaign for these. And going further, the UK can help the EU to decide how best to reform the Euro, retaining its important role as an international trade currency while dismantling the straitjacket that it creates for domestic users and for the ECB.Further integration of the EU is not the right way forward. Ultimately, EU member states will break the bonds that further integration creates, since in the absence of any willingness to share risks and losses, they are far too restrictive. The EU needs to be looser, not tighter: wider, not deeper. It is not yet too late to turn around this particular Titanic. Rather than launching a solo lifeboat, the UK should take the helm.I hope and pray that the people of Britain recognise the vital role that the UK can have in the essential reforms that the EU must undergo if it is to survive, and vote to Remain. I shall do so.__________________________________________________________________________________* There are some exceptions, of course: Switzerland, Norway, Liechtenstein and Iceland have chosen not to join the EU. And the Balkan states Albania, Serbia, Montenegro, FYR Macedonia, Bosnia and Kosovo have not yet been accepted as members, though most of them are candidate countries. The most controversial candidate is Turkey, an Islamic country which borders both Greece and Syria and has an ongoing dispute with EU member Cyprus over the status of the north part of the island of Cyprus. It remains to be seen whether the EU's need of Turkey's assistance in controlling the flow of refugees and migrants will be sufficient for it to be admitted as a member. Consistent with its historic support of enlargement, the UK is supporting Turkey's application. However, this might change if the UK government suffered a change of management after a Leave vote.