One of the points most strongly argued by eurosceptics is that the euro was the trigger for all the follow-on problems of property bubbles, wild spending by governments, etc. How true is that?
It’s certainly true that exiting the eurozone creates problems that a country would not have if it had not entered the eurozone in the first place. But I’m not sure I buy the argument that Greece et al would still be competitive if it still had the drachma. Greek competitiveness has surely been hindered by successive Greek governments throwing borrowed money at their people rather than reforming their economy, and that would have happened inside or out. It’s the weirdness of the pro-devaluation argument that I struggle with: its supporters say that internal devaluation within the euro, that is, cutting labour costs, etc, hurts the poor. That can be true. But devaluation increases imported inflation which makes fuel and imported food and consumer goods more expensive which also hurts the poor. You cannot get away from actual economic reforms, and at least within the eurozone you have the benefit of currency stability. Selling devaluation as a pain free solution is a three card trick.
As for the cheap credit argument: Would Spain and Ireland not have had property bubbles if they had kept the punt and peseta? It is certainly arguable that Irish lending institutions would not have had as much access to cheap funds to lend out, but don’t forget that both countries were seen as attractive places to invest, and in the modern global economy that attracts capital. Ireland had a growing economy, a strong pro-business environment, a well-educated workforce and membership of the single European market. We should also not forget that the amount of money flooding into Ireland, even if it had been a smaller amount, was still going to be lent recklessly by a banking regulation regime that was not as much light touch as a financial version of shadow hand puppets.
Finally, don’t forget that Ireland had been a public spending nutcase OUTSIDE of EMU, and became a good boy once bound by the Maastricht criteria. EMU forced Irish leaders to obey borrowing rules that they would have struggled to create domestically.
Of course, the big question is what would have happened in a Europe where countries like Greece over borrowed but without EMU. Would we still be baling out Greece if there was no euro? That depends as to how integrated the banking system would have become. Is there reason to believe that the non-existence of a single European currency would have made cross border contamination less likely? That’s the big question to which I don’t know the answer, but it does raise another question: Did the problems of banks in other (non-European) currency zones have any effect on us? Is this a problem of EMU, or the intricate integration of the global banking system? Is the problem that we are trying to apply national solutions to what is essentially a European banking system?