BBC World Service, 24 February 2012

This morning I was interviewed on BBC World Service regarding the future shape of Europe. To put this in context, the French employers’ association, supported by The President of Medef's Ile de France region, and head of the French association of female business leaders, Marie-Christine Oghly, said it wants full political union. During my discussion I explained why such a union would undoubtedly make the situation worse.

You can listen to the full interview here (starting at 6mins 10 seconds) and a transcript of my discussion is below.

ED BUTLER (Presenter): Germany’s chancellor, Angela Merkel, has supported the idea of further European integration.  She’s demanded the strengthening of Brussels’ oversight of national budgets.  And many business leaders have in the past seen a federal European superstate as the only logical conclusion of monetary union.  But since the latest crisis, those who already had misgivings about the creation of the euro and deeper union, feel that their position has been reinforced.  One of those is Terry Smith, chief executive of his own brokerage and fund management firm, one of Britain’s richest investors, and a man who reckons it’s a time to draw a line under what he calls the “European experiment”.

TERRY SMITH: It’s tempting in the crisis that we’ve had for the last few years, and particularly the eurozone crisis, that, for a number of people, when asked what the solution is, to say “more Europe”.  I rather suspect, though, that it’s highly probably that the answer is “less Europe”, because if you look for the majority of Europe – not just France, but I would include France in this comment. For the majority of countries in Europe, their membership of, certainly the currency union portion of Europe, has really been quite a problem for them.  It’s impossible, really – for Greece, certainly, Portugal, probably Spain, some of Italy, and France and Ireland – to live in a currency union with Germany, so a political union would probably make that worse.

ED BUTLER: But surely the problems of Greece arose because it wasn’t in this single political union, you could argue. If it had been, all of the accounting issues that people have talked about, all of that, that sense of Greece trading off the wealth of the northern states would not have been possible in the…

TERRY SMITH: It’s certainly true insofar as if  you’re going to have a single currency and make it work, I don’t think you can do it without political union, because in the end you have to have a single authority that guarantees the debt, and that single authority can only guarantee the debt by raising taxes.  So I think you’re right about that.  However, I would disagree that if Greece, or indeed any of the other peripheral countries which are struggling, had been in this currency union and it had a political union, it would all be all right.  I think you’re missing another bit that would have to occur for that all to be all right, which is you’d have to have the political union and the single authority to do the taxing and guarantee the debts and so on, but there’s one other thing everybody would have to accept: forever, there would be transfer payments from the rich nations – primarily Germany but also Holland and Finland – to the poorer countries.

ED BUTLER: But the paradigm of the United States, which is often talked about, isn’t it, in the context of United States of Europe, United States of America…

TERRY SMITH: Yes.

ED BUTLER: …the Americans have a great tradition of upping sticks and moving stake when things don’t work, and perhaps that’s part of the problem in Europe that we’re too cemented in our little cultural zones, and if there were that single entity, we would somehow feel freer, as workers, as businesses, to move around.

TERRY SMITH: The parallels with America don’t entirely work.  Bear in mind America basically is a country which is pretty much single language.  It’s a country where, other than the American Civil War, there hasn’t been any conflict on that continent since foundation, basically; whereas you haven’t got to go very far into Europe to find the states of Europe warring with each other.  I mean, part of the problem in the German/Greece situation now is their history.  And so it’s not quite that simple.  Engineering what you see in America would probably require some of the things that you had in America to build that.  America did have a civil war before this was accepted.

ED BUTLER: True.  But Terry aren’t you speaking here as a British-based financer and investor who will look at the eurozone and know that you’re not part of it, you’re not of it, you’re not in there.  If you were in France, if you were in Germany, would you not feel a strong sense of, “look, we have two choices. One is disintegration – which is a total nightmare – and the other is integration, which gives us some glimmer of hope”?

TERRY SMITH: I look at it as a businessman who does business in 24 countries around the world, and I spend a lot of time living outside the UK and looking at it from the perspective of America or Singapore or Zurich or wherever else I happen to be at that time.  So I don’t think I’m purely UK-centred.  When you say “if I were in that situation, wouldn’t I want this integration”, I think that the French probably want it because with it they’re in a great deal of trouble.  France has got a current account deficit which has been growing continuously since 2004.  It’s got unemployment over 10%, it’s got the highest minimum wage rate in Europe, it’s got the biggest exposure amongst its banks to the eurozone debt, and 56%/57% of the French economy is a state economy.  France is in a mess if it gets cut loose from all this. 

ED BUTLER: Right.  But if it wants to get bailed out by the Germans…

TERRY SMITH: I can understand why, but that doesn’t necessarily mean that it’s good for all the states of Europe just because it’s good for France – or indeed for the remainder of the world – to have this happen.  Just to go back to an earlier point, you said disintegration, it would be a nightmare.  I think that’s accepted wisdom, but again, I think accepted wisdom is an oxymoron.  It may be that actually disintegration is better than trying to hold together something which shouldn’t be held together.  And I would doubt that those countries around the periphery, including France… I very much doubt if those countries can survive in a union with Germany.

ED BUTLER: Are you betting on Europe’s future?

TERRY SMITH: I’d have a bet on Europe’s future.  I would bet that Greece is going to leave the euro.  And I would bet that it’s highly likely that then Portugal will leave the euro.  And I think it’s then reasonably questionable whether or not Spain and Italy can survive… certainly the south of Italy has got all of the characteristics of the other peripheral countries.  And I think the final frontier of this is France.  France, in this crisis, has been seen at the top table dispensing justice alongside Germany but France’s financial characteristics are far closer to the peripheral countries that are in trouble than it is to Germany.

 

Comments

[Geoffrey Ashby FCA]

One could write a book on the subject of full integration but since America is often cited it is worth remembering that over there there are enormous taxation differences between States - Florida with no personal State Tax vastly differing State Taxes and, with all this, California managed to become bankrupt!
Germany wont be able to shoulder the burden of poore Nations in the EU forever because they are making the mistake of relocating manufacturing Overseas thus causing unemployment. A few years ago many of their local authorities were bust but I don't know the current situation. I cannot see how unity could work because there is and will be huge unemployment in certain countries with consequewnt deficits - why would Germans wish to subsidise that? Personally, I am sick and tired of the UK contributing around £9 bn in excess of what it takes out - why should I pay even higher taxes to reduce the consequently higher deficit?

[Terry Smith]

To Geoffrey Ashby,

I cannot see what the UK derives for the £50m per day it contributes to the EU.

[Geoffrey Ashby FCA]

My memory and knowledge of History are both now pretty sketchy but I seem to recall that Monetary Union is not a new thing - there was the LMU (Latin Monetary Union) from around 1860 until around the time of the first World War. Being based on Gold it operated quite well - individual Countries having their own insignia on Coins but due to being Gold based, values were kept in order. England refused to join but had it done so the Sovereign would have had to be reduced in weight to have a Gold value equal to a (from memory) 25 franc French coin. Why do I mention all this - because Greece quit in 1908 having debased it's currency (reduced Gold content) - plus ca change etc !!