The End of The Eurozone

Showing Observer readers that High Tories keep alive the spirit of Ernest Bevin, Hugh Gaitskell, Aneuran Bevan and Peter Shore even if those great men's own party, having been taken over by their enemies, does not, Peter Oborne writes:

It is nearly 20 years since the Conservative chancellor of the exchequer Norman Lamont made his notorious remark that unemployment was a "price worth paying" for the restoration of economic stability. Lamont was at once condemned for his comments, made at the height of Britain's ill-fated membership of the Exchange Rate Mechanism. The progressive left universally denounced him as arrogant, brutal and out of touch. And yet, only two decades later, the European left has made the identical calculation. The imposition of the euro, and the rigid economic policy a single currency implies, is having socially catastrophic effects across much of Europe on a scale that dwarfs Britain's suffering in the 1990s.

Consider the facts. In Spain, unemployment has already reached a gut-wrenching 19.3%. But unemployment for those between 16-24 is a catastrophic 42%. In Greece, youth unemployment is 25%, in Ireland 28.4% and Italy 26.9%. Marginal eurozone countries such as Greece, Spain and Ireland are not just in recession. They are in depression – and so long as they remain inside the euro there is no exit.

Before their decision to abandon economic sovereignty and sign up to the euro, policymakers had a tried and tested response to the kind of global setback of the last two years – depreciate the currency and loosen fiscal and monetary policy. This has been the answer produced by Britain, mercifully outside the euro thanks mainly to John Major's brave, far-sighted and universally denounced decision to opt out of monetary union when he signed the Maastricht Treaty in 1992. But inside the euro, individual countries are stripped of the ability to manage their own economies. That is why the global recession has been far, far more devastating for some eurozone members than would otherwise have been the case – in just the same way that membership of the ERM inflicted wholly unnecessary damage on the British economy in the early 1990s.

Indeed, the economic policies being forced on the unhappy people of Spain or Greece today would bring a snarl of approbation from even the most feral of the so-called sadomonetarists who advised Margaret Thatcher. And yet the paradox is that in 2010 this massive, deadly and sustained attack on the livelihoods of ordinary working people is being cheered on by the mainstream left.

The European single currency amounts to an experiment in social and economic engineering on a scale only very rarely before encountered in world history. The great question is whether it will work. There is a universal belief among the European political and economic elite that the euro will continue, no matter how much damage it inflicts or how many jobs it costs. George Papandreou, the socialist prime minister of Greece, insists that a return to the drachma will never happen. So does Jean-Claude Trichet, president of the European Central Bank. So do Angela Merkel and Nicolas Sarkozy, Goldman Sachs, Morgan Stanley, the US Treasury, the Bilderberg group and, for what it is worth, the British foreign office.

I believe that this heartless analysis is mistaken, and that the eurozone will in due course collapse (as Karl Marx might well have remarked) under the weight of its own contradictions. Economically, the euro can be spotted a mile off: it is a classic bankers' ramp. It is designed to do all the things that bankers have historically wanted: create efficient markets, drive down the cost of labour, impose price stability, eliminate trade barriers, confound national boundaries and maximise corporate profits. Bankers don't care much about youth unemployment in Madrid or home repossessions in Lisbon or riots on the streets of Athens. They worry about the bottom line and the euro has been very good for the bottom line, with stock markets up by an obscene 50% over the last eight months.

There remains, however, that irritating little contradiction between the calamity that is hitting home on the streets, housing estates and industrial parks of Europe and the bourgeois comfort and intellectual certainty of the international capitalist class. According to traditional democratic theory, this contradiction would manifest itself in the political sphere. Mainstream political parties would normally articulate the suffering of working men and women and call for a return to humane economic policies. But this has not happened. The central mystery at the heart of the modern European predicament is why the euro is accepted without question by mainstream parties of right and left across the continent. There is an important historic reason for this. Portugal, Greece, Spain and many other European states have very recent memories of dictatorship. The EU, and all that it brings with it, is an important certificate of political stability and democratic virtue.

But there is also a troubling reason. The European political class has done something extraordinary: it has turned its back on politics. In a series of brilliant articles and essays, Professor Peter Mair, professor of government at the European University Institute, has shown how western democracy has been hollowed out across the EU. He argues that a new notion of democracy has emerged instead, only stripped of its popular component – Mair calls it "democracy without a demos". This elite withdrawal from mass electoral politics, characteristic of so many modern European states, has closed out the euro as a subject of legitimate discussion. This failure of apparently mainstream politicians to engage with the social and economic consequences of the European single currency has handed over power without demur to the bankers.

Yet the implications for liberal democracies of this elite disengagement are profound. The French critic and philosopher Louis Althusser used to speak in terms of a problematic – a system of unspoken questions governing the answers that a given text or discourse cannot answer. This term is helpful when confronting the prevailing European economic and social dynamic. The true nature of current events cannot be perceived without reference to the insuperable constraints imposed by the euro. Yet the rules of European economic discourse determine that these constraints cannot even be articulated. We are witnessing is a potential political and economic tragedy.

One problem is that if democratic parties such as the PSOE [Spanish socialist workers' party], with its profound popular legitimacy, are inhibited from engaging with the most burning question of our time they are creating space that will be filled by others. So it is unlikely to be a coincidence that in last summer's elections in Portugal, the hard left secured 11% of the vote or that riots are now endemic to the streets of Athens. Elite disengagement is a gift to extremist nationalist parties of the type that has flourished over the past 150 years. The political class is gambling that politics as we knew it during the 20th century has been negated by the postwar architecture of the EU.

History teaches us they that they are certainly wrong. Elite constructions such as the EU may sometimes be able to treat the voters with disdain, but never the markets – and the brutal truth is that the crisis is about to get worse. For the time being, the European Central Bank has adopted a very easy monetary policy. If, as economists now project, the overall economy of the eurozone starts to grow, the ECB is bound to raise interests and reduce liquidity. Such a policy would suit Germany, which has coped well with the recession, has a jobless rate of about 8% and a healthy trade surplus. But it would be terrible for poor Spain, with its 20% unemployment, massive trade deficit and negative growth.

This would not matter if Germany had the Deutschmark and Spain the peseta. The mark would appreciate and the peseta fall. The trade imbalances would automatically adjust. Spain's exports would increase, helping demand and reducing unemployment. None of this can happen while Spain and Germany remain uneasy partners in the euro.

The problem would still be just about manageable if there were political unity in Europe. Germany would then be ready to make the massive fiscal transfers necessary to bail Spain out of its difficulties – just as the City always does for disadvantaged areas of Britain during a recession. But the architects of European monetary union have put a single currency ahead of political unity and the long-term consequences for the euro are likely to be fatal.

We have been here before. In the 1920s, central bankers like Bank of England governor Montagu Norman were convinced that all would be lost once sterling abandoned the gold standard. In 1992, the British banking and political elite felt the same way about the ERM. But, as Norman Lamont discovered the hard way on Black Wednesday, you can only defy political and economic reality for so long. In the medium term, economies like Greece and Spain are certain to break away from the euro. The refusal of the political elites to recognise this inevitability means that 2010 is going to be very painful, very bloody and very dangerous.