'The UK would be crazy to join the euro'

'The UK would be crazy to join the euro'
(Filed: 08/06/2003)

An influential former Bundesbank director tells Liam Halligan why he believes the single currency is fatally flawed

Wilhelm Nolling is a card-carrying member of Germany's economic establishment. For 10 years, until 1992, he was an influential director at the Bundesbank - the central bank that underpinned his country's post-war economic renaissance.

Before that, Nolling was a well-known politician, serving in both Houses of Parliament as a member of the centre-left SPD. Now 69 years old, and Professor of Economics at Hamburg University, this soft-spoken technocrat still oozes the charm and tact which allowed him to serve in a range of posts almost unique in his country's history.

But talk about one particular subject, and Nolling's natural caution is put firmly to one side. That subject is economic and monetary union.

"Germany is suffering its worst economic crisis in decades," he tells me in his oak-panelled office. "We are in bad shape and euro membership has played a major role in limiting our policy-making room for manoeuvre."

Across Germany, for all kinds of historic reasons, public criticism of the "European project" is politically taboo. Yet no domestic opinion poll has ever shown majority support for the euro. And no German referendum was held before monetary union was launched in 1999.

Against that background, Nolling is probably the most senior figure willing to articulate his country's deep-seated concerns about being in the euro. As he sees it, his technical experience and expertise simply prevent him from toeing the line.

"The present euro zone structure is devastating for Germany," he says. "Our economy is bleeding. And I am convinced the UK would be crazy to join - you should stay out for as long as I can foresee."

What is undeniable to Nolling's fellow Germans is their current economic predicament. The euro zone's largest economy is technically in recession, with 11 per cent unemployment. Germany is forecast not to grow at all this year and, with prices falling for the past two months, the spectre of deflation looms large.

"Deflation has already arrived, in that our economic dynamism has disappeared," Nolling says. "There is no willingness among the private sector to invest, and euro zone rules have cut back public investment to an extent we haven't seen since the war."

Nolling singles out the European Central Bank for particular criticism. "The ECB's interest rate cuts have been far too timid. The Bundesbank would have cut much faster and deeper, following the example of the US Federal Reserve."

Last week, of course, the ECB finally did cut rates - by 50 basis points to 2 per cent. With inflation of 1.9 per cent, the euro zone is flirting with negative real rates.

Yet most economists say any potential stimulus has been more than offset by the euro's recent rise. A higher currency undermines growth by making exports more expensive. This particularly applies to a trade-driven economy such as Germany.

"The truth is that the ECB is trying to carry out an impossible task," says Nolling. "You cannot set one interest rate for 12 very different nations - that's a problem which won't go away".

Critics dismiss Nolling's views as sour grapes: after all, monetary union stripped his beloved Bundesbank of many of its powers. "That's not the point," he replies.

"The point is that it is simply not in Germany's economic interest to allow major parts of our policy to be implemented by bodies which are not responsible for Germany."

I probed him further on the UK's prospective euro membership - both of us conscious of Gordon Brown's impending assessment. "Why on earth would you want to join?" he asks. I trot out the Europhile line about losing influence in Europe if we don't.

"But what influence would you gain if you did?" he retorts. "Your policies would be restricted by euro zone rules. And if Germany can't get the interest rates it needs, why should the UK? You will end up being treated like Ireland or Greece - and a big country like yours deserves more."

But how about that other pro-euro argument - that not joining would undermine our crucial trading links with the Continent? "That's completely untrue," says Nolling.

"The UK is in good standing in the single market - the euro zone will always want to sell you goods and buy goods back. That applies whether you're in the euro or not."

Nolling points out that Europe's economic woes are not limited to Germany. Even the ECB admitted last week that during the first quarter of this year, growth in the euro zone as a whole was zero. There is now a real possibility that Germany's recession could spread to other euro members.

"Just compare your country and the major euro zone economies and it's clear you're doing much better," Nolling says.

He says the UK still benefits from sterling's ignominious exit from the exchange rate mechanism, the progenitor of full monetary union. "The pound broke free in 1992. Since then you've been able to conduct your own policies and you should keep it that way."

So, will Germany ever leave monetary union? Even asking this is heresy, of course - or at least it was until two weeks ago, when the heavyweight French newspaper Les Echos wrote an editorial asking that question. "It's not realistic, for now, because we're so committed politically," Nolling says.

"But the whole system could eventually collapse, given the problems when one central bank has to steer an entire continent of nation states. Certainly, the more countries that join, the more ungovernable it will become," Nolling says. "In that sense, the euro was born to die."

Given Germany's economic problems, I ask, and if the euro is inherently unstable, how does Germany view a possible UK referendum on British membership?

"Many Germans privately feel that given the chance, they would have voted against, and we wouldn't be in this mess," he says. "That's why we feel the UK is a very privileged country."

A lesson to the world wankers from a Lt. in the field: (^;
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