Policy Research in Macroeconomics

Why not join the Euro, Mr Osborne?

There is nothing original about George Osborne’s proposal that governments of both the left and the right should in future embrace

“a permanent change in ….our approach to fiscal responsibility – just as they have done in recent years in countries like Sweden and Canada.” (My emphasis)

“Governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future.”

It’s an idea that is older than Lord Palmerston’s  Victorian Commission for the Reduction of the National Debt convened 150 years ago.

And it is an idea that is revived periodically. Indeed the principle of stripping elected, democratic governments of fiscal policy autonomy underpinned the “corset” that was the gold standard – Keynes’s “barbarous relic” – both before and after the First World War. [1]

And we know how that ended.

But it was revived even more recently than that: in the EU’s “Fiscal Compact” or the Fiscal Stability Treaty – which is  a “new stricter version of the (EU’s) Stability and Growth Pact” Wikipedia informs us.

In March 2010 Germany presented a series of proposals to address the European sovereign debt crisis, and argued

“that the previous Stability and Growth Pact needed to be reformed to become more strict and efficient.”

Twenty three countries signed up for a deal that conferred what the Guardian called

“intrusive rights on European institutions to enforce budgetary policy in countries breaking the euro’s debt and deficit rules, as well as quasi-automatic penalties for delinquents.”

Wikipedia elaborates further:

“Member states bound by the fiscal provisions of the treaty will face annual fines up to 0.1% of GDP, if they after one year of the Fiscal Compact entering into force for them, have failed to enact a domestic “implementation law” establishing a self-correcting mechanism, guided by surveillance of a governmentally independent fiscal advisory council, which shall guarantee their national budget be in balance or surplus under the treaty’s definition.” (My emphasis).  

However, one country in particular made a point of standing out in opposition to the Fiscal Pact.

That country was Britain. David Cameron incurred the wrath of his European partners by the use of his government’s veto to block the new EU-wide fiscal responsibility treaty.


Why did a Conservative Prime Minister, as recently as 2011, and with the support of both Chancellor George Osborne and deputy Prime Minister Nick Clegg, block and veto a European fiscal law, intended to bring about “a permanent change in ….our approach to fiscal responsibility?”

And given his evangelical commitment to budget surpluses and straitjackets, why does Mr Osborne not simply repent of that veto, and recommend that Britain should now sign up to the Fiscal Compact?

Indeed why not go even further and join the Euro? It provides just the kind of bureaucratic top-down ‘corset’ of which he approves.

A Euro application would provide a perfect backdrop to the forthcoming referendum on membership of the European Union.

Now that would add to the gaiety of nations!


[1] Fred Block the sociologist notes that: “Contrary to the aspirations of neo-liberal economists who were keen to sideline or minimise the role of the state, the gold standard before and after 1914 “had the ironic effect of intensifying the importance of the nation as a unified entity. In Block, F ’Introduction’ to the new edition of The Great Transformation by Karl Polanyi, Beacon Press, 2001.

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