By Szu Ping Chan at The Telegraph
The eurozone is doomed to fail and will lurch from crisis to crisis unless it is broken up, according to the former governor of the Bank of England.
In his new book, Lord King claims that steps towards fiscal union will not quell tensions in the 19-nation bloc and could even tear it apart.
He warns of a looming “economic [and] political crisis” triggered by endless bail-outs, austerity demands and pressure from the “elites in Europe” and the US to create “a transfer union” to solve the eurozone’s woes.
In the second extract of The Telegraph’s exclusive serialisation, Lord King warns that this has “sowed the seeds of division” in the bloc and created support for populist parties. Further steps towards political union, where countries are forced to cede sovereignty and yield to Brussels diktats, could spark a public backlash.
“It will lead to not only an economic but [also] a political crisis,” he says. “Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous.”
However, Lord King, who often used sporting analogies during his decade at the helm of the Bank of England, says the alternative of struggling countries such as Greece being “temporarily relegated” from the bloc to regain competitiveness may also be “too late”.
Policymakers, already scarred by repeated rounds of brinkmanship, are unlikely to reach an accord, he argues. “The underlying differences between countries and the political cost of accepting defeat have become too great.
“That is unfortunate both for the countries concerned – because sometimes premature promotion can be a misfortune and relegation the opportunity for a new start – and for the world as a whole because the euro area today is a drag on world growth.”
Germany and the rest of the eurozone must “face up” to the fact that uncompetitive countries in the south can only prosper again if the bloc is broken up, Lord King argues.
Europe’s biggest economy faces the “terrible choice” of writing a blank cheque to support the bloc “at great and unending cost to its taxpayers” or calling “a halt to the monetary union project”, he says.
The “only way” to stop countries staring into the abyss of “crushing austerity, continuing mass unemployment” with “no end in sight to the burden of debt” faced by debtor nations is for them to abandon the euro.
“The counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight,” Lord King says.
“But… leaving the euro area may be the only way to plot a route back to economic growth and full employment. “The long-term benefits outweigh the short-term costs.”
He also calls for the International Monetary Fund to lead a debt-relief programme in which countries can restructure their debts in a fair way.
While this could slow growth and reduce spending as creditors adjust to the reality that debts will never be repaid, this is “inevitable” he says.
“The underlying challenge is to move to a new equilibrium in which new debts are no longer being created on the same scale as before.”