The Polish banking and financial elite gathered last week at a conference in the Baltic seaside resort of Sopot. The proceedings were enlivened by the presence on the platform of Jacek Rostowski, one of the two senior Polish politicians caught on tape badmouthing, in very colourful terms, David Cameron for his failure to stand up to British Euro-sceptics. He began by making an apology, not to Cameron, but to a member of the panel he was chairing. He had been recorded calling her a Communist whore. You certainly get a better class of political abuse in Poland.
Poland is of course Europe’s great economic success story, the only country to avoid a recession during the financial crisis. So it is easy to see why the Poles are enthusiastic about Europe. For them, it has been both a great liberation and an opportunity, of which they have taken full advantage through their hard work and enterprise.
An altogether more cautionary note was delivered by Professor Hans-Werner Sinn, President of the august IFO Research Institute, and possibly Germany’s most influential economist. Sinn estimated the cost to date to the taxpayer of the bail out of the Mediterranean countries as being almost 1 trillion – trillion! – Euros. For him, the Euro crisis is certainly not over.
A key issue is the astonishing lack of competitiveness in the countries of Southern Europe. Hourly unit labour costs in the manufacturing sector in Poland are just 6.90 Euros, according to Sinn. In Spain, they are 20.4 Euros. In the 1990s, Germany had serious problems of competitiveness, with the collapse of the Soviet economic bloc and the ability of German companies to relocate to neighbouring countries such as the Czech Republic and Poland, each with cheap but well educated workers. But the Germans have both improved productivity and accepted real wage reductions, so they are once again highly competitive.
This is a fundamental fault line in the Euro zone which exists entirely separately from the banking crisis. The latter does not help, because it gives cover to the massive subsidies which are now being provided to countries like Spain, Greece and Italy. Receipt of these transfers blunts the incentive for the countries to make the necessary adjustments to real wages. Sinn argues that these countries need to exit the Euro zone temporarily, restructure their debts, improve their competitiveness, and then rejoin.
The UK’s experience in the forerunner of the Euro, the Exchange Rate Mechanism, suggests that this may very well be a viable option. Introduced as long ago as 1979, it was not until October 1990 that we joined. However, the British workforce refused to curb wage demands, a recession followed and we were thrown out by the markets on that famous day in September 1992. It cost the Tories the next three General Elections, but it was the making of the British economy. Between 1992 and 2007, our annual GDP growth was over 3 per cent, compared to not much more than 1 per cent in Germany.
As published in City AM on Tuesday 1st July