As a qualified engineer I am often given to thinking of engineering comparisons for economic or social questions. Two examples illustrate the folly of deliberately building rigidities into economic systems, as the designers of the Euro did.

Take, for example, the motor car. Cars have pneumatic tyres, springs and shock-absorbers for a reason: to absorb the forces imposed on the body of the car, its driver and passengers when going over bumps or braking or cornering. A car without pneumatic tyres, springs and shock-absorbers would literally shake itself to pieces before going a few hundred feet. If it did manage to stay together it would be a very rough ride and leave the occupants in a highly distressed state.

Or take a modern passenger jet: an Airbus 380 for example. If you sit in a seat by the wing, you see that on the runway, when the plane is stationary, the wing droops, so the tip is ten or twenty feet below “level”. Once up in the air, the wing curves upwards: the tip is maybe ten or twenty feet above “level”. And when the plane flies through turbulence, you can see the whole wing flexing and vibrating so as to absorb the shocks. Without that deliberately-designed-and-constructed flexibility, an aircraft’s wings would shear off and the plane would crash.

The fundamental design fault of the Euro (and of all “currency unions”) is that it removes from participating countries the two key economic safety valves or shock absorbers: the exchange rate and the interest rate. Something has to give – and it is usually the level of unemployment and a deterioration or collapse in economic growth.

The fact that none of the sixteen countries currently using the Euro (including Germany) is able to allow its exchange rate to rise or sink, or adjust its interest rate, is a major reason why all of them are or have been in economic trouble: Germany because its exchange rate should be higher, so as to reduce its massive trade surplus, and most of the others because their exchange rates should be lower, to correct their massive trade deficits. As for interest rates, had Ireland, for example, or Spain, been able to bump up their interest rates to choke off, or at least mitigate, their property bubbles, they wouldn’t be in the appalling mess they’re now in. Thankfully the UK is not in the Euro. Its exchange rate dropped by around 25% between 2007 and 2009; this undoubtedly lessened the impact of the crisis on UK exports.

A third engineering comparison, perhaps less striking than the first two, would be the fact that soldiers have to break step when marching over a bridge, so as to avoid setting up an oscillation in the bridge structure which is self-amplifying and can result in it shaking itself to pieces (just like the famous “ant scene” in Tom & Jerry) . Modern bridges, especially suspension bridges, are designed so as to neutralise the effect of strong winds setting up potentially-fatal oscillations in their structure. In economic terms, the bridge is the economy; the soldiers’ steps or the wind are analogous to fixed exchange rates and interest rates.

The designers of the Euro knowingly ignored all the evidence back in the 1970s and 1980s, notably the McDougall Report that they themselves commissioned, which concluded building rigidities into an economic system leads inevitably to disaster. Now, due to the inbuilt rigidities of the Euro 4×4 the wheels are falling off the jalopy.

 

Ian Milne is chairman of Global Britain, has a degree in engineering and chaired an engineering company for many years. This article is published courtesy of the Better Off Out campaign

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