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Mervyn King, the former governor of the Bank of England, predicts the collapse of the eurozone in a book published this week, going further than his well-known private scepticism for the European single currency.
In extracts from The end of alchemy: banking, the global economy and the future of money, he says the burden of debts between nations in the eurozone “may become too great to remain consistent with political stability”.
Highlighting the need for the eurozone to integrate more fully, including significant debt write-offs, he says the process will probably exceed the willingness of the European people to bailout other countries.
“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,” the former governor says.
Lord King has expressed similar views before and railed against the requirement, only for debtor nations to adjust policies while in office. In 2013 he told the FT that the requirements on Greece and other eurozone periphery countries were best described as hell. “Instead of mere hell, it’s real hell,” he said.
Coming to the end of his 10 years in office, the then governor said it was “astonishing” that eurozone authorities had not realised the bloc needed higher inflation in Germany, permanent transfers from countries such as Germany to nations such as Greece, or to break up.
At the time he said: “I don’t know what the right answer is”, a view he has toughened in his book to say that attempts to find a middle way, in which Greece is offered concessional loans on lax terms by the rest of the eurozone, will not work.
“The attempt to find a middle course is not working. One day, German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit,” Lord King says.
The book primarily concerns the future of banking and imbalances in the global economy. He says the world will inevitably face financial crises because it has not sufficiently resolved the issues that caused the problems of 2007-08.
His predictions will cause some consternation among central bankers and regulators since his period in office was marked by a dismantling of the financial stability efforts of the Bank of England in the belief that controlling inflation was sufficient to prevent economic crises.
Lord King is by no means sanguine about breaking up the eurozone. Predicting that southern European countries will tire of the efforts needed to stay in, he adds that “the counterargument — 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”.
“But if the alternative is crushing austerity, continuing mass unemployment, and no end in sight to the burden of debt, then 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 writes.