The recent signs of economic recovery in the eurozone are an indication that, as happened in the UK several years earlier, expansionary monetary policy is finally triumphing over repressive fiscal policy.

The combination of interest rates that are close to zero and "quantitative easing" (an absurd term for old fashioned expansion of the supply of money and credit) is finally proving efficacious, not least because Mario Draghi, president of the European Central Bank, has skilfully encouraged a decline in the value of the euro to more internationally competitive levels.

Osborne's Economic Experiment William Keegan.jpg
Cover from the book Mr Osborne's Economic Experiment - Austerity 1945-51 and 2010 by William KeeganWilliam Keegan

To this powerful combination has been added a factor that has precious little to do with the decisions of Western policymakers, namely the boost to real incomes resulting from the dramatic fall in the price of oil.

The decline in the value of the euro has hardly gone unnoticed on this side of what we like to call the English Channel. Skiing parties, and those planning their summer holidays, can hardly believe their luck.

This is one of those occasions when people I meet ask me for financial advice, the topic being: "Should I be investing heavily in the euro?"

If my wife overhears them, she immediately intervenes: "If I were you, I should not take investment advice from him!"

In fact, I never attempt to proffer it. Years of experience have taught me to say, in a case such as this: "Buy euros if you need them. But leave speculation to the speculators."

British economic recovery exaggerated

While welcoming the recent trend of the pound/euro relationship for their short term ends, the British ought to be concerned for economic reasons if the trend persists. For the fact of the matter is that in much public comment, not least the regular propaganda pumped out by the Chancellor of the Exchequer George Osborne, the putative superiority of the British economic recovery vis-à-vis the rest of the Group of Seven is much exaggerated.

In the third quarter of 2014, the UK was running a current account balance of payments deficit of some 6% of gross domestic product. Things appear to have improved somewhat in the fourth quarter but the recent loss of exchange rate competitiveness bodes ill for the future. And the productivity figures are terrible.

This is the slowest and worst UK economic recovery on record, as a recent analysis from the independent Institute for Fiscal Studies has demonstrated. In the third quarter of 2014, real GDP per head, and real output per hour, were both 1.8% lower than in the first quarter of 2008. Some recovery.

Mr Osborne's Economic Experiment

Buy Mr Osborne's Economic Experiment - Austerity 1945-51 and 2010 on Amazon

What happened - as I point out in my new book "Mr Osborne's Economic Experiment" - was that the British economy was recovering nicely after the G20 fiscal stimulus of 2009 but the emphasis on austerity and fiscal tightening from summer 2010 threw the economy into reverse gear.

It took several years, and it has taken even longer in the eurozone, for an expansionary monetary policy to offset the pernicious impact of ill-timed and inappropriate fiscal contraction. All the official boasting about the UK's high levels of employment reflects, to a considerable extent, the low level of wage earnings in what is known as our "flexible labour market".

This was a development foreseen, and indeed feared, by French President Francois Mitterrand during the run up to the Maastricht negotiations of 1991, which led to the formation of the single currency.

When British prime minister John Major was arguing (in the end successfully) for the UK's exclusion from the European Social Charter, Mitterrand correctly remarked - as Philip Short observes in his excellent biography, Mitterrand: A Study In Ambiguity - that Britain could continue to adopt more flexible labour policies with fewer protections for its workers than the rest of the Community, making it potentially more attractive to multinational investors.

That is precisely what happened.


Mr Osborne's Economic Experiment - Austerity 1945-51 and 2010 is published by Searching Finance.

William Keegan is a journalist and academic who is the senior economics commentator at The Observer.