April 15, 2024

The Welsh Economy Slips, but London Cushions the Fall

For decades, Wales, like Greece, has been plagued by persistent deficits and uncompetitive industries. Yet unlike Greece, which teeters on the edge of bankruptcy and faces a possible exit from the euro zone — the 17 European Union members that use the euro — this semi-autonomous country suffers no threat of running out of cash or being forced to abandon the British pound, which it shares with other members of Britain’s own political and monetary union: Scotland, Northern Ireland and England.

This year Wales, including this fading slate mining town in one of Britain’s poorest counties, is expected to receive about £14.6 billion, or $22.6 billion, from the central government. The money is used to cover what Wales cannot raise itself from taxes and borrowing.

Most people do not think of Britain — home to many of Europe’s most outspoken euro skeptics — as having a monetary union. But it does, and these money transfers are the essence of what makes Britain’s common currency a success in knitting together a collection of regions and historically separate countries with different languages, cultures and economic profiles.

As a sovereign nation, Greece has had free rein to recklessly spend and borrow, the result of which is its near-bankrupt condition. Wales, by comparison, has limited tax and borrowing capabilities, and the money it gets each year to fulfill its spending needs comes automatically from the British treasury.

And therein lies the lesson for the euro zone: until it can find a way to ensure that its poorer nations can manage their fiscal affairs, countries like Greece and Portugal that run constant budget deficits will become increasingly dependent on transfers from richer countries like Germany. For Britain, such a transfer is accepted as the cost of keeping the union together.

By contrast, Europe’s richer nations, led by Germany, resist institutionalizing any substantial flow of money toward Greece apart from a modest amount of development aid long made available to Europe’s poorer regions for specific projects. In Germany, the notion of a so-called transfer union, which many economists see as essential to any enduring common currency, is still firmly resisted.

As a result, Greece, along with Portugal and Ireland, is dependent on negotiating individual bailouts with the European Union and the International Monetary Fund in a torturous process that risks collapse at almost any turn.

“Wales is part of a fiscal union, a nation state in which the political culture is cohesive enough to legitimize these fiscal transfers,” said Kevin Morgan, an economist at Cardiff University who is an expert on Britain’s north/south divide. “But what works at the national level breaks down at the supranational level.”

As in the euro zone, there are questions even within Britain about the value of its union. But they are driven more by political and cultural divisions than monetary ones. The Scottish national leader Alex Salmond is pushing for a vote that might provide Scotland independence from Britain, while remaining vague on whether the Scots should then abandon the pound to adopt the euro.

In terms of economic contribution to their respective monetary unions, both Wales and Greece are roughly equal, packing a fairly weak punch of about 3 percent. Both are heavily dependent on public spending. Wales is even poorer than Greece, generating a gross domestic product equal to $23,100 per person, compared with Greece’s G.D.P. of $26,900 per person.

Despite the similar economic profiles, Britain is far more generous with Wales than the European Union is with Greece. Compared with the nearly $23 billion in funds London sends to Wales every year, which is used to bolster local tax revenue and pay for services like health care and education, Greece receives on average about 2.9 billion euros a year in structural funds, or $3.7 billion, devoted mostly at specific development projects.

It is not just Wales that benefits from British transfers. In 2011, Wales, Scotland and Northern Ireland together received £54 billion, or $83.7 billion, a sum that is almost twice the level of British military spending.

The yearly transfer payments total about 3.5 percent of Britain’s G.D.P.

Robert A. Mundell, the Nobel Prize-winning Canadian economist whom many see as the intellectual father of the euro, cited a willingness to move money from richer areas to poorer ones as a crucial component of any nation or group of nations bound together by a successful monetary union, pointing to Britain and the United States as examples. The other central requirements of an effective currency zone, he argued, were free trade in goods and services, the ability of workers to move easily from one place to another, and roughly similar economic cycles.

Blaenau Ffestiniog (pronounced  Blay-NIGH Fes-TIN-ee-og) presents a stark tableau of just how such a currency area works to soften the wide disparities even within a relatively small and cohesive country like Britain.

Article source: http://feeds.nytimes.com/click.phdo?i=ff515b23de98b20cf95c7825a37b7e4d