Among the analysts and politicians criticising the single European currency, perhaps the most numerous (and vocal) come from Britain.
This should be no surprise: the UK itself is a currency union, and those working within it should know a thing or two about why such a regime does not really work.
One-size-fits-all monetary policy certainly doesn’t work for the UK. Scotland, the north, the west and Wales all need interest rates as low as they can get. For London and the south-east, interest rates have been too low for years. This has created a lot of tension.
The differences between these regions are stark. The south-east and London are booming — mainly on the back of the buoyant financial industry, the City, which is pulling everything else along — while the other regions stagnate.
The markets will always find a way to correct such discrepancies. Because they could not play on this difference in the stock or bond markets, investors have done it via the real estate markets, particularly the housing market.
House prices have shot up to record highs in London and the south-east, whereas in the other regions, with the exception of some big cities, they have been flat or rising only gently.
For example, the ratio of house prices to income in Durham, in the north, was around 6.7 in 2013, according to government data. In Newcastle upon Tyne, it was 5.2. In Cumbria, it was close to 5.
In inner London, that ratio jumped to 10.4, with big differences between boroughs. The borough with the biggest house prices to income ratio was Kensington and Chelsea, with a ratio of 32.39, followed by Westminster with 20.36. Newham was the most “affordable,” with a ratio of “only” 7.66.
In the area surrounding London, the ratios are also elevated: outer London has a ratio of 9.10, Brighton more than 10, Hampshire 8.04, Kent 7.75, Oxfordshire 8.66, East Sussex 8.96, etc. You get the picture. These data are from 2013, but in the years that followed the trend was maintained.
While part of this is due to the government’s extraordinary subsidies for house prices — Help to Buy, which in fact should be re-named Help to Sell — speculative arbitrage is also playing a big part. Investors sought to take advantage of historic low interest rates and inflated a bubble in the south-east, while leaving the north largely un-invested.
This speculative trade may be about to unravel. There are already hefty discounts to newly built so-called “luxury flats” in London — small units, with the kitchen in the living room renamed “open plan” and which are no longer attracting the “savvy international investor” — and properties spend months on the market without being sold.
However, unlike a stock or bond market bubble, when this one bursts it will take years for prices to bottom out. During those years, investors should probably expect hyperinflation — as the Bank of England will keep printing money to try to keep the housing market afloat — and a lot of uncertainty about private consumption brought on by a collapse in confidence.
Markets will always try to find ways to correct anomalies between various components of a currency union. This lesson should not be lost on the eurozone.