Britain’s stagnant regions are stuck in a monetary union trap
The Economic Statistics Centre of Excellence created a bit of a stir at the end of last week with its estimates of growth in the regions of the UK.
Since the recovery from the financial crisis began during 2009, London’s economy has grown by 26 per cent.
At the other end of the scale, output in the north east has expanded by only six per cent, less than one per cent a year. Yorkshire has grown by just eight per cent, and the north west, which includes both Liverpool and Manchester, by 11 per cent.
The economies of the Eurozone show a similar pattern. Since 2009, Germany has expanded by 20 per cent, growth in Spain has only been six per cent, and the numbers for Portugal and Italy are even lower, at just two and one per cent.
The regions of the UK and the Mediterranean economies of Europe have an important feature in common: both groups are in a monetary union with more dynamic and innovative economies. Newcastle is in the sterling monetary union with London, and Portugal is in the euro with Germany.
The weaker economies are not sufficiently competitive to produce enough goods and services that others want to buy. They run a balance of payments deficit with the world outside their borders.
And in a monetary union, a balance of payments deficit translates into lower growth and higher unemployment. Standard trade theory in economics shows this clearly.
At least in the UK, the poorer regions get compensation in the form of large transfers of money from the more successful ones to finance their trade deficits.
London generates a fiscal surplus – the difference between income raised by taxes and public spending – of £3,700 per head, according to the latest Office for National Statistics estimates. But only two other regions – the south east and the east of England – run surpluses. The rest are in deficit – they spend more than they raise in tax.
Northern Ireland gets the biggest per capita subsidy, to the tune of £5,000 a year for every single person living there. The DUP might usefully contemplate the fact that the rest of us would be better off if we got rid of the province altogether.
A devaluation for the UK’s regions against London and for the economies of southern Europe would help to make them more competitive. In a monetary union, this is simply not possible.
The problem goes deeper than a simple lack of price competitiveness. The British regions just do not attract enough high-skilled workers to produce the quality goods and services which are in demand in the twenty-first century.
We might imagine that low housing costs would attract people, but the price mechanism works very slowly and imperfectly in this context. Over the past couple of years, there has been a trickle of people out of London to the regions, while the inflow from them to the capital has been halted. But there is a long way to go.
And that means that, whatever form Brexit takes, the economic trends of Britain’s monetary union are such that the future for Britain’s regions still looks grim.