The Welsh Economy Slips, but London Cushions the Fall
A mountain view of Blaenau Ffestiniog, Wales, an industrial town that has seen better days.
By LANDON THOMAS Jr.
Published: January 27, 2012
Infusions in the billions of pounds keep fading towns like Blaenau Ffestiniog alive.
Andrew Testa for The New York Times
A functioning slate quarry in Blaenau Ffestiniog is a reminder of the town's past.
Andrew Testa for The New York Times
The artist David Nash hopes his sculpture will be part of a plan to draw tourists.
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 agross 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.
More than a century ago, Blaenau was a thriving industrial town of more than 10,000 people, churning out slate slabs that roofed houses the world over. The residue now covers the hills that surround the town, casting a pall that mirrors its economic condition. Since undercut by cheaper slate varieties from Spain and China, the mines no longer provide many jobs, and the town’s steadily shrinking population is now below 5,000.
It is a proud settlement where virtually everyone is bilingual. Conversation at work and in and around town is mostly in Welsh rather than English.
While more people are leaving Greece as the economy worsens, greater language and cultural barriers make it harder for Greeks to move easily to Germany or Italy than for a resident of Blaenau to settle in Birmingham or London, perhaps never to return.
A quarter of the town’s population receives unemployment benefits and the average income is a mere £10,600, half the national average. The town lost its last dentist five years ago.
“There are just too few people chasing too few jobs,” Phil Rogers, a slate mason, said one evening recently as he sipped a pint of ale on the town’s threadbare main street. Mr. Rogers says he is earning no more today than he did 10 years ago, but while times are hard and he often traps squirrels and rabbits to supplement his diet, he says he manages to get by.
“The welfare state — it’s pretty good, isn’t it?” he said with a wink.
But such a safety net does not come cheap. Of the money flowing to Wales this year, 42 percent is destined to pay for health and social services, including free prescription drugs and home day care for the elderly, a critical support for towns with a rapidly aging population like Blaenau’s.
The town is embarking on an ambitious project to make it more appealing to tourists, including the construction of a mountain biking complex. Local officials hope that the investments will reverse the town’s fortunes, economically as well as psychologically.
“People see themselves in a declining town,” said Bob Cole, the chairman of the local group here that has pushed for the project. “We are saying, ‘Look, we are now on the up.’ ”
While the European Union contributes substantially to such projects, the transfer payments from Britain’s more prosperous south keep the town alive as its tax base shrivels and demand for welfare services increases.
For some here, that dependence is galling — especially now as Scotland’s bid for independence gathers steam.
“We have a better understanding of what to do with our money than a bunch of millionaires in London,” said Paul Thomas, the town official who represents Blaenau at the local county seat and who is also a member of Wales’s nationalist party, Plaid Cymru.
But as the bite of the recession grows worse and the need for help from the south becomes more acute, such a view is distinctly a minority one.
“It’s good to be part of the United Kingdom,” said Glenys Lloyd, a local inn owner. “I was born in Wales, but in the end I’m British, aren’t I?”
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