Warning: Euro-iceberg approaching

August 24, 2011 9:33 am

icebergFreethinking with Rob Marchant

As we pass an unusually newsworthy summer on the domestic front with phone-hacking and riots, not to mention economic wobbles in the US and China, let alone Libya, it might be wise to return for a moment to the iceberg edging towards our own continent, its long-term significance for Britain ultimately liable to outstrip all these things.

For a measure of just how significant, you must admit that it is newsworthy, not to say deliciously ironic, when that full-blooded Tory George Osborne finds himself somewhat sheepishly agreeing that

“the remorseless logic of monetary union leads from a single currency to greater fiscal integration”. In other words: you Euro-chaps really should get cracking on giving away more sovereignty.

Excuse me? As Nick Cohen relates:

“We have become so used to hearing it that we fail to notice the strangeness of a eurosceptic Tory chancellor begging Europeans to integrate faster…Osborne is panicking because the theories of what will happen if the EU tries to keep muddling on and a major European country defaults range from the alarming to the catastrophic. Liquidity would freeze, British banks’ capital would be wiped out, Britain would go back into recession…and the deficit balloon beyond control…he must support a policy he has spent his career opposing.”

Osborne is therefore, for the moment, containing his Schadenfreude at seeing the euro-zone on the brink. And so perhaps, given the seriousness, we should contain ours at his own humbling.

Last week, Sarkozy and Merkel had another of their cosy meetings, as they had done back in July. As predicted, their agreed sticking-plaster to resolve the immediate problem of Greece and reassure the markets didn’t work. The European Central Bank had to intervene to buy up Spanish and Italian bonds, and a new meeting was arranged.

The good news is, at that meeting they quietly committed themselves to that bête noir of the Tory back benches, a political integration project which could yet save the euro-zone. The bad news is threefold: the plan has inherent flaws; it may simply be too little, too late, as this Reuters piece suggests; and the sticking-plaster still hasn’t stopped the underlying infection in Spanish and Italian debt which, if left untreated, may yet result in a terminal euro-gangrene.

Now, let’s not underestimate the magnitude of what, relative to the measured and Sir Humphrey-like world of Brussels-speak, has occurred. It’s a big deal, and to get there, one can’t entirely blame them for bypassing the formal protocols and openly thrashing out a bilateral proposal which others will now need to sign up to.

However, in doing so, they seem to have rather eschewed the input of everyone else, that is, the other twenty-five countries. And, furthermore, what is a big deal in traditionally consensual, incrementalist Euro-land is still not necessarily the kind of radical action plan the markets were looking for. In short, the plan, however cunning, may not work.

The flaws are significant: first, they need to take a lot of awkward countries with them who could well be further alienated by this lack of consultation. Second, if you wanted to embark on a long-term structural project like this, “you wouldn’t start from here”: that is, in the jittery aftermath of a banking crisis, infused with a near-universal fear of low growth.

Third, the plan is full of not necessarily workable ideas. Jointly-owned “Eurobonds”, to carry additional debt, are being suggested as a medium-term solution, but seem a political improbability (Merkel’s coalition partners are against, for a start). And then there is the “Tobin tax” to be paid on each transaction taking place on the financial markets: oft touted, never implemented. That is partly for the very good reason that London is by far the most important financial market in Europe, and might not want to risk its business disappearing off to New York or Tokyo. And it would be especially difficult to achieve in any case: the UK is not even in the euro, has a Tory government, has a big dependence on City income and a long history of being at least mildly sceptical of all things European.

And overall, it’s not so much that the plan itself might not work, although it might not; it’s rather the time you have available versus the hoops you have to jump through to get there. Negotiations, treaties and parliamentary votes would have to be managed in twenty-seven countries. Realistically, it ain’t going to happen soon.

It’s a plan that, arguably, should really have started with the birth of the euro twelve years ago, so it could come to fruition around now. But to try to implement such a grand scheme on the fly, in the kind of timeframe the markets will demand, seems a very tall order. Especially since, as Gavin Hewitt points out, they have even not addressed the immediate problems of the possibility of further problems with its weaker members: the failure to increase the bailout fund – still not large enough to save Spain or Italy – was the gaping hole in last week’s package.

At least now Europe’s leaders seem to be starting to see the acute danger of their situation. As they should: after all, metaphorical alarm bells and sirens are not merely sounding, but screaming. Europe, in contrast, is reacting in its customary, measured way.

As for solutions, they seem to be two-fold: embark on a huge – and perhaps insanely ambitious – project of integration: or kick out the troubled economies who are not pulling their weight. Nothing is sure, and I am not a betting man. But I’d have to say that the first of those two options is looking very tricky to pull off.

And the second, given the treaties which underpin the EU, might be very messy indeed for European relations, if some of these were to be reneged upon (a euro-zone expulsion was described by a top EU lawyer as “legally almost impossible”). Let alone the economic consequences.

So, if that happens, as it could, expect some fireworks. European summits have historically thrived on moving things forward slowly; as a relatively unwieldy mechanism for resolving fast-moving crises, they have a pretty mixed record. A fact to which the still-uncomfortable memory of a certain Munich conference, a mere seventy-three years ago next month, might attest.

Rob Marchant is an activist and former Labour party manager who blogs at The Centre Left.

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