By John Baron MP
As the eurozone crisis becomes increasingly desperate, it's time for the prime minister to face reality.
All the signs of stress are there. Mario Draghi, the president of the European Central Bank, is openly talking about the breakup of the eurozone. Even though Italy alone requires 300 billion euros in refinancing next year, eurozone members presently struggle to cobble together a new 200 billion euro loan to the IMF to help rescue the single currency. Several European leaders have warned of the difficulties of pushing the fiscal compact through their national parliaments. Meanwhile, the market continues to demand jaw-dropping interest rates on peripheral debt.
The eurocrats have brought this on themselves. Their response to the eurozone crisis has been too little, too late. The umpteen summits, the various initiatives, the increased borrowing and loan agreements have failed to reassure the markets. This is because the central cause of the problem — that is, a lack of competitiveness — has not been addressed. Until this happens, all other measures are sticking plasters — and the markets know it.
This recession is different: it is not a 'destocking' recession, which could be countered by a decent dose of Keynesian stimuli. This one is built on debt. Governments across the west have not lived within taxpayers' means. They have spent too much. The only true long-term remedy is for these economies to become more competitive, to generate growth and therefore better pay their way in the world. But there is little sign of this happening.
In the short-term, cuts to spending and a touch of inflation will help. But these are not long-term solutions. Further relief may be provided if the ECB becomes the lender of last resort, and starts printing money. This decision is in the balance. But again, it is not a long-term solution.
This is why the prime minister needs to be careful. The veto was right, but he will now be encouraged to participate in all sorts of deals to save the single currency. Such talk from the prime minister must stop. He needs to think again.
That the underlying concept of the single currency was flawed is beyond doubt.
Binding divergent economies together without fiscal union was, and remains, a massive mistake. History shows you cannot have monetary union without fiscal union.
The eurozone members may now talk of fiscal union, disciplinary measures and penalties. However, cracks are already appearing as to how serious they really are. We do not forget how easily the eurozone members ignored the last fiscal strictures when the euro was born.
Saving the euro may actually be making this recession worse. Denying countries the option of devaluation results in austerity packages having to be more severe. The sky will not fall in if countries leave the eurozone. Since 1945, there have been over 80 cases where countries have left a currency union; in the vast majority of cases, those countries have benefited. The UK's recovery in 1992 started almost to the day we left the ERM. If the euro were to fragment, consumers would still want their German cars and their French wine, not to mention Greek holidays — which of course would be cheaper come devaluation.
So why is it that the eurocrats are living in this 'Alice in Wonderland' world? Why are they ignoring the markets and ploughing on regardless of economic reality? Why do they talk of economic catastrophe if the euro were to break up?
It can only be that the euro is not an end in itself, but a means to an end — that being political union. The euro is a vital step towards this objective. Some eurozone leaders have even stated as much.
In such a make-believe world, economic reality is marginalised and the eurocrats plough on, regardless of the harm that is being done.
Economic vandalism is one thing; political vandalism another. Democracy has effectively been suspended in some eurozone countries. The appointment of eurocrats in Greece and Italy has so far been swallowed by the electorates. How long this will last with planned austerity packages yet to bite, only time will tell. This perhaps is a natural consequence of the fact that Greece, Italy and the others are no longer economically sovereign — they have no central bank, no control over interest rates, and no currency. Ever tighter fiscal controls will mean budgets policed by the unelected European Commission. Even in the currency union that is the US, at least each state elects its governor.
The prime minister should not only face reality, but also publicly recognise that the euro may not be saved. Contingency plans and possible remedies should be more openly discussed. This would do the country a great service. It would help prepare the ground and perhaps soften the blow if it comes. Publicly recognising reality would be both right and popular. The government's rise in the opinion polls after the veto is no accident.
However, the prime minister's veto should not be the end of this sorry crisis. Instead, it should mark the beginning of a process to renegotiate a relationship with the EU based upon free trade, competitiveness and growth, moving away from political union and deadweight regulation.
This is not some grand utopian vision — it exists today. Switzerland in particular enjoys easy access to the EU's markets, without its burdensome regulation, and prospers as a result.
This kind of new relationship with Europe would recognise that we want good relations with our neighbours - but that we also want to better engage with the faster-growing world outside the EU.
John Baron MP is the Conservative MP for Basildon and Billericay
40 comments