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Euro meltdown

One key element in any renegotiation of the UK’s position within the EU is Osborne’s fork: either the EU’s voting procedures must be reformed so that non-Eurozone members cannot be outvoted by the collective votes of the Eurozone, or non-Eurozone members will have to choose between joining the euro and leaving the EU.  The significance of this point is acknowledged by British Europhiles such as Roland Rudd of Business for New Europe and even Angela Merkel has signalled some sympathy.

Osborne and Rudd both contend that the for of “double majority voting” applied to the European Banking Authority (EBA) could provide a model for wider protection of non-Eurozone EU members.  The way EBA double majority voting works is that for a new rule to be accepted, as well as there being a qualified majority, by voting weight, of all EU members, there will also have to be a simple unweighted majority of both Eurozone members and of non-members.  That means that if a majority of non-Eurozone members do not want to accept a new banking rule, they can block it, thereby preventing the Eurozone members collectively imposing rules on the non-Eurozone members via the fact that the Eurozone members collectively constitute a qualified majority of the EU as a whole.

Obviously if this principle were extended to Single Market and other rules of the EU as a whole it would be highly favourable to the non-Eurozone members, since they would carry disproportionate blocking weight.  It therefore seems unlikely it would be extended beyond the special case of banking or perhaps broader financial regulation, in which the UK is a large player and might be granted some accommodation.  Is it really going to be applied to Single Market rules applying to car manufacturing or the fashion sector?

One might be sceptical, but let us assume for the sake of the discussion that this form of double majority voting were introduced right across the EU.  Would it be sustainable as the Eurozone expanded?  At present there are 18 members of the euro and 10 non-euro members.  Eight of the ten non-euro members have committed to join eventually, though two (Sweden and Bulgaria) have said they do not intend to join despite their Treaty obligations to do so.  Thus the current expected target is for 24-26 euro members and 2-4 non-euro members (with the numbers depending on whether we count by Treaty obligations or public statements).

Thus, even if we believed some special double majority-type protection for non-Eurozone members could be achieved and work in practice with the current configuration of membership, could that conceivably be sustainable when there were just 2-4 non-Eurozone members?

At the recent Bloomberg debate on the future of the EU I put this question to Roland Rudd.  Roland is usually a very impressive chap, never at a loss for a credible comeback, so I was rather surprised to hear his very odd reply to my question.  For he asserted that there will always be a large group of non-Eurozone members, never just 2-4.  He stated that although there were notional commitments for other members to join the euro and all new EU members took on such a commitment, the date was put back and put back and expansion would soon stall.  Therefore the concern that some new arrangement might be rendered unsustainable by the growth of the Eurozone was based on a false premise.

I am rather at a loss to know what to make of this.  The Eurozone had 11 members in 1999, then Greece joined in 2001 (12), Slovenia in 2007 (13), Cyprus and Malta in 2008 (15), Slovakia in 2009 (16), Estonia in 2011 (17), and Latvia in 2014 (18).  Lithuania is scheduled to join in January 2015 (19), Croatia in 2019 (20), Hungary in 2020 (21).  The Czech Republic aims to join in 2017 and Romania hopes to join in 2020 – making 23 members by 2020.  That leaves only Poland with neither a scheduled entry date nor an expressed target.  There may in recent years have been a little slippage of target dates because of the Eurozone sovereign debt crisis, but that has only meant a couple of years’ delay, not any serious rowing back on the idea of joining (Bulgaria accepted) and the joining dates are not in the distant future – they are later this decade, only a couple of years after the UK’s planned in-out referendum!

It is thus very clear that of the existing EU members that are not members of the Eurozone, most plan to join fairly soon.  Any protection for current non-Eurozone members can thus only be of practical significance in the interim between now and about 2020.  After that date, a “double majority” principle would mean that the UK and Sweden, alone, could block any EU rule.  That would clearly be ridiculous and totally unfair on Eurozone members.

Thus, for the scheme to have any chance of working, it cannot be enough simply to have protection for existing non-Eurozone members most of whom are planning to join the euro quite soon.  What would be needed, for the arrangement to be credible in the long run, would be for there to be a large group of non-euro members that were never going to join the euro – indeed a large enough group that the Eurozone (or EU Federation or whatever it called itself by then) would be simply one country amongst many within the EU, so that the euro ceased to be effectively an EU project with a couple of opt-outs but instead became a separate minority project of its own.

Who would these new members be?  The only possible candidates would be the countries that currently surround the EU.  That means Norway, Switzerland, Liechtenstein, Iceland, Ukraine, Belarus, Moldova, Turkey, Serbia, Albania, Israel, Egypt, Libya, Tunisia, Morocco.  Even all of these would probably not be enough, but stating just that list illustrates the challenge.

The point is this: for it to be sustainable for there to be any non-Eurozone EU over the long-term, there have to be a large block of EU members that are never going to join the euro and the mechanisms and institutions of the EU have to be separated from those of the Eurozone.  It can’t possibly be enough for us simply to deliver disproportionate protections for non-Eurozone EU members for now (even in the unlikely event the Eurozone would agree) because as the Eurozone expands (which it has been doing and is scheduled to do, further) any special protections for non-Eurozone members would quickly become totally unfair upon the Eurozone.  If we want the non-Eurozone EU to continue, it’s going to need a lot more members, and the only candidates available are likely to seem pretty unattractive to all concerned for many years to come.

11 comments for: Andrew Lilico: Any EU renegotiation needs to work when there are 24 members of the euro, not just 18

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