There are moments that change history. When previously unquestioned assumptions are challenged. When the unthinkable has to be thought through. The Eurozone is now experiencing such a period.
The exact outcome of all this nobody knows for sure. But one thing is clear; the Euro has failed in its original intent. It has done serious economic harm to at least five of its original members.
So when Eurozone leaders meet later today they have a choice to make. Not about how to save the Euro, but whether the single currency will face quick and painful surgery or a long and agonising death.
In 2001 the then EU Commission President flew to London to warn us that we must join the Euro or risk losing out. He predicted the spread of the single currency to North Africa, and even claimed it would soon become “very popular” here in Britain.
But the sheer intellectual arrogance of the European political elites was not justified. The Euro was not a success even in benign times. Faced with global financial instability, it has fallen apart.
First Portugal and Ireland needed a bailout. Then Greece needed two in twelve months. Italy teeters on the brink and Spain could yet go the same way. The appointment of unelected, EU approved technocrats in Greece and Italy has solved nothing. Now almost the entire Eurozone, including France and Germany, could have their credit ratings cut.
How have we got to this position?
Put simply, the Eurozone crisis is the result of flying in the face of economic reality. A monetary union with one size fits all interest rates set in Frankfurt and imposed on 17 nation states with very different economies was a project doomed to failure from the start.
What is more, the nominal Eurozone interest rate masked great gulfs in real interest rates, fuelling extraordinary real estate bubbles in Ireland and Spain. These burst, leaving those countries with a legacy of ghost estates – rows of unfinished properties and thousands of brand new houses left unsold.
There was, however, one winner from all this.
From the creation of the Euro up until the 2008 banking crisis, Germany’s current account balance has improved by over $200 billion, whilst the total balance for the so called PIIGS worsened by over $300 billion.
These trends were almost exact mirror images, because they are both direct consequences of membership of the Euro.
So for all its complaints about shouldering the costs of the Euro crisis, Germany is a massive beneficiary of the Euro. Accordingly, for reasons of economic self-interest as well as its commitment to the federal European project, Germany will not countenance any of the solutions that will fix the deficit problems for the PIIGS – namely splitting the Euro or allowing them to exit.
All other options are just palliatives – nothing more than bandaging over the gangrene.
Yesterday the Prime Minister said he is determined to stand up for Britain’s national interests. In particular, he pledged to stand up for the City of London, Europe’s largest and most lucrative financial centre, in the face of EU calls for a financial transaction tax.
I am pleased the PM has resisted this Tobin tax. The proposal should be dismissed out of hand. First, such a measure would neither be in the interests of Britain nor the EU as a whole. Second, the idea that the EU can impose a tax which even the European Commission admits would draw almost all its revenues from the City of London is politically laughable even if it was legally achievable.
The Prime Minister is also right to say that the Eurozone crisis is harming the British economy. Germany, France, Ireland, Italy, Spain, Belgium and the Netherlands are amongst our main trading partners. This means that when the Eurozone’s economy suffers, so does ours.
France and Germany believe greater fiscal integration, along with stricter rules for those countries which have colossal deficits, can turn the situation around. But the simple fact is no amount of treaty change will turn Greeks into Germans, either in terms of fiscal responsibility or economic productivity. Instead the combination of fiscal tightening and overvalued currency will damage the market for British goods in Italy, Spain, Ireland, Portugal and Greece for the foreseeable future. So the EU’s solution to the crisis will depress our markets almost as much as the crisis itself.
The only way for the Eurozone’s weakest economies to take the first step on the road to economic recovery is for them to leave the Eurozone, devalue their currencies and go for growth. A combination of yet more fiscal integration and hairshirt budgets simply will not work.
This is an unprecedented opportunity for the government to establish a new relationship in Europe. This is not because we could veto the arrangements to underpin the short term finances of the Euro members. That would be irresponsible and was always implausible. The opportunity arises precisely because France, Germany and the Commission want to use the crisis to accelerate the centralisation of Europe. That is a perfectly legitimate aim for them, and on the same basis it is perfectly legitimate for us to seek to change our relationship in a different direction.
The question is, what should that relationship be? The changes we need in a new Treaty go far beyond simply “protecting the City of London.” The threats to the City are the sort of thing the EU classically comes up with at the beginning of major negotiations, creating an unacceptable demand that they then trade off against what they really want. We should brush this hackneyed tactic aside, and focus on what the UK needs.
What comes out of the EU summit ought to be new terms of membership, with less focus on a legislative union and more focus on free trade, competitiveness and prosperity. They should include an emergency brake and a variable opt out from EU legislation. The first of these would allow the UK to veto future damaging EU proposals like the Tobin tax. The second would allow us to sidestep any EU laws which would be detrimental to our national interest. The fundamental principle of our new relationship must be that Parliament has the final say. If the EU proposes a law and Parliament rejects it, that law must not apply here in Britain.
We have already seen, with the motions on prisoner voting and extradition, Parliament beginning to insist on being heard on matters vital to the country. This trend is likely to accelerate, so government should in turn insist on our democratic rights within the EU.
To achieve this, Britain must talk to the 10 non-Eurozone countries about how to protect our interests against the emerging Eurozone bloc. Of course, not all of the group of 10 will be interested. Some will almost certainly decide their interests lie in staying close to the Franco-German axis that has always dominated Europe. That is their decision to make.
But Britain should provide leadership for those non-Eurozone nations who, like Britain, do want to maintain a higher level of autonomy. Who reject further integration and want to end the erosion of their national sovereignty. Who want free trade to boost their citizens’ prosperity, not political subservience to unaccountable and expensive European institutions.
This is a defining moment in our history. Britain may never get a better opportunity to create a better relationship with the EU. We must seize the chance with both hands. If the Prime Minister seizes the day this government will be remembered as doing what governments are supposed to do for their people, changing history for the better.