John Baron is the Member of Parliament for Basildon and Billericay. Before entering Parliament, John managed portfolios for charities, pension funds and private clients, and was a director of two City fund management groups. He now writes a regular column for the FT’s Investors’ Chronicle.
The Eurozone crisis continues to unfold. The economic news goes from bad to worse. Furthermore, with the ink hardly dry on the fiscal compact treaty, many countries are already in breach of the EU’s debt limits. Politicians are now queuing up to argue against austerity packages, if not the Euro itself. No wonder the Prime Minister has changed his tone: but his comment that we are not yet half-way through the crisis falsely assumes a solution has been found. A prize awaits him the sooner he realises this is not the case.
Short term, the federalists may be relieved. Christine Lagarde has been successful in drumming up support for increased loans to the IMF. Meanwhile, the ECB’s initiative for three-year loans to beleaguered banks has bought time. But in the absence of a growth agenda, the market knows such measures are nothing more than sticking plasters.
Unlike previous recessions, this one is the result of excessive debt. The solution to such a crisis is not more debt. And no amount of moving this high debt around the system, between banks and governments, will conceal or erode its scale. At some point there has to be a reckoning.
The Eurosceptics among us are not the only ones to believe the Eurozone’s present course can not lead to a solution. The US and Canada declined to increase their IMF contributions. The Government may fall back upon the old argument that no country has ever lost money lending to the IMF, but lending to countries which can not to devalue their currency is breaking new ground and, therefore, carries substantially greater risks. It is disingenuous to suggest that only three of the IMF’s 53 rescue packages are in the Eurozone – it is only these three that can not devalue, which has been an essential part of IMF packages in the past.
Meanwhile, many countries are already in breach of the new fiscal compact to keep government debt to below 60% of GDP. Media attention has focused on Greece, Italy, Portugal and Ireland. But already Germany, France, Belgium, Austria and the Netherlands are also in breach. It does not bode well. The fiscal strictures put into place following the launch of the Euro were also soon ignored, notably by France and Germany. The originators of this doomed venture are now paying the price.
The political fallout is noticeable. Geert Wilders, the far-right Dutch politician, is now campaigning on an anti-EU ticket and is gaining support. Germany might yet lose a key ally in its efforts to base the Euro on sound money. The French elections mean there is a real possibility the fiscal compact will be renegotiated and austerity put on the back burner. This will tempt some peripheral countries, such as Greece, to break ranks. Such political divisions increase the chance of a fractious break-up of the Eurozone.
Against such a backdrop, this country now needs clear and strong leadership.
We need to publicly question whether the Euro should be preserved if it is not creating greater prosperity and harmony. Life post-Euro should be openly discussed. Otherwise, we risk talking ourselves into a deeper crisis. Investment is being held back because the Government has very publicly bought into the view that matters will get worse should the Euro break up. The result is uncertainty, which affects investment. This is a cul-de-sac which may be politically expedient, but which is economically naïve.
Economic life will go on after the Euro, and may even thrive. Indeed, efforts to save the Euro are actually making this recession worse. Denying countries the option of devaluation results in austerity packages having to be more severe. Such belt-tightening leads to a spiral of cuts, recession and more cuts.
We all know that devaluation is not a long-term solution, but it does provide a short-term boost to competitiveness. Since 1945, there have been over 80 examples of countries leaving a currency union; the vast majority of those countries have benefited. The UK’s recovery in 1992 started almost the day we left the ERM.
Longer term, the best way of increasing competitiveness and narrowing the gap between what Eurozone governments spend and what they earn is through economic growth. But where are the sweeping supply-side reforms needed to foster this? Where is the machete to cut down the swathes of bureaucratic regulation which acts as a deadweight to enterprise and initiative? Where is the political will needed to cut business taxes, especially for SMEs, and foster economic growth? There is scant evidence of anything positive. No wonder markets are seriously doubting whether the debt will ever be paid back.
At the very least, the Prime Minister needs to be questioning the rationale behind the EU’s heralded near 7% budget increase for next year. David Cameron should be now setting out his stall as to why the EU needs to make deep cuts to the EU’s bureaucratic structures.
Long-awaited reforms to the Common Agricultural Policy continue to remain elusive: over three-quarters of the EU budget is spent on agricultural or structural funds – much of it in countries which need it least. The waste, profligacy and fraud is renowned. The EU budget has never been signed off by its auditors for each of the last sixteen years. €bns can not be accounted for.
The Government needs to grasp this nettle. It needs to seize the moment. It needs to stop talking up the crisis, and make business better aware of the more profitable opportunities in the faster-growing regions outside the EU. It needs to do more when it comes to supply-side reforms in this country – even if it means taking on the EU (and the Lib Dems). And it needs to set its case out now for deep cuts to our EU budget for next year and beyond – this would save £bns. If the EU will not co-operate, then this perhaps begs a bigger question.
The Prime Minister should reflect on the boost to Conservative ratings the last time he took a tough line on Europe. Electoral success awaits if he is courageous and reflects the views of the majority of the British electorate. The moment has arrived: let’s hope he seizes it.