At last weekend’s G20 meeting of central bankers and finance ministers, there was yet another grandiose and hubristic statement that this weekend’s European Council Summit would result in a package that would be “decisive” and “save” the euro. Suffice to say that by the middle of the week, Germany’s minister of finance, Wolfgang Schäuble, had poured cold water on any notion that there would be the “big bazooka” that markets believe is needed to prevent the currency club breaking up. The cycle of expectation, nay elation, followed by disappointment and bitter reality is now well established. And by the end of last week we were told that few decisions will actually be made today. There would be another Summit on Wednesday at which we have been reliably informed there will be a “breakthrough”.
Well maybe. Without going into details, the factor that hits a casual observer between the eyes is the sheer lack of political direction and will in the face of the mounting Eurozone crisis. We are seeing a play in which the players seem to be making the script up as they’re going along. Or worse, they seem unsure as to which play they are appearing in.
There are three main issues on the agenda at this weekend’s Summit. Briefly, the key issue concerns the enhancement of the European Financial Stability Facility (EFSF) in order to build a firewall around Spain and Italy. France, in one corner and aware of the vulnerability of its own “triple A” rating, is in deep disagreement with Germany, which is allied with the ECB. The second concerns revisions to the second bailout package for Greece, which was agreed only last July. In particular, there are Franco-German disputes over the size of haircut private holders of Greek sovereign debt should be expected to bear. And the third issue concerns the re-capitalisation of Europe’s banks. Capitalisation of over €100bn, apparently from private and public sources and not involving British banks, was agreed yesterday. We await next week’s announcements on the first two.
As if to add to the sense of panic, drift and decline, the Financial Times, hardly noted for its sensationalism, led yesterday’s edition with the headline “New alarm over Greek economy”. It said that the Greek economy had “deteriorated so severely in recent months” that the second bailout, agreed last July, would be quite inadequate to support Greece’s ailing finances. Just when you thought it could get no worse, it gets worse. The economy is stuck in a downward spiral, with every austerity package adding to the decline. It is impossible to see how this country can recover on current policies – and the Greek citizenry know it. Every piece of news confirms the view that the country should leave the Eurozone, experience widespread default and let the new drachma depreciate significantly to give the economy’s competitiveness a kick-start. Of course there would be pain and disruption, but such a strategy would give the country hope, where now the people have none. And, of course, Greece’s exit would be an admission of failure and a major blow to the European project.
There are (approximate) precedents for Greece’s plight. Argentina had established something close to monetary union with the US in 1991, in order to eliminate hyperinflation, when it fixed its currency to the dollar, backing the link through the foreign-exchange reserves of a currency board. Argentina’s experience in the ensuing decade was similar to Greece’s after it joined the Euro in 2001. Both countries initially thrived but then experienced deteriorating competitiveness, requiring devaluation or savage deflation to correct it, and worsening public finances. Argentina defaulted on its debt in December 2001, abandoned the dollar peg in January 2002 and the currency depreciated. Argentina’s crisis was highly disruptive, including limits on bank withdrawals (the “corralito”) and big losses for depositors and banks as their assets were redenominated. Many pots, pans and other utensils were banged in order to express dismay. But it proved to be a turning point for Argentina’s economy.
If Portugal, for example, followed Greece to the exit door, then so be it. It is time to stop pretending that the EU’s current strategy is succeeding. The Eurozone is turning into a monster that is devouring its children. Without fully fledged fiscal union the Eurozone cannot be saved in its current configuration. And today’s Summit and Wednesday’s Summit, even if they are successful, cannot change that. In the words of free market economist Herbert Stein, “If something cannot go on forever, it will stop.” Moreover, I would be amazed if contingency plans are not being drawn up in the EU’s main capitals and the ECB for Greece’s exit, irrespective of the treaties’ no exit clause. Lord Wolfson’s £250,000 prize for an academic economist’s blueprint for break-up is certainly welcome. But it may be overtaken by events.
By the way, the aforementioned Herr Schäuble last week poured cold water on the notion that Britain could use the Eurozone crisis to repatriate powers, specifically employment and social laws. (These laws are incidentally intrinsic to the “Single Market”, which in all its stiflingly regulated glory is apparently the “jewel in the crown” of our EU membership.)
We should be grateful to Herr Schäuble for speaking the truth, and for our other EU partners, and not allow ourselves to be seduced by the prospect of the repatriation of powers whilst a member of the EU, when it’s simply not on the table. And much as I welcome tomorrow’s debate on an EU referendum in the Commons, I fear that the third option of negotiating a “relationship based on trade and cooperation” can only realistically be achieved by leaving the tight embrace of the EU and reinstating our EFTA membership.
There is a huge appetite in this country for a changed relationship with the EU. Yesterday’s People’s Pledge rally in the Methodist Central Hall was a terrific success and there was overwhelming support for a referendum on EU membership in the hall. Tomorrow’s debate in the Commons is progress and yesterday’s rally was progress. But we have a long way to go.