Britain and the future of the eurozone

John Palmer

By John Palmer

There are two seemingly very different conclusions to be drawn from the latest European Union summit meetings designed to tackle the growing crisis within the eurozone. The first is that the eurozone has taken major steps towards an economic union not just a monetary union and that it lays the foundations for European economic governance. The second is that the EU has failed to find a lasting solution to the chronic problems afflicting some of the eurozone peripheral economies now and that the crisis may intensify.

In my view both conclusions are valid and are not in contradiction with each other. The agreement on the strengthening and reform of the Euro Stability and Growth Pact and the matching “Euro Plus Pact”  do not yet add up to the “revolution” which Commission president Manuel Barroso hailed last week. But they mark a potentially decisive impetus for further and closer future European integration.

Inevitably much attention was focussed in Brussels during the summit meetings with the crisis in Portugal. The collapse of the centre left government and the calling of a general election predictably inflamed speculation that Portugal may very soon be obliged to seek a full scale “bail out” from the EU and the IMF. In addition last minute difficulties created by Chancellor Merkel’s German government means that unnecessary and potentially dangerous question marks still hang over the practical operation of the new, permanent bail out mechanism.

That said, no one should under-estimate the scale of financial support now being made available to help eurozone countries in difficulty. There should be more than enough – on current estimates – to meet the needs of Greece, Ireland and Portugal over the next few years and sufficient even in the unlikely event of a bailout be required by Spain. On the other hand the problems affecting the sovereign debt of these so-called “peripherals” is only one aspect of the crisis. We still await judgement on the state of the EU banking system given its massive exposure to sovereign debt which should emerge from the current bank “stress tests”.

Further ahead there are serious question marks over the capacity of Greece – and perhaps other peripherals – to generate the economic growth to be able to service their debts in the medium to longer term. Debt repayment by Greece has been eased (through lower interest rates and a long repayment period) and this will soon be extended to Ireland. But the overall impact of the financial support arrangements may weaken not strengthen the peripherals’ ability to grow their way out of crisis.

The short-sighted attitude of some of the economically stronger eurozone governments to the creation and use of eurobonds which could exploit the eurozone’s collective credit worthiness is worrying. Politicians have found it hard to articulate the case for greater eurozone solidarity at home in spite of the evidence this would help the EU as a whole back to faster and more sustainable growth and employment. Nor have they been entirely forthcoming about the vulnerability of their own banks to the unresolved bank and sovereign debts of the weaker peripheral economies.

On the other hand it is clear that the strengthened Growth and Stability Pact goes a long way to requiring Member States to comply both with eurozone rules on debt and budget deficits. It also sets a framework for far reaching reforms for economic, pensions, health and welfare policies. Sanctions against those who break the Stability Pact rules are now less likely to be blocked by eurozone governments while governments seem willing to take ownership of the objectives set out in the Euro Plus Agreement.

Eurozone governments will in future have to prepare their national macro-economic policies in closer conjunction with their fellow eurozone colleagues. The new regime is best described as “Inter-governmental Cooperation of a Special Kind”. The European Commission and the European Central Bank will be involved and their role (as well as that of the European Parliament) seems likely to grow in the longer term.

Six non-eurozone EU countries will also sign up for the “Euro Plus Pact” and thus become involved to an intensified process of peer review of national economic decision making. But the United Kingdom and Sweden with a small number of other non-eurozone Eastern European EU member states – remain outside the new arrangements for now. But even the British government has maintained a low profile and not created needless obstacles to the need for EU Treaty changes to implement the new reforms.

The coalition government’s stance may be in some measure represent a prudential insurance against the possibility that in a future sterling crisis, the UK might need all the help it can get from the EU and the eurozone in particular. But for the time being the UK has taken another self-marginalising step on the fringes of the Union and this is bound to reduce its wider influence on EU affairs.

A number of important questions still remain to be clarified about the way the new eurozone system will operate including what is meant by “economic imbalances”. The current interpretation in Berlin and elsewhere is that this only refers to those at risk of running “excessive deficits”. But pressure is already building for imbalances to also include countries within the eurozone running “excessive surpluses”. It is an argument which is not going to go away.

The true health of the EU banking system will hopefully become clearer when the rest of the bank stress tests are publicised. But if eurozone state insolvencies loom even larger in the medium term it would not be surprising if the possible restructuring of debt envisaged after 2013 has to be brought forward to deal with the crises in Greece and Ireland.

There are also questions about the adequacy of European Union longer term economic reforms set out in the Europe 20/20 growth strategy. It speaks about creating the conditions for sustainable growth. But the priority given to deficit reductions in as short a time scale as possible risks weakening growth as may the emphasis on wage reductions rather than productivity gains.

There is immense but as yet under used scope for EU coordinated action against tax avoidance and an integrated corporate tax base. The EU budget could play a far greater part in helping to stimulate the conditions for sustainable growth – including human and physical infrastructure. This is an area where an EU eurobond issue as well as a hypothecated EU tax could support economic recovery.

Surely the time has also come to consider replacement of the traditional GDP measurement of economic progress with a measurement (or measurements) which reflect systemic environmental and socially sustainable development? Mobilising public support for economic and social reform should be linked with a more deliberate strengthening of the democratic accountability – primarily through the European Parliament.

There a case for an Inter-Governmental Conference after 2013 to test the efficacy of the new treaty arrangements and to agree on possible further reforms in the light of experience. Why not prepare for this by convening an EU Citizens Assembly including trade unions, NGO, regional and local authorities, business and other social actors to provide input from European civil society for a future EU Economic Government?

John Palmer is was formerly European editor of The Guardian and then founder political director of the European Policy Centre. 28 March 2011.

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