It looks as though at about the tenth attempt the Euro zone countries have just about done enough to fend off the wolves, prevent Greece from going under and avert a brushfire spreading throughout the Union’s southern flank which could have brought down the single currency. The crisis is not fully over yet; the new rules on economic governance have not yet been drafted let alone agreed, the rescue fund may have been reformed but it is not yet replenished, and in the longer run everything will depend on whether the specific investment measures temporarily entitled ‘the European Marshall Fund’ and, more generally, the zone’s economic growth will trickle down to Greece, Portugal and Ireland so that they have some prospect however distant of climbing out of debt.
In the end Union leaders found a compromise which at least for now keeps the show on the road. If the decisions of July 2011 had been taken a year earlier the sovereign debt crisis would have been throttled at birth. But this generation of European leaders who sometimes seem to have in common only their domestic political weakness and their pusillanimity have finally stumbled backwards and almost blindfold onto the road which leads inevitably to fiscal union and common economic policies.
Before the most recent summit many commentators were already salivating about the inevitable break up of the euro. For some this had always been a vanity project for European enthusiasts. It had been a political decision which defied economics, and was finally getting its comeuppance. Its demise or at best its dismantling would let Europe concentrate on what was possible not on some Utopian vision. A Europe of member states would continue cooperating on matters of common concern, carry on removing internal trade barriers, negotiating trade deals and acting together when it suited on international questions. This would be the open, intergovernmental Europe beloved by British eurosceptics of varying hues; and far removed from the ‘political’ Europe so close to the hearts of those continental federalists.
Like so many other judgments about Europe the idea that the euro could just be abandoned and that a looser and more flexible European cooperation could take its place is based on a series of misreadings and misunderstandings.
First, the history. The euro was not some kind of visionary whim cherished by economically illiterate politicians. It was a political and economic project. Having a single European economic area without a common currency was contradictory; each currency realignment causing increasingly insupportable stresses on internal European trade. As Europeans mostly trade with each other the economic gains from rock hard exchange rate stability were considerable. The 1970s and 1980s had seen repeated bouts of currency instability which had huge economic costs for all the member states. So Maastricht laid out the path to monetary union as a response to economic pressures.
But the currency had one main design fault. Its governance was designed for fair weather conditions. Member states were not yet prepared to pool sovereignty on economic decisions- and no European Treasury was there as a backstop for when times got hard . Even the idea of Brussels or Frankfurt based checks on national statistics was considered anathema- as an unwarranted intrusion by European institutions- not least in Berlin. And for the euro’s first decade the new currency bathed in the constant sunshine of more or less general and uninterrupted economic growth. It became a strong currency and an international reserve one beginning to rival the dollar.
But when the financial crisis hit in 2008, and the degree of vulnerability of some euroland countries became apparent, the EU had practically no instruments to enable it to intervene either to coerce member states to sort out their public finances or to assist in bailing them out. So the last ten summits of EU leaders have been spent in putting into place mechanisms of economic policy and governance which have nearly always been just a bit too little and a bit too late. It has been like watching teeth being extracted without anaesthetic only to discover that the problems and the pain remain as before.
Why try so hard? Are Merkel and Sarkhozy and the others so in thrall to the European dream that they fail to see the basic unworkability of the ‘big idea’? More likely, surely, that these ultimate pragmatists have analysed what the collapse of the euro might mean. For it surely is the collapse of the euro that was the alternative. There is no neat and tidy solution with the benighted Greeks being shown the door while the rest continue as before. ‘The markets’ (or ‘speculators’ as they used to be called) would have then decided that a succession of other countries should take the ‘walk of shame’ until the euro became a rump currency of Germany and its near neighbours. A fanciful variant of this scenario has been the two centre euro currencies, a ‘hard Euro’ for the virtuous Nordics; a soft euro for the profligate Latins (including France!).
In reality, the collapse of the Euro or its dismemberment would have caused the most almighty economic crash. First, a national currency which has been abolished cannot simply be resuscitated overnight. Any announcement of a country’s intention to leave the euro would provoke a gigantic flight of capital. It would almost certainly create a Europe-wide banking crisis given the level of banking exposure in even the smaller euro states, and the interdependence of all Europe’s main banks. And the disruption for intercommunity trade caused by a return to roller-coaster exchange rates would send the whole continent reeling into recession. What would be the prospects for German growth- the motor for continental recovery- were its exports to its European partners to be priced out of the market by an enforced massive revaluation?
No, the German and French agreement to strengthen the bail-out, to provide some relief for Greece, Portugal and Ireland, and to shore up the euro, is a hard-headed economic calculation. The implosion of the euro would have been perhaps first and foremost an economic disaster for the more prosperous member states.
For Europe it would have been the death-knell; not just the end of the dream but the first and most spectacular unravelling of all that Europe has achieved; the single market, common action on climate change, joint efforts in R &D and innovation, a unified position on international trade, the largest aid programme in the world, limited but important transfers to less favoured regions. Bit by bit the return to the law of the jungle for national currencies would lead to the dismantling of common economic and social policies, however timid they may be, and the triumph of aggressive economic nationalism.
That is why the more intelligent British euro sceptics have been hoping that the eurozone countries get their act together and take the necessary steps towards some fiscal union which can underpin the euro. Britain would have suffered just as much as anybody else if the euro had been toppled. Its banks have huge exposure in some of the more vulnerable euro land countries. It is just as dependent on intereuropean trade. And its own miserable combination of near-zero growth, high inflation, and chronic debt, would sooner or later make it the centre of very unwelcome attention from the private American ratings agencies.
Some have seen the most recent Euro summit as a doubly welcome development; the governments taking the necessary measures, and setting off on a road which because it takes them towards closer Union, widens the gap between ‘core’ Europe and the UK. They begin to see the contours of a ‘new relationship’ between Britain and Europe, with the UK as a country cooperating from the outside.
But here’s the snag. Henceforth, will decisions -like those taken in mid-July- so vital for our economy and well-being always be made in our absence? Are we at ease forfeiting the right to be at the top table as our own economic future is decided? And what if one day, we need a little bit of EU support and solidarity to stop us becoming the next prey for speculation?
The unthinkable has not come to pass at least for the moment. The collapse of the euro would have been disastrous for the EU, and for all its member states. But the mechanism by which the worst has been averted poses awkward questions for Britain now and tomorrow.
Waterloo, July 23rd 2011