Now here’s a thing. There is currently no greater enthusiast for european economic integration than the British government. George Osborne and David Cameron have become cheer-leaders for the euro, gatecrashing summits of the eurozone countries and appealing to EU leaders to press ahead with fiscal union – with creating the very “United States of Europe” that they condemn in their eurosceptic manifestos. On the latest deal, Osborne welcomed the measures as far as they go, but insisted that the eurozone must move to “greater fiscal union”.
Of course, this is out of national self interest not ideology. Britain realises that if the euro collapses so do we, not least because our banks are so heavily involved in European sovereign debt and because half our exports go to the EU. The City of London is a europe’s leading financial centre. The economic destiny of these islands is therefore increasingly dependent on the success of the euro and the resolution of the crisis through the creation of a central european treasury.
But hang on – if we are so up to our necks in europe, and indeed have a potential noose around our necks if the project goes under, should we not be in there fighting to get the crisis resolved in a manner that benefits, er, the UK? And if there is no economic future for Britain without the euro, does that not mean that – defacto – we now accept it as the economic reality of the world economy. And if we accept that, should we not be a part of it, if only to ensure that Britain’s interests are safeguarded. It’s all very well to jeer from the sidelines – ha ha clever us for not adopting the euro – but the whole history of British involvement in the EU since the 1950s has been like this. We say no no no until economic interest forces us to say a belated yes yes yes.
This latest crisis summit over sovereign debt is a case in point. If we are so happy to be out of the eurozone, why are we so desperate to be involved in saving it? Surely if it is a busted flush , we should be urging teh EU to restore national currencies not set up a multi trillion euro bail out fund. And why are British Tory politicians arguing the case for fiscal union? George Osborne has for months now been calling for a fast forward to the “ever greater union” that Tories are supposed to despise. If integration is so good for Europe, and for the British economy, why are we so hostile to it?
How long, Lord, how long must we suffer the excruciating tedium of the Sarkozy-Merkel roadshow? Two leaders of vastly different temperament, who clearly feel little personal warmth, parading around Europe like Little and Large, convening inconclusive summits that seem designed to avoid addressing the central issue: the need for a central European treasury. It surely can’t go on like this – but it will. Until it no longer can.
However, it’s not entirely fair to say that nothing has been achieved by these Sarkel talkathons. For one thing, investors have been given a clear sign that they’re going to have to pay the price of their rash purchases of Greek debt. Only a few months ago, the idea of banks and pension funds in Britain and France taking a substantial “haircut”, or loss, on their investments in Greek bonds seemed inconceivable. What, accept responsibility for their own actions? The very idea…
Well, now private investors are being advised that they may have to accept a loss, not of 5% or 21% but more like 50% on their Greek bonds – not so much a haircut as a decapitation. Previously, everyone thought that such a defacto default by Greece on this scale would lead to a loss of market confidence in the debt of other sun-belt states like Italy, Spain and Portugal But this “credit event” no longer seems to be quite such a risk.
Confidence is a two way street. The banks have been very good at using the threat of a collapse of confidence in various Eurozone countries as a means of prising open the public purse. But if the banks did actually precipitate the collapse of the Italian, Spanish and Portuguese economies, who would be the first casualties? Yes, the banks. They have a collective interest in preventing another sovereign debt crisis because it would lead to most of them going out of business. European political leaders are involved in a game of poker with the financial markets, and they have just raised the stakes.
Another significant move has been the agreement by the European core states that there needs to be a better means of financing future bail outs, while at the same time reducing the risk of banking crises like 2008. The British government is hostile to the idea of a bank transaction tax, or Tobin Tax, to raise funds for future banking rescues, but both Sarkozy and Merkel have agreed in principle that something like it is essential. The idea was first put forward by the celebrated British economist John Maynard Keynes in 1936, and its time has arrived. In September the European Union formally proposed a transaction tax raising around 78bn euros by 2014.
Europe’s mega-banks cannot expect governments to bail them out with tax payer’s money indefinitely. Indeed, it is clear that, even if they wanted to, European governments simply lack the means to do so. Taxing some of their more speculative activities, like short selling, CDS swaps and currency arbitrage, will take some of the frenzy out of financial wheeler-dealing and will also create a central fund to deal with banking crises as they arise. The City of London, europe’s largest financial centre, doesn’t like it, which suggests that a transaction tax is probably on the right track.
Tobin tax money could find its way, ultimately, into the European Financial Stability Facility (EFSF), which is the other important achievement of the Merkozy talkabout. The EFSF is not just a bailout fund. It has the power to issue bonds, buy sovereign debt and even recapitalise banks, all of which were anathema to German central bankers and politicians only 8 months ago. This is clearly the embryo of a future central European treasury – though it currently lacks power to raise its own revenues through direct taxation. But the moment the eurozone countries accepted that a central, supra-national authority has the power to buy bank shares and bonds anywhere in the EU, a new era of European financial integration had begun.
Really, the issue is only one of scale. The original 440bn euro fund, agreed by the Bundesbank, is simply too small. The European Financial Stability Fund was always going to need greater firepower to deal with crises in economies the size of Italy, which has debts of 1.9 trillion euros. But the point is: the machinery is now in place. This is the “federal authority” that everyone says was lacking when the euro was introduced a decade ago.
Germany realises this, but doesn’t want to be taken for a ride by countries like Greece, who lack fiscal discipline. Hence the prevarication and the demands for Greek and Italian austerity. Germany will have to accept higher interest charges on its sovereign debt if it takes the sun belt countries under its wing, so it is hardly surprising then that it wants to be sure that Greeks and Italians pay their taxes in future and don’t retire earlier than German workers.
Finally, the crisis has made Britain back the euro. Oh yes. Listen to the Chancellor George Osborne and David Cameron and they are urging european leaders to introduce fiscal union as soon as possible. This crisis has shown that, while we may not have adopted the euro, Britain’s fate is inextricably bound up with it. Eventually we may realise that if we want a say on how it develops, Britain – or perhaps Scotland – may have to join the club.
One way of looking at this whole summit psychodrama is that it has been about persuading the peoples of Germany, France Greece, Italy, Spain that they hang together or hang separately. That they are now condemned to come together as a European fiscal union because they can no longer survive on their own. It is only on a european scale that the problem of mega banks that are too big to fail can be addressed by governments. If we don’t want to end up as serfs of the international financial oligarchy, we’d all better hope that the euro survives. And that Sarkozy and Merkel keep talking.