UK urges Europe on from the sidelines

29 May 2012

James Kilcourse

British political leaders have been vocal in recent weeks on the need to find a lasting solution to the Eurozone crisis. Although the three main political parties are in agreement that the Eurozone must embrace the “remorseless logic” of a single currency and move towards a fiscal union, there are important nuances in what the different players recommend for the Eurozone.

In A Speech on the Economy on 17 May, Prime Minister David Cameron gave a blunter than usual warning that the Eurozone is at a cross-roads and it needs ‘to make-up or it is looking at a potential break-up’. As Britain slips into a double-dip recession, Mr. Cameron pointed to the turbulence coming from the Eurozone as one of the challenges the government faces ‘in keeping Britain safe and building the recovery’. He said that three things need to happen for the Eurozone to function properly:

-       ‘First, the high deficit, low competitiveness countries in the periphery of the Eurozone do need to confront their problems head on. They need to continue taking difficult steps to cut their spending, increase their revenues and undergo structural reform to become competitive’. However, he argued that they are less likely to be able to do this unless they receive more support from the core Eurozone countries and the ECB.

-       ‘Second, the Eurozone needs to put in place governance arrangements that create confidence for the future.’ According to the Prime Minister, this means ‘following the logic of monetary union towards solutions that deliver greater forms of collective support and collective responsibility of which Eurobonds are one possible example.

-       Third, Europe needs to address its ‘low productivity and lack of economic dynamism’. To this end, the Single Market should be completed and a pro-business, pro-growth agenda adopted in Europe.

Speaking in Chicago after the NATO Summit three days later, David Cameron warned the Greek people that they face a choice: ‘you can either vote to stay in the euro, with all the commitments you’ve made, or if you vote another way you’re effectively voting to leave’. By making the threat of ejection from the Euro credible, his remarks attempted to make next month’s vote in Greece a referendum on continued membership of the Euro. He also called on the Eurozone to put in place robust contingency plans for both eventualities.

At the informal summit of EU leaders in Brussels on 23 May, Mr. Cameron reportedly frustrated his European counterparts and senior officials by urging them to follow his advice and move towards a more federal Europe. He argued for a sweeping change of policy priorities to deliver growth across Europe, but without giving up on austerity measures. He also rejected the proposal of an EU-wide Financial Transactions Tax (FTT): ‘it will put up the costs of people’s insurance, put up the cost of people’s pensions, it will cost many, many jobs. It will make Europe less competitive and I will fight it all the way’.

In a speech in Berlin on 24 May, Deputy Prime Minister Nick Clegg set out the Liberal Democrat approach to the Eurozone crisis, arguing that the search for solutions has so far been ‘woefully fragmented’. Mr. Clegg set out four points to create a lasting solution to the crisis, some of which are unacceptable to his German hosts:

-       ‘First, faced with different economies, which suffer shocks in different ways, Europe must either share common debt, or change the way money is transferred. You cannot have a monetary union in which one country saves, exports and invests and another spends, borrows and consumes without some mechanism to make it all add up. So we need new fiscal instruments in the Eurozone, through either Eurobonds or greater transfers between Eurozone members.’

-       ‘Second, the European Central Bank has to act as a real monetary backstop, a lender of last resort. This is critical. Fiscal action across the EU must be supported by responsive monetary policy – with central banks prepared to intervene aggressively to support demand.’

-       ‘Third, we must build a firewall big enough and strong enough to stop the flames from spreading… We need to find a sustainable, realistic way of re-capitalising and stabilising banks.’ 

-       ‘Fourth, we need to get serious about structural reform. The creation of the single market – the largest borderless single market in the world – is an incredible achievement, one that still has the potential to create hundreds of thousands of jobs. But if that potential is to be realised, we must allow the single market to flourish. We must maintain a relentless focus on creating the right conditions for growth.’

Mr. Clegg warned about the failure of finding a lasting solution to the crisis: ‘The combination of economic uncertainty and political disillusionment is a perfect recipe for an increase in xenophobia, populism, and extremism.’ He rejected the view that Europe’s problems are irrelevant to the UK and emphasised his party’s continued commitment to Europe. Moreover, unlike Mr. Cameron, the Deputy Prime Minister refused to countenance the possibility of a Greek exit from the Eurozone: ‘My own view is that that wildly underestimates the unpredictable, irrevocable damage that could be done to a monetary union when it is shown not to be permanent. No rational person interested in the wealth and wellbeing of Europe's citizens could advocate taking such a risk: not with Greece's future, or our own.’ Finally, on the issue of the proposed FTT, Mr. Clegg stated in an interview with Der Spiegel on 21 May that: ‘Banking is a highly integrated global industry. It doesn't make much sense to apply a transaction tax over one little bit of that system, when it can be so easily avoided by migrating to other parts of the system. A transaction tax as it is advocated only makes sense on a global level. Let's push for that. We'd be happy to lead that argument.’

The Labour Party has focused its attention on criticising the coalition’s domestic economic performance, pointing to the fact that the UK economy is now performing worse than the Eurozone economy. Ed Miliband has referred to the UK’s double dip recession as ‘a recession made in Downing Street’. Mr. Miliband coined the phrase “Camerkozy economics” to sum up the approach taken by the Prime Minister, German Chancellor Angela Merkel and former French President Nicolas Sarkozy over the last two years to tackling the Eurozone crisis. Ed Balls, the Shadow Chancellor, has criticised the government for using the Eurozone crisis as an excuse for the coalition’s failing economic policies. In a joint op-ed in The Guardian with Lord Peter Mandelson on 13 May, Mr. Balls urged Europe’s leaders to urgently adopt a plan to stimulate growth in parallel with fiscal responsibility. The three recommendations outlined in this op-ed are:

-       Europe does not have the institutions to project confidence in its own future. Firstly, therefore, ‘it needs a new political settlement’, including a European central bank that is willing to stand in the way of sovereign contagion from the periphery, an active European stability mechanism and a system of collective decision-making among Eurozone members that ensures everyone plays by the rules. Mr. Balls and Lord Mandelson agree ‘that some form of greater fiscal union is now inevitable’.

-       ‘Second, Europe needs to boost public investment in the demand that will help to drive growth, as the European Commission is now urging’. They recommend that the European Investment Bank receives a serious capital lift and unused structural funds be recycled into new programmes.

-       ‘Third, in the longer term, growth will depend on structural reforms, so that struggling Eurozone countries become more competitive. Europe needs to raise economic participation rates, make it easier for businesses to grow and take on workers, improving competition in some product markets, and improve its skills base.’

Finally, Mr. Balls and Lord Mandelson argue that Britain should be at the centre of this process, regardless of the fact that it is not in the Eurozone: ‘The reality is that there is no bad outcome for the Eurozone that is not a bad outcome for Britain. So this is a perilous time for the British government to be increasingly isolated and politically disengaged.’ In the debate on an EU-wide FTT, Mr. Balls supported the government’s position in November 2011 that such a tax should only be implemented on a global level. He argued that ‘doing it in Europe and not including major financial centres such as New York risks real damage to the City’.

All three parties are now calling for a fiscal union in the Eurozone with a greater role for the ECB, a system of collective economic decision-making and fiscal burden sharing. They all focus on the need for structural reforms to create the right conditions for growth, though they differ in what reforms are needed. Mr. Cameron has called for a pro-business agenda and the completion of the Single Market, particularly in the services and digital sectors. The Labour Party argues that public investment will boost growth. It recommends a capital lift for the European Investment Bank to provide fresh sources of infrastructure investment, infrastructure bonds and the use of unused structural funds to help the weaker Eurozone states to connect with the large markets of northern Europe. The British parties also disagree on the extent of deficit reduction that is necessary in weak Eurozone countries. Mr. Cameron insists that the countries on the periphery of Europe must continue to cut their spending and undergo structural reform to become competitive. Mr. Balls and Lord Mandelson, on the other hand, warn of the danger that ‘binding countries into ever larger cuts and tax rises to meet the new structural deficit and debt targets will become self-defeating, economically and politically’. Mr. Cameron has floated the possibility of Greece leaving the Euro if it does not meet its deficit reduction targets but, echoing the Labour Party, his coalition partner, Nick Clegg, has argued that German taxpayers should be patient with the Greeks because ‘it is not sustainable to believe that the Eurozone can thrive through fiscal discipline alone’. However, one key issue that unites all three political parties is their opposition to the FTT that the European Commission is seeking to introduce by January 2014.

Some have pointed to the irony of the fact that all of the political leaders in a country outside of the Eurozone, including the Prime Minister, who heads an increasingly Eurosceptic party, are now advocating fiscal and political union for the Eurozone. This concern is no doubt motivated by the fact that the break-up of the Eurozone would have very negative consequences for the UK as well as the rest of Europe. As the Prime Minister explained: ‘Based on trade flows alone Britain is more than six times as exposed to the Eurozone as the United States – and that’s before you factor in the impact on confidence and our closely connected financial systems’. The British government has reportedly started to discuss contingency plans for the break up of the single currency, including plans for emergency immigration control should the crisis trigger large-scale migration from the Eurozone to the UK.

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