Mats Persson: The financial turmoil – what can the UK do?

Mats Persson is Director of Open Europe.

Ed Balls hit the wires yesterday complaining that the “British government is absent from the global economic debate at this critical time.” It’s true, that the UK government hasn’t exactly taken the bull by the horns in the eurozone crisis, but it’s also true that it was on the previous Labour government’s watch that we entered the financial crisis in the first place. What we’re now experiencing is not a return of the 2008 crisis as much as a continuation of it. In short: the debt bubble was never really dealt with following the Lehman collapse, it was mostly shifted from banks to governments, which in Europe has been exacerbated by a flawed Single Currency.

The brutal truth is that EU leaders are running out of options.  They have wasted so much time and manoeuvring room on completely failed policies, i.e. the bailouts, that some of the paths that were previously open to them, such as a full restructuring of struggling countries’ debt, are quickly closing (although I hasten to add that it’s not quite off the table just yet).

Leaving aside the problems in the US and the potential overheating in emerging markets – hardly the jurisdiction of the Coalition - and Balls’ attempt at political point scoring, what can the UK do to influence the euro crisis (which remains the most immediate threat)? Well, the truth is: in the immediate term, not that much unfortunately.

Balls is correct that “whether the eurozone gets its act together matters hugely for British jobs and pensions”. He’s also correct that the eurozone needs growth, not only austerity. But that’s hardly news. Everyone knows what needs to happen – that the PIIGS need a radical agenda for growth and competitiveness – the problem is how to get there.

But there are still a couple of things that Osborne and Co could push for. First, a write-down of Greek, but also possibly Irish and Portuguese debt, which would actually deal with these countries' debt burden rather than increase it, as well as spreading some of the burden from the weary shoulders of taxpayers, which may help quell some of the rising political chasms seen within the eurozone. This option still looks viable, though for every day that EU leaders are waiting, the more painful the necessary restructuring becomes with increasing bond spreads putting more pressure on government funds as the crisis indiscriminately sucks in more countries. If markets continue in freefall, even a restructuring of Greece, Ireland and Portugal will hardly help – and may in fact make the situation far worse. In such a scenario, it’s hard to see any other way out for the eurozone than either a break, or radically more fiscal centralisation.

George Osborne has said that greater eurozone integration is “necessary to make the single currency work”, but the question still remains, what kind of integration? Eurobonds, for example – an increasingly popular idea that involves eurozone countries borrowing collectively rather than individually – will not work. As Alvaro Nadal – the economy spokesperson for Partido Polular (the Spanish opposition party, tipped to win the elections there in October) – told an Open Europe event last month, Eurobonds would be “suicide” for Spain as it discourages fiscal discipline and threatens sovereignty across the eurozone, while possibly even increasing overall borrowing costs for some of these countries. Eurobonds would involve a very high political cost, but with very little economic benefit. Osborne needs to remind his EU colleagues if they feel that they absolutely have to move towards fiscal union, for heaven’s sake, pursue an option that works at least in some sense. Any move towards a full fiscal union in the eurozone would soothe markets in the short-term. But the trade-off is that Europe is setting itself up for a potentially massive political fall-out in the long-term, as voters and taxpayers in weaker and stronger countries alike grow increasingly impatient.

The Coalition better start planning for all eventualities.