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Ruth Lea

Ruth Lea: Without fiscal union, the Euro will surely die

Even by the standards of international meetings, last week’s G20 shindig in Cannes was a costly failure. There were hopes that the meeting would acclaim the Eurozone’s latest rescue package, as agreed in Brussels the week before, as a triumphant solution to the Eurozone crisis. But it was not to be. Putting aside the loose ends of the rescue package, the event was overshadowed by Greek PM Papandreou’s outburst of democratic zeal when he said the latest bailout terms would be put to the people. Suffice to say he and his troublesome referendum were quickly despatched by his fellow brothers and sisters.

There were however two fascinating developments at Cannes. The first was the suggestion by Angela Merkel and Nicolas Sarkozy that Greece might leave the Eurozone after all. This was a first. It was an acknowledgement that the “ever closer union of the peoples of Europe” may actually be reversed. Mark Hoban’s confirmation that the Treasury had contingency plans to deal with the potential collapse of the euro seemed more than reasonable under the circumstances. The second development was Italy’s agreement to the IMF’s monitoring its public finances. Given Italy’s mountain of sovereign debt, at €1.8tn it is the third largest in the world after the US and Japan, and a less-than-serious Prime Minister this is a useful development.

Moving on to more parochial issues, it is becoming increasingly clear that Britain’s semi-detachment from the heart of Europe has moved up a gear. Sarkozy’s spat with David Cameron a fortnight ago was, of course, a clear indication that he believed Britain should keep out of the debate over the Eurozone’s troubles, even though we had already contributed £12bn to the bailouts, and there may be more to come through the IMF. And in response to the BBC’s Paul Mason the French President uttered “…you come from an island, so maybe you don’t understand the subtleties of European construction.” This comment, apart from its sheer banality and discourtesy, was curiously reminiscent of de Gaulle’s belligerence towards Britain in the post-war years. Mind you, de Gaulle did veto our membership of the EEC twice. Alas he was not immortal.

As the Eurozone crisis intensifies, the governance structures of the currency union are changing. Meetings of the Eurozone leaders, in addition to their finance ministers, began in October 2008 at the height of the banking crisis. Subsequent leaders’ meetings took place in May 2010, July 2011 and October 2011. The October 2011 session was historic. At this session it was agreed that the meetings should be formalised as “Euro Summits”, to be held at least twice a year and take place, if possible, after European Council meetings. The Euro Summits will eventually have their own president, chosen from a Eurozone country. But in the meantime Herman Van Rompuy, the European Council President, will fulfil the role. The “outs” will be excluded completely. The Eurozone is integrating institutionally.

Formalised Euro Summits present Britain with new challenges. How Britain should define its position vis-à-vis the newly empowered bloc? One suggestion is that Britain should attempt to strengthen the ten “outs” as a counter-weight to the EU17 but the EU’s power centre is undisputedly at the Franco-German core and the “outs” are a heterogeneous group of countries. Only Britain and Denmark have formal opt-outs whilst Sweden has only decided to stay out of the euro for the time being. The other seven, however, are legally bound to join and wish to do so (apart perhaps from the Czech Republic).

The key challenge for Britain is to establish safeguards so that, if the EU17 discuss issues affecting all EU members (for example, the Single Market in financial services) the matter is brought to the EU27 for full and unprejudiced discussion. This, in FCO parlance, is all about “retaining influence”. Though with most EU legislation going through by QMV, where we have just 8.5% share of the vote, our current influence is embarrassingly modest. One safeguard idea floating around, albeit with a whiff of desperation, is to trust the Commission to act, without prejudice, on behalf of all 27 members.

But over time the “ins” and the “outs” will surely drift apart. Even if the EU17 play by the rules and safeguards are established and respected, habits of cooperation will begin to influence behaviour – not out of spite but out of solidarity.

Another aspect of increased Eurozone cooperation is the beefed up economic governance procedures. But let us be clear about the nature of this deeper “economic integration”. It involves increased economic and fiscal coordination and surveillance, along with tougher enforcement mechanisms, principally for non-compliant Eurozone Member States. It is a combination of a souped-up Stability and Growth Pact (SGP), aimed at fiscal sustainability, and new-style mechanisms for identifying and correcting macroeconomic imbalances such as asset bubbles or competitiveness divergences. Angela Merkel has tellingly referred to the imposition of these tighter economic governance procedures as a “Stability Union”.
This deeper economic integration is not, most emphatically not, about constructing a proper fiscal union, even though much commentary has suggested it is. A proper fiscal union involves a centralised Treasury with shared budgets (shared taxation and spending), common sovereign debt (debt pooling and joint bond issuance) and significant permanent fiscal transfers from the northern competitive economies to the southern. Additionally, the ECB would be expected to act as the “lender of last resort” to governments.
There are, however, no signs that the Eurozone is moving towards fiscal union, for all the loose talk. Germany, constrained by its constitution, has specifically ruled out such moves. Moreover, the new ECB president Mario Draghi responded to a question about the ECB’s role at last week’s ECB press conference by saying “…what makes you think that, [for the ECB] to become the lender of last resort for governments, is actually the thing that you need to keep the Eurozone together? No, I don’t think that is in the remit of the ECB. The remit of the ECB is maintaining price stability over the medium term”.
As I have written before, there is really one way to “save” the Eurozone and that is by establishing a fully-fledged fiscal union. The rescue packages announced to date cannot address the economic frictions and fissures in the Eurozone. Without fiscal union, the euro will surely fail.


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