Losing billions on defaults is the price Ministers are willing to pay to avoid blame abroad

by Paul Goodman
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Ministers' public case for making taxpayers liable for bailouts is as follows.  Britain has an interest in a stable Eurozone.  Were it to slide into recession, let alone depression, British exports to the Eurozone would fall as foreign markets contracted.  The flow of Eurozone bank lending would slow to a trickle, hitting British consumers.  (Santander accounts for almost 15 per cent of household loans in the UK.)  Britain's bailout commitments are part of an international effort to a prevent a fully-fledged European banking crisis - which would dry up lending altogether, leading to the damaging consequences for British exporters and consumers that I describe above.

They add that the political implications of a banking collapse would be ominous: the parties likely to benefit abroad would almost certainly be protectionist and chauvinist, and most likely far-left or fascist.  But cheer up, they say: our €7.5 billion commitment is a mere one per cent of the €750 European support package, because Britain contributes only to the European Financial Stability Mechanism (EFSM), and not to the much larger European Financial Stability Facility (EFSF).  Furthermore, bailouts in themselves would cost us nothing, since under the EFSM arrangement funds for them would be raised by the European Commission borrowing from capital markets.  Only if defaults take place will British taxpayers stump up.

Besides - they go on - even if there is a default, we're very unlikely to lose the whole €7.5 billion, because lender countries usually get at least some of their money back.  So at the most, Britain's losses will be limited.  But this line of argument is flawed by a fatal weakness.  The bailout procedure is illegal - a fact explicilty recognised by Chris Heaton-Harris when he moved a Commons motion on bailouts recently that Ministers themselves trooped through the lobbies to support.  But even were it not, there is an obvious retort to Ministers - namely that, as Greece approaches its "Lehman Moment", this Eurozone crisis is going to happen anyway, defaults and all: Andrew Lilico explained why yesterday in a magisterial article on this site.

Greece is going down.  Ireland too, probably.  And maybe Portugal as well, plus others.  British taxpayers are going to take a hit to the likely tune of millions if not billions of pounds.  These may be a tiny percentage of the overall rescue package, but they're a vast sum of money for British taxpayers: I invite readers to list how, say, £3 billion could be otherwise spent at a time of gnawing economic pain.  The Government will simply be throwing good money after bad.  So why don't Ministers do what Mark Reckless advised them to do in the Commons recently, when he moved the motion to which Heaton-Harris's amendment was tabled? Why won't George Osborne go to the next big EU meeting, and say that enough is enough?

The reason is twofold.  First, there is the psychology of senior civil servants and the entire establishment network of which they're a part - the Euro-equivalent of what in British education Sir Chris Woodhead once labelled "The Blob".  This is substantially unchanged from the ERM fiasco of the early 1990s, to which this crisis bears an eerie resemblance.  The collapse of the banks could end the Euro as we know it.  To the Euro-Blob, this is unthinkable.  And to be fair to it, its fears aren't altogether unreasonable.  Such a fate for the Euro would turn Europe's economic and political future into a new question mark.  And no sensible person licks their lips at the prospect of a banking degringolade.

Second, there is a reason which Ministers are shy of briefing or even talking about, but is the kind of consideration that politicians think about a lot, though everyone else scarcely at all.  Let's imagine that the Chancellor did go to the next meeting of EU Finance Ministers and "do a Thatcher" - bang the table and demand our money back.  It can be argued that there'd be no point in him doing so, since Britain's already signed up to the EFSM, and in any event these matters are now decided by qualified majority voting.  But where there's a will, there's usually a way: for example, the Government could always threaten to veto a settlement on the EFSF's successor unless Britain's allowed to junk its EFSM commitments.

In doing so, however, the Chancellor would have to say more or less what I've said - namely, that Greece is a goner, that Ireland, Portugal and others may be too, and that Britain has no intention of taking money from its taxpayers and lending it to countries that are unlikely to pay it back.  Such words would be likely to bring about precisely the events of which they warn.  For the British Government to declare that it has no confidence in the entire European system in general - and the Euro in particular - would be to hurl a nuclear bomb into the markets.  There would a financial stampede.  And if Britain delivered the kick which brought the whole tottering edifice down in a heap, there would be consequences.

Namely, that the Euro-Blob would blame Britain in general, and its Coalition Government in particular, for the collapse from now until doomsday.  Nick Clegg will be well aware of this, and were Conservative Ministers minded to act in the way I describe, their Liberal Democrat partners would move to stop them.  But the former will be no more inclined to than the latter, which brings us to that second reason: they want to avoid blame.  Politicians always do.  And Ministers have a point in wishing to do so, after all.  Let someone else bring the building down, they say.  Why should Conservative politicians shoulder the blame for the collapse of a currency that they helped to keep Britain out of?

To which a question comes in reply: isn't the blame of British taxpayers for losing their money more dangerous than the blame of EU governments for igniting a crisis that isn't Britain's fault?  My guess is that Ministers believe that the answer is no - and that if the current economic circumstances resemble those of the ERM debacle, the current political ones are different.  ERM membership was the guiding star of the Major Government's economic policy; this one's equivalent is deficit reduction, not Euro-bailouts.  If the taxpayer loses out, I suspect that Ministers will congratulate themselves for keeping Britain's exposure limited in Government, and for warning in opposition that the Euro was "a burning building with no exits".

And they may get away with it, so to speak.  There is no raging media campaign against bailouts.  The state broadcaster - i.e: the BBC - isn't pushing the issue.  Bills for defaults will be paid quietly and gradually.  There will be no equivalent of the totemic appearance of Noman Lamont outside the Treasury after the pound left the ERM.   But Ministers shouldn't be so quick to pat themselves on the back.  They are part of the failure of the entire European political class, the author of the continent's present horror story.  Sure, they're far less to blame than some, but that class should long ago have striven to restructure the PIIGS debt, support the banks as they take the hit, and - crucially - get the PIIGS out of the Euro.

For until Greece quits that currency, lending it more money is like shovelling more cash at an alcoholic: just as the second can't recover till he stops drinking, so the first can't do so until it has an exchange rate that meets its needs.  As I say, no reasonable person should be gleeful about a banking collapse, but would the end of the Euro - or, rather, its reinvention as a Franco-German core currency - really be that bad?  The PIIGs would have a chance to do what Britain did after 1992, and export their way back to prosperity.  Even accompanied by the consequences of default, this is better than the alternative of mass bankruptcy, unemployment, poverty and misery - the human cost of the inhumane dogma of the Euro-Blob.

But here I am writing as though there's a choice.  There isn't.  Default is going to happen.  British taxpayers are going to be hit.  And the millions if not billions of pounds that they'll lose are the price which Ministers are prepared to pay for the avoidance of blame.