John Palmer says France and Germany will not allow a full-blown euro-area solvency crisis
Euro-sceptics have had great fun in recent weeks tracking the bond markets’ onslaught on the euro in European Union countries. Some, more excitable, bond market vigilantes and euro-sceptic ideologues have predicted the eventual break up of the 17-member euro-area. Others have even suggested that the disintegration of the euro might undermine the economic and then the political foundations of the European Union itself.
There is no denying the shock the euro-area has received as a result of the crises first in Greece, then in Ireland and more recently in Portugal and Spain. Even the most dedicated supporters of “the European project” have warned that a combination of political indolence at the highest level of euro-area governments and antiquated ideas about how to respond to the bank generated crises could put the entire Union at risk.
But, as the market dramas start to subside, the reality seems very different. The European Union institutions and the 27 EU Member States are now making it clear not only that they “will do whatever is necessary” to protect the euro. They are now poised to sanction further economic and political integration for the euro-area in the weeks ahead.
In a series of EU summits planned for February, March and June we can expect a major strengthening of the governance of the entire single currency. The measures now being debated include:
- Far greater euro-area oversight of the economic strategies of individual euro-area governments,
- A further increase in the financial aid available to help euro-area countries in difficulty,
- Reductions in the interest charged in financial aid to Greece, Ireland and potentially other euro-area states,
- Tougher sanctions against those who deliberately undermine euro disciplines,
- Pressure on the stronger economies to expand domestic demand faster to offset austerity among the peripheral euro-area economies,
- Renegotiation of the terms of bail out agreements to make possible bigger sacrifices by bank shareholders and bond holders rather than tax payers, and
- Tougher EU regulation of the entire financial services industry.
When agreed, those EU countries which share the euro will have taken major steps towards an economic as well as a monetary union and with it the foundations of a European “economic government.” Whatever the legal procedures which will be adopted, there will be no mistaking the reality: not EU disintegration but deeper European integration among its core members in the euro-area.
The conservative majority in the EU Council of Ministers (and in the European Commission) did not come to these conclusions lightly. The French and German governments initially sought to limit EU support for the stricken Greeks and Irish to high interest rate assistance to deal with the immediate liquidity crisis generated by the collapse of the banks.
But they began to change their tune when they counted the cost to their own banks and to their export oriented economies of permitting a euro-area liquidity crisis to turn into a full-blown euro-area sovereign state solvency crisis. This, combined with pressure from opposition social democrat, green and left parties to radically change direction, explains the about turn in Berlin and Paris.
Of course the planned steps to greater economic integration will not all happen at once. More likely they will multiply as the months pass and the scale of the longer term crisis sinks home. But the immediate measures to protect the euro-area seem certain to stimulate debate about a new approach to environmentally and socially sustainable growth across the EU as a whole.
Although general elections are some way off in France and Germany it is beginning to look as though both countries may elect centre left social democratic/ green coalitions before too long. Interestingly both the French and German Green parties – which are enthusiastic supporters of closer European integration – will be more powerful coalition partners because of their increased voter support. The German Left party may also play a role but they too now speak more often about the need for “More Europe – not less.”
David Cameron has made it clear that Britain will remain outside any new euro-governance agreement. But that does not mean that Britain will not be profoundly affected by steps to European economic union. It will consolidate the UK’s semi-detached peripheral position within the European Union especially as other non euro states follow Estonia’s example this month in signing up for the single currency.
The real test of the long term viability of Britain’s marginalisation within the EU may come if the global currency Tsunami begins to threaten sterling (and eventually the US dollar). If and when that comes to pass the British government will be grateful for all the friends they can get and especially from their EU partners. Perhaps that is why Cameron has promised not to impede the decisions now being prepared to deepen euro-area integration.