A Welsh airing for the Eurozone’s crisis

Delegates to a Cardiff conference heard gloomy predictions of a prolonged period of economic uncertainty in Europe, reports Rhys David

Rhys David is a trustee of the IWA. He writes on economic and business affairs

The week in which European leaders were due to meet to find a workable rescue plan for the Eurozone crisis was on reflection not the most opportune timing for the first in the Learned Society of Wales inaugural conference series, Reforming European Governance. After all if it is touch and go whether the stricken Euro will last the year – and much will depend on the decisiveness of European leaders on Friday – there is not much point looking too closely into Europe 2020, the European Semester and the EuroPlus Pact, the sub theme of the event held in Cardiff’s Pier Head building yesterday.

Life must go on however, and for Lord Kinnock, former European Commissioner and the conference chair, the Brussels talks will need to produce a plan leading to fiscal union – the absence of which is given most of the blame for the Euro’s crisis as free-spending Greeks fail to match the prudent parsimoniousness of their German fellow-Europeans. Secondly, according to Lord Kinnock the conditions have to be created that will foster economic growth across the Continent, a point that would be roundly endorsed by his Labour party colleagues in Britain.

For Lord Kinnock, too, the story was all about the superficiality of the British response to the crisis, from the Government to the press. The more Britain called on the Eurozone to move towards fiscal harmonisation the more we would be pushed to the margins. The British Government, he urged, should avoid hectoring or grandstanding from the sidelines or risk provoking a hostile reaction from our European partners.

Kay Swinburne, Welsh Conservative Euro MP, would have none of this in an event which, perhaps because the agreed extent of the crisis, was by and large free of too much political posturing. It was the French and Germans, she pointed out, who were now grating on their Continental neighbours by leaving them out of their discussions, with a series of Merkel-Sarkozy summits deciding what needed to be done and handing it down to the other 15 Eurozone members. The 17 members of the Eurozone should take the decisions on sorting out their problems not just the leaders of the two biggest Eurozone economies.

The real problem as she saw it was that the 27 economies of the European Union were at different stages in the economic cycle and in their competitiveness. Securing an independent source of statistics to measure these economies and making use of the appropriate macro-economic tools to bring the economies more closely in line with each other was needed. The European Central Bank also had to be brought more fully into the picture and given the powers to disperse the large amounts of capital at its disposal, even if this was a policy the Germans were not too keen to endorse. Structural reform as well as fiscal discipline were required.

Immediately before the European Commission delegate, Michele Calandrino, had outlined steps the Commission had put in train to develop such policies – macro-economic and financial surveillance, the regulation of financial services, and targets and guidance for structural reforms – another speaker Professor Kenneth Dyson of Cardiff University, co-sponsor of the conference, had placed events of the last few months in context.

When the Maastricht treaty leading to the creation of the Euro currency was signed, many commentators at the time had pointed to its weaknesses, he said, but it had been hoped that as the currency took hold these would be corrected. No mechanism existed to deal with the problems of states such as Greece, Portugal, Italy and Spain that had lost competitiveness against Germany, and just as importantly the absence of a legal capacity enabling the Eurozone countries to act decisively, a problem the markets had not been slow to spot. “You cannot bet against the Fed or the Bank of England [because they have the freedom to create resources they can deploy against you], but you can bet against the Euro area.”

The nature of the crisis had changed, too. What had started as a financial crisis in the US and the UK – the Anglo-American phase – had become a sovereign debt crisis and hence a crisis of states and, in particular, those states that constitute the Euro area. The UK had paradoxically won itself a lot of friends, he argued, at the time of the initial financial crisis when Gordon Brown had demonstrated ways in which banks could be recapitalised. The UK now, however, was standing aside and no longer trying to win friends. This could redound to our disadvantage if at some time in the future the crisis returned to haunt the UK more directly as well.

This, he claimed, was a distinct possibility. “Crises of this type are long term – often a minimum of a decade and they could permutate. They require judgment calls in short time periods from political leaders. Professor Dyson said this could be a tale of three or four crises and Britain needed to take out insurance in the form of co-operating with others creating credit, trust and respect for ourselves.

Within the Eurozone the problem stemmed in part from a reluctance on the part of some countries and notably Germany to adapt to circumstances. German lawyers had placed prime weight on honouring treaty commitments, such as the Maastricht provisions, ruling out bail-outs and denying privileged access for debtor countries to the central bank. In part this was due to a German fear, because of pre-war events, of allowing Governments to adopt any form of emergency powers.

When the context changed, however, all bets should be off. The commitment to ensuring the survival of the Euro made by both President Sarkozy and Chancellor Merkel meant there should be the capacity to act in contradiction to treaty commitments in the event of a supreme emergency such as the current crisis. An exemption now from the no bail-out rules would give decision-makers the necessary fire power to act to ensure the survival of the Euro over the long term.

There were two further mismatches built into the current system that needed to be overcome. Firstly, there was a tension between the claims of sovereignty and of solidarity. Governments had insisted on the former in regard to fiscal powers. When it came to solidarity the Germans regarded it as meaning solidarity of effort – in other words everyone behaving like them  – while the southern countries interpreted it as collective assistance.

Secondly, there was now a misfit between the speed of markets and that of ministers in the European Council, which helped to explain why action so often seemed to be slow in coming. This again suggested the importance of more supranational decision-making that could react much faster.

In case there was any doubt in the minds of those present, First Minister Carwyn Jones popped in to stress how important the EU was for Wales – jobs, funding, markets etc. – and popped out again. From the presentations it was clear, however, that Europe’s importance and the survival of the Euro is a given whether or not Britain is a member itself. There was general agreement, too, that there is a long and hazardous journey ahead with consequences that will be seriously destructive if solutions to current problems are not found.

As the delegates left for the somehow appropriately windswept and deserted plazas of Cardiff Bay the overarching title of the morning’s event – A Federal Europe in the Making? – stared back almost apologetically. Another day, another year another decade, perhaps.

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