The immediate market crisis of last week should subside today. The Euro member states have realised the serious threat of the Greek crisis spreading to Portugal and Spain. They have decided to put in place huge credit lines in case member states can no longer borrow from the markets at sensible rates of interest. The European Central Bank can now buy up state debt from member states, just as the Bank of England has been buying up UK state debt. The immediate worry of the markets that Euroland member states would run out of money has been eased by the twin facts of more credit and the ability to literally print money.
All of this comes at a political price. It must mean two things. Firstly, there has to be more control and influence over member states budgets. What the EU has failed to do by law and agreement, it will now be able to do as the lender of last resort. It lacked the will to enforce its 3% maximum ceiling on annual government borrowing. Now it has to force reductions where member states have public finances wildly out of control. If member states need access to the special funds, they will be expected to undergo surgery to their public spending and deficit plans to qualify for the cash. Secondly, for it all to work, there need to be in place realistic plans anyway to get the budget deficits down. If there are no such plans, the markets will return to force up government borrowing rates.
One of the ironies of the left of centre thinking on economics that tends to prevail in European circles is they will end up concentrating on cutting spending rather than on policies to promote growth. They will be reluctant to slash tax rates and reduce regulation on earning and saving, policies which could promote faster growth and create a stronger private sector. So, instead, they will have to keep on cutting more out of their public sector budgets.
Meanwhile, the Europeans love of proportional representation and hung Parliaments makes the task of government more difficult. Mrs Merkel has just lost her majority because she went to the aid of Greece. The German political class may be committed Europeans who want to integrate further and who understand that if you share a currency with another country you also have in effect to share a budget. The German people think otherwise. They resent these obligations and degree of common working, and have as punishment snookered their government. That makes handling the next phase of the crisis that bit more difficult.
PS The pro EU Europeans in the UK might like to thank those of us who fought against British membership of the Euro. If the UK had been in the Euro in the last year our public finances would have wrecked the common currency. I remain a strong supporter of our independence, but have to admit it leaves us free to make a mess on our own, instead of helping destroy the common cause. Let’s hope soon we can start to use our freedom from the Euro to good effect.