Yesterday in the Commons Conservative Eurosceptics were not happy about the EU’s approach to the Euro crisis. Everyone wants to see Ireland treated well, and wishes our neighbours success in getting out of the economic difficulties which have been largely created by membership of the Euro, by the European Central Bank’s decision to run down support and by poor regulation of Irish banks within the EU system. The questions at issue were “Who should pay to help Ireland at a time of difficulty?” and “What policies should Ireland be made to follow by the EU and IMF to help her out of the crisis?”
Today these same questi0ns need to be asked about any Euro member state in difficulties as the EU Heads of government turn their attention to what to do to mend the Euro. The UK government has the full support of Eurosceptics when it argues the case that future financial support for Euro members should come from Euroland states and not from EU countries outside the Euro. It also has full support in saying any Treaty change to allow and pay for bail outs of Euro members should very clearly and expressly not apply to the UK.
The EU and Euroland needs to answer the following questions.
1. Should Euroland countries assist each other when in financial difficulty? Of course if you belong to a single currency area you have to accept obligations to help neighbours in the same currency. There has to be stronger central economic government for the zone, transfers of money from rich to poor areas, common banking regulation, and controls over the total levels of debt and bank debt in the system. All this requires further transfers of power to the emerging Euroland sovereign government, Treaty change and more regulation. It will anyway be the natural response of the EU in difficulties. If you shared a bank account with the neighbours, you would want to be reassured that they cannot overuse the overdraft at your expense. They will want to be reassured that you will help them keep the account solvent, as you are jointly liable.
2. How should the money be made available to countries in distress? All banks within the Euroland area should be subject to effective common regulation of cash and capital. They should all be eligible for as much financial support as they need from the European Central Bank all the time they are solvent, and subject to orderly run down if they are not. All countries should be subject to strong deficit and debt controls. If they observe them they should be eligible for as much financial support as they need, financed from common Euroland bond issues. If they start to break the rules there needs to be a process to bring them back into line, which is far from easy all the time they appear to be independent democracies with views different from Euroland views on spending or taxing.
3. What should happen to non Euro members? If they are intending to join, then they could be part of the creation of the Euro sovereign and join the economic management arrangements as part of their preparation. If a country very clearly does not intend to join, like the UK, it needs to be exempted from the panoply of economic controls and management. The creation of stronger economic controls which is now underway should be the opportunity for the UK to redefine its arrangements as well, as we do not need nor wish to be under the degree of Brussels control that a Euro member has to accept. People in the UK will want to know what we are getting in return for allowing the Euroland members to press ahead with Treaty change.
4. Will the austerity programmes imposed by the EU on overborrowed Euro members work? Normally an IMF programme of spending cuts is augmented by devaluation to allow a shift of resources into exports, and by easier money to allow a general private sector led expansion. Belonging to the Euro makes these two routes difficult, making it much more difficult to see how a Euro member in crisis will generate the faster growth it needs to pay the interest and get out of difficulties. There is no easy answer to this. Some of us went hoarse explaining that Euroland was not a natural single currency area, and pointing out the architects of the Euro had not brought the different economies closer enough together to make it a success.
It was clear in the run up to the Euro that Greece, Portugal, Spain and Italy failed to meet the EU criteria for membership by a wide margin. They did not get their debt levels down to the specified amount, their deficits were too high, their inflation rates were too high and their long term interest rates were too high. I argued then that these four countries could not get their performance into line to enable them to make a success of Euro membership: “their economies are simply too different and diverge too far from the French and German economies to make it feasible”.
It would be good to hear from the proponents of this scheme what their answer is now. I forecast the Euro scheme would end up with higher taxes to pay for bail outs, and higher unemployment as the economic policy failed to offer growth and prosperity.