Comment: A bailout won’t save the tottering eurozone
The only choice now is whether the eurozone transforms into a United States of Europe which no-one wants, or endures a messy divorce.
By Stephen Booth
The perilous situation currently facing Ireland has taken on an unnerving air of inevitability, similar to that which preceded the Greek bailout last year. We’ve seen the same frantic denials from Irish ministers and the same pledges from European Union leaders that support will be provided if required. Others meanwhile, such as Portugal and Spain on the increasingly frayed periphery of the eurozone, look on nervously fearing they will be next.
Most will be well versed in the causes of Ireland’s current mess by now: low eurozone interest rates, essentially designed for a sluggish Germany, fuelled a property bubble financed by over-leveraged banks. This private debt has rapidly become state debt with the realisation that Irish banks are more or less insolvent but for the ongoing intervention of the European Central Bank. Greece admittedly has very different problems, cooking the books to get into the ‘elite’ euro club in the first place, but the outcome looks likely to be the same.
The Irish crisis has prompted cataclysmic declarations from EU Council president Herman Van Rompuy as well as German chancellor Angela Merkel, who said this week, “If the euro fails, Europe fails”. These predictions of the looming collapse of the EU if the single currency isn’t saved are revealing both as to why the euro is now in this mess and the challenge ahead.
Rather than blaming “the markets” and “speculators” for the crisis, it’s time to for eurozone leaders to face facts. The European elite’s desire for a grand political project, which culminated in the euro, was always a huge economic gamble, throwing together hugely different national economies under one monetary policy but without the United States-style central budget or mobility of people to iron out the differences.
The euro belongs to the days when the myth of a ‘federal Europe’ seemed attainable to European leaders. In that sense Merkel is right to suggest that if the eurozone were to break up it would be the final nail in the coffin of this dream. But while no one longer believes in it, least of all German taxpayers who are paying the bills, it would be a hugely significant admission for a German chancellor to make. Hence the seemingly unflinching desire to keep the euro together at all costs.
Ireland’s fierce resistance to a bailout up to now is evidence of the lack of enthusiasm for heading down the ‘federal’ route. The government knows that accepting EU money also means playing to the tune of Brussels and Berlin, whether it is decisions on what to cut or its treasured low rate of corporate tax.
But how does this affect the UK? Shouldn’t Britain simply mind its own business and let the eurozone get on with it? The UK has thankfully retained the pound but the single currency’s problems still have enormous political and economic consequences for Britain.
Not only would a chaotic eurozone collapse damage the UK’s nascent economic recovery but British taxpayers are also likely to be asked to contribute to an Irish bailout. This could come through either the EU’s ?60bn bailout fund or the bilateral loans reportedly being prepared by George Osborne (the UK is not part of the larger ?440bn fund, to which only eurozone members contribute).
The question many people are legitimately asking is why should UK taxpayers shell out for the problems caused by the euro, foreign governments and some dodgy lending by the banks?
Both George Osborne and David Cameron have been preparing the ground for British involvement in an Irish bailout, stating the importance of trade links, and Bank of England governor Mervyn King has added that UK banks’ exposure to Ireland is “by no means trivial”.
This may be valid justification but, in reality, the UK may not have a choice. The ?60bn EU bail-out package which Britain underwrites to the tune of £6-7bn is not protected by a UK veto. This means that the mechanism can be triggered by a majority vote amongst EU ministers, even if the UK didn’t want it. A bilateral deal may be more desirable for the UK and, as it might come with fewer strings, for Ireland, but in effect the UK is likely to pay either way.
However, the eurozone’s fundamental problems will not be addressed by a bailout. So, if the UK is forced to contribute, British taxpayers need some reassurance that good money will not simply be thrown after bad. The eurozone faces an unenviable choice: it either integrates further to become a United States of Europe, which very few citizens and even governments really want, or prepares itself for a messy divorce in which some countries have to go it alone. If UK taxpayers’ money is to be involved it is only right that the British government focuses the minds of its European partners on answering this fundamental question.
Stephen Booth is a research analyst at the Open Europe thinktank.
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