The swan song of Britain in Europe

The deepening of the crisis in the eurozone over the last few months has been inexorable. Every attempt to stabilise the currency and halt the contagion has brought only temporary respite, and after a short interval the crisis has returned, in an even more threatening form. The euro can still survive but time is very short.

Markets and politics are as usual operating at very different speeds, and a deep conflict has opened up between what the bond markets require and what democratic politicians are able or willing to persuade their electorates to accept. A breakup of the euro has been treated as unthinkable, but it has gradually been acknowledged that it is now a distinct possibility, because matters are passing out of the hands of governments.

The longer that the governments of the eurozone fail to agree on measures that will restore calm and confidence to the markets, the more intractable the crisis becomes. Different technical solutions to the eurozone crisis exist and have been set out by Jose Barroso, George Soros, Mervyn King, Lawrence Summers, and many others.

Their common feature is that they involve the European Central Bank acting as a true central bank for the eurozone, a lender of last resort, and either issuing the bonds or printing the money in sufficient quantities to persuade the markets that there is a credible political authority standing behind the euro, which will do what it takes to hold the currency zone together and prevent defaults.

The difficulty is not in the technical detail of what needs to be done but in the political will to do it, since authorising the European Central Bank to act in that way means that the surplus countries in the eurozone — and above all Germany — have to take responsibility for the debts of the eurozone rather than those debts remaining the responsibility of the individual countries.

It is against the terms of the treaty which established the European Central Bank, but more importantly it is against the wishes of the German electorate, which Angela Merkel must face at a general election expected in September or October 2013. There is no appetite in Germany to run the financial affairs of countries such as Greece. The Germans instead prefer that the debtor countries impose their own fiscal discipline to make it possible for them to continue within the eurozone.

The design flaw at the heart of the eurozone has been much discussed during this crisis. It was also much discussed by, among others, the Bundesbank at the beginning of the project to establish an economic and monetary union. This was a monetary union without a fiscal union, and therefore without the mechanisms on which other currency unions, such as the United States, have relied upon in times of financial crisis — a lender of last resort, fiscal transfers, and a political authority standing behind the currency.

The markets are testing the resolve of the European Central Bank to stick to the narrow definition of its role which the Treaty prescribed for it.

They are doing this by in effect treating the countries of the eurozone as though they still had separate exchange rates which are temporarily frozen in the straitjacket of the euro. What the markets perceive is that these exchange rates are now seriously misaligned because of the productivity gap between the northern and southern eurozone states.

The problem can be solved either by breaking up the eurozone and allowing states to regain financial balance by re-establishing national currencies and devaluing sharply; or it can it be solved by political integration of the eurozone to make it a fiscal union as well as a monetary union. But, at the moment, fiscal transfers and bailouts on the scale necessary to satisfy the markets are ruled out, and the only policy on offer is the imposition of ever-greater austerity and fiscal discipline.

The amount of austerity required however looks impossible to deliver, because growth has disappeared and further austerity destroys the possibility of growth. If governments in the most indebted countries cannot persuade their peoples to accept enough austerity to convince the markets that the deficit will eventually come down, the markets impose a level of interest rates which makes it certain that debt will go on increasing, as the proportion of national income that has to be devoted to interest payments on the debt rises.

Escape is possible through default and exit from the eurozone, but this brings the risk of financial collapse and contagion spreading through other countries, and leading to a wider financial collapse which will affect not just the eurozone but the whole international economy.

All the countries of the European Union now face an existential choice about their future, and the future of the Union itself. Germany has to decide whether to rescue the euro in return for major treaty changes which will mean that Germany has permanently to take responsibility for the eurozone and its finances, or whether to allow it to collapse. Britain chose not to participate in building economic and monetary union, but it too will have to make an existential choice if Germany, for example, decides that it will seek to establish some form of fiscal union in the eurozone.

David Cameron has two coalitions to manage in determining the European policy of the government. He has a formal coalition with his Liberal Democratic allies, and he has a coalition inside the Conservative party with the radical eurosceptic wing of the Conservative party.  This is the most Eurosceptic Conservative party there has been since Britain made its first application to join the common market in 1961. The fault line has shifted: it is now between the sizeable number of Conservative MPs (up to one third) and their media allies who want Britain to leave the European Union altogether, and the majority of the Conservative parliamentary party who want Britain to remain a member, while repatriating some powers.

The coherence of the second position will however be tested, because the government appears to want incompatible things. It seeks to repatriate enough powers to satisfy an increasingly Eurosceptic House of Commons and public that it has put Britain’s relationship with Europe on a new footing, but it also wants to have a say in the terms of the fiscal union that emerges in the eurozone, so that Britain’s interests in maintaining the single market are not damaged.

Many members of the eurozone regard demands to repatriate powers as a further sign that Britain wants to retreat to the margins of Europe, and is no longer seeking to lead in Europe and offer an alternative vision for Europe, and in that case they cannot see why Britain should want any longer to play a part in the decision-making institutions of the Union.

Count Lambsdorff of the German Free Democrats has inquired whether Britain might not be happier with the kind of relationship with the European Union which Norway has. This also happens to be the preferred solution of UKIP. But it is not the policy of the British government. This is so partly for economic reasons and partly for strategic reasons.

Many in the government fear the loss of influence over the way the single market will operate if Britain disengages from the European institutions. Britain would survive, but the eurozone remains Britain’s major trading partner and it is hard to see that altering very quickly. It has also been British policy since Cromwell to prevent, if at all possible, the domination of the continent by a single power.

There is no longer a military threat from Europe, but in a world which may well be moving into some form of regional blocs, to be excluded from the European bloc, and by Britain’s own choice, would certainly be brave.

This may explain why David Cameron and George Osborne have both in recent weeks become strong advocates of fiscal union, urging their eurozone colleagues to take decisive measures to satisfy the markets, while at the same time insisting that the eurozone must not assume a form which threatens the interests of those nations outside it. They have even called on the Commission to act to ensure that the EU is still governed in accordance with the wishes of all its members.

The irony is not lost on radical Eurosceptics, many of whom want to see the eurozone broken up, and want Britain at the very least to regain the bulk of the powers it transferred to Europe when it signed the European treaties.

This course of action spells exit. Britain once had its own radical vision of the way the Europan Union should be organised. The difficulty is that relative few of the member states were ever persuaded by it, in part because Britain was often so reluctant in its own engagement with Europe.

It may be that over the last twenty-five years Britain has in effect made its choice about Europe. The political costs of re-engaging with Europe may now be too high, and very few politicians are arguing for it. Labour is steadily reverting to its traditional Euroscepticism, and in the Conservative party the pro-European wing has almost ceased to exist.

Cameron wishes to continue a policy of pragmatic engagement with Europe in Britain’s interests, but he appears to lack the language or the support to do so successfully. The Germans in particular are sorry to lose Britain as an ally in Europe, but they — like the rest of the Europeans — are beginning to recognise that the forty-year attempt to integrate Britain into Europe has failed. A very different Europe may eventually emerge from this crisis.

Andrew Gamble is Professor of Politics and Head of the Department of Politics and International Studies, University of Cambridge.