03 June 2012

Simon Nixon: Euro political union a risk for UK

The eurozone needs to move towards deeper political union now, including embracing a banking union and common eurozone bonds, or risk certain disaster. But where would this leave the UK, asks Nixon in his WSJ column.

The euro… was created partly in the belief it would force Member States down a path of more effective government, based on sound money, fiscal discipline and respect for the rules of the club.

Certainly Germany continues to believe the euro can fulfil this role. From Berlin's perspective, membership of the euro forces countries to respond to market discipline by embracing wide-reaching reforms of broken political cultures based around unaffordable entitlements, over-generous welfare systems, entrenched privileges and weak administration. Only when Member States have tackled their "original sins" can Europe move to a deeper political union based on common eurozone bonds and a genuine banking union of the sort many now agree is needed.

But the history of Italy suggests that the eurozone may not be able to escape its own path dependency. Greece has barely implemented many of the structural reforms required under its bailout; Spain has wasted years dithering over the reforms of its banks; Italy's reform programme seems to have hit a wall.

Yet the eurozone needs to move towards deeper political union now—including embracing a banking union and common eurozone bonds—or risk certain disaster, as European Central Bank president Mario Draghi warned last week. Given the alternative, the best bet must be that the eurozone does embrace deeper integration, probably including Greece. What emerges won't be anyone's idea of utopia, it may not be economically successful and it certainly won't be very democratic, but it will be a political union.

But where would this leave the UK? Demands for a referendum on its EU membership are fast becoming irresistible; the creation of a European banking union could be the trigger. Already influential voices are insisting any banking union must be for the whole EU, not just the eurozone. Countries that don't join risk being shut out of the single European financial-services market—a major blow given the importance of London's financial-services industry to the UK economy.

On the other hand, joining a banking union would represent a major transfer of sovereignty and could expose UK taxpayers to the cost of future eurozone bailouts via a common deposit guarantee fund. Britons may soon be forced to choose between the engine of their economy and the institutions that have served them so well.

Full article

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