18 January 2016

OMFIF: Light in the multicurrency tunnel

The prospect of Britain leaving the European Union has been a background influence adding to the New Year factors disturbing financial markets. None of this has been lost on the principal actors in the German government, which is digesting the implications of a collapse in Chancellor Angela Merkel’s political status over her errors of judgement in the refugee crisis.

Losing Britain as an ally in Europe at the same time as she is losing her grip in Germany would not be good news for the embattled chancellor. In forthcoming horse-trading, the clear dismay with which Berlin regards the prospect of bidding farewell to a major strategic and economic player from an already weakened EU gives British Prime Minister David Cameron some important negotiating cards. So long as he does not overplay them, his hand in the UK’s referendum on EU membership – likely to take place this summer – is strengthened. [...]

One positive sign is that Berlin appears willing to allow the UK to affirm that the EU is a ‘multicurrency bloc’ – certifying that several EU currencies circulate as well as the euro, including sterling and monetary units of other countries with no intention of promptly (or ever) acceding to the monetary union.

An important political principle lies behind this apparently technocratic issue, namely that the UK and other non-euro counties would be guaranteed political and commercial safeguards in the single market – a key issue for the Cameron government. Germany and other countries also appear willing to accept some British strictures over immigration controls.

One overriding reason for the UK’s desire for some form of separation from the EU is the belief that the euro area needs a much greater degree of political integration to enable the single currency to function properly – a step in which Britain would take no part. On the other hand, it is clear that, whatever the pretensions of the so-called ‘five presidents report’ last year, the euro area is not going down the route of significant additional integration any time soon. The implications are two-edged: on the one hand, Europe’s inefficiencies and shortcomings will continue; on the other, British fears of a European ‘super state’ are unfounded. [...]

The next two months will be crucial for Germany and for its chancellor. That is precisely the time that UK negotiations on a new compact with the EU will come to a head. For both Cameron and Merkel, there is much to play for.

Full article on OMFIF

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