14 March 2014

Graham Bishop: Europe: Miliband + Soros + Merkel = Impenetrable Fog in Channel and Clarity unlikely in Budget

In recent days and weeks, the British political class (aided and abetted by the Westminster media bubble) has shown an amazing ability to continue stubbornly ignoring the implications of key messages from the European mainland. Next week is the UK’s “Budget”. Will that be the opportunity to tackle economic problems as vigorously as the euro area has done?  With an election in 14 months – the answer is obvious!

Eventually, financial markets will wake up to Britain’s economic weakness flowing from the double deficits in the government’s finances and foreign trade. The budget deficit is likely to remain at twice that of the euro area and the European Commission Winter Forecast was for Britain to continue running the largest current account deficit in the EU: last year, this year and next year. That deficit reflects the UK’s woeful export performance as market share is lost year after year. Such a record can only be exacerbated by a political marginalisation in Europe that leads on to loss of inward investment.

The political message from the mainland: Chancellor Merkel visited recently and gave the UK Parliament a central message - the process of reinforcing economic union by way of greater integration is a long way from finished. So it is not enough just to survive, but the aim must be to come out of this stronger than at the start. That requires “responsibility and solidarity”, more competitiveness, stronger European institutions, dismantling further barriers to trade, and “the euro states must back up monetary union with a strong economic union with a clearly-defined and sustainable architecture”. Perhaps the key passage was “Only through closer and more binding coordination of economic policy can we prevent ourselves in the long term from getting into another severe crisis in the euro area. In my view, this requires that we adapt the treaty basis for economic and monetary union quickly in a limited and targeted way in order to ensure lasting stability for monetary union.” So Germany will be happy to see a narrow change in the Treaty that focuses solely on deepening economic integration.

The message from global financier Soros: “Europe is at a crossroads. It faces two crucial decisions: one is the future of the eurozone; the other is Britain’s role in Europe... The eurozone needs to become more integrated. It needs a common fiscal budget policy, a Banking Union and a more level economic playing field...But any move towards greater integration risks exacerbating anti-European sentiment in the UK.” (See text below)

A common theme: the euro area needs to become more deeply integrated and Chancellor Merkel, for one, is willing to see a “limited and targeted” change in the European Treaties to achieve a greater degree of integration. Would that trigger a rash of referenda around the EU? The October European Council will receive a report from Presidents van Rompuy and Barroso on “a system of mutually agreed contractual arrangements and associated solidarity mechanisms...with a view to reaching an overall agreement". There might have to be sufficiently attractive “solidarity mechanisms” on offer to sweeten transfers of power.

Treaty revision: Labour Leader Miliband boldly offered an in/out referendum if any proposal for a Treaty change involved the transfer of powers from the UK to Europe (see text below). It is difficult to find any difference between this pledge and the commitments in the existing European Union Act of 2011. However, could a Treaty proposal for integration that excludes the UK also include a measure to remove the requirement for unanimity on `enhanced cooperation’? That would put an end to the UK’s bargaining power – but would certainly trigger a UK referendum under the European Union Act - (4 (1) (k)).

Impenetrable fog in Channel: The British political class seems determined to avoid recognising that the euro area is set to expand further in the next few years – cementing the range of common interests and thus political integration. The arithmetic of voting weights will shift the balance of power to the euro area and away from Britain – amounting to a de facto shift in power even if it is not de jure. At some stage, the political class will have to explain to the people of `Great’ Britain how they became comprehensively marginalised - without a popular vote but with massive consequences.

Appendix: Miliband on Europe

“I want to set out why I believe our country’s future lies in the EU. Why the EU needs to change. What that means for the next Labour government’s position on Britain’s membership of the European Union… Britain is stronger as part of the EU. Because the only way to respond to problems that cross borders is with countries working together. Not standing apart. So the case for Britain’s place in the EU is about our strategic influence in the world…But it is not just strategic. It is also economic. The economic case for membership is overwhelming. Our membership of the EU gives Britain access to a market with hundreds of millions of people…Exit from the EU would put all these gains at risk. Either we would end up outside the single market or even if we could stay within it, it would be under terms and rules dictated by others. That would be bad for Britain.

In this context, people ask: if there are 18 countries in the Eurozone which might wish to integrate further, could this lead to further powers being transferred away from our country?...Without a clear choice about whether Britain stays in the EU. Now, from what I have said about proposals coming from the EU for such a transfer of powers, I believe it is unlikely this lock will be used in the next Parliament. But the British people know, given the history of the EU, as well as uncertainty about precisely what an integrating Eurozone might involve, that it remains possible and they need a guarantee…With a clear lock that guarantees that there will be no transfer of powers from Britain to the European Union without an in/out referendum.” 

Appendix: Soros on Europe: It is Time to Stand Up for the European Union

“There is an important debate under way about the future of Europe and Britain’s place in the EU. I bring a pro-European bias to this debate. I am a great believer in the Union as it was originally conceived…

The policy of austerity that Germany imposed on the eurozone countries was the wrong one. The downward pressure has now diminished and this has given financial markets a lift. But the prospect of a long period of stagnation has not been removed and it has set in motion a negative political dynamic. Anybody who finds the prevailing arrangements are intolerable is pushed into an anti-European posture, so I expect the process of disintegration to gather momentum. 

During the acute phase of the euro crisis, we had one financial crisis after another. From now on I expect a series of political rather than financial crises, although the latter cannot be excluded... Europe is at a crossroads. It faces two crucial decisions: one is the future of the eurozone; the other is Britain’s role in Europe... The eurozone needs to become more integrated. It needs a common fiscal budget policy, a banking union and a more level economic playing field...But any move towards greater integration risks exacerbating anti-European sentiment in the UK.

Right now Britain has the best of all possible worlds – it is part of the European common market but it is not part of the euro. Any change would be for the worst as far as Britain is concerned…I will leave it to the business community, especially the multinationals that use the UK as an entry point into the common market, to explain to the British public what they have to lose: jobs.“ Source: Financial Times

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© Graham Bishop