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Summary of the report:
There are welcome signs that the euro area crisis has eased. The eurozone has exited recession, and there are positive indications of progress in countries such as Ireland, Portugal and Spain. More than anything else, the ECB President Mario Draghi’s July 2012 commitment to “do whatever it takes” to save the euro has caused the existential crisis threatening the single currency to subside.
While the crisis may have abated, it would be unwise to conclude that the storm has entirely passed. Fundamental weaknesses remain which make the euro area vulnerable to future shocks. There are immense economic imbalances between core and periphery countries. Unemployment, and in particular youth unemployment, is at destructively high levels. The programme of structural reforms is incomplete in a number of Member States. Growth across the euro area is anaemic, and there are growing fears of a damaging deflationary spiral. Continued political tensions due to the effect of ‘austerity’ on the lives of EU citizens are apparent. Such weaknesses will continue to test the economic and political stability of the euro area for as long as they persist.
In light of this, EU leaders need to promote growth-friendly policies, and press on with structural reform and the completion of the Single Market. Creditor Member States, notably Germany, have their own obligations to stimulate growth and demand. The ECB must ensure that its comprehensive assessment of the banking system (concluding in October 2014) is robust, yet does not undermine the euro area’s fragile recovery. However these steps are not enough. We do not underestimate the political challenges of deeper euro area integration, but such integration is vital if the single currency is to prosper.
This in turn raises significant challenges for the UK. The euro area crisis has seriously altered the institutional and decision-making structure of the EU. Euro area authorities, notably the ECB and the Eurogroup, have grown in influence, while the Commission’s role has diminished. Moves towards euro area integration leave the UK in an increasingly isolated position. In order to ensure the UK’s interests are effectively promoted, the Government and the Bank of England should maintain and develop constructive relationships with the increasingly powerful euro area institutions. All parties should also redouble their efforts to convince euro area colleagues of the benefits of the City of London as the leading global financial centre for the EU as a whole.
The economic fortunes of the UK and the euro area are intrinsically linked. If all can be convinced of the mutual benefits of prosperity both for the euro area and the Single Market, then the UK and the City of London have much to contribute and much to gain.
Commenting, Chairman of the EU Sub-Committee on Economic and Financial Affairs, Lord Harrison, said:
"A more integrated eurozone is necessary for the single currency to thrive. Yet the growing role for eurozone institutions leaves the UK in an increasingly isolated position. The UK needs to get a grip: firstly by maintaining effective working relationships between the Bank of England and the ECB; secondly by developing constructive relationships between the Government and the Eurogroup; and finally by working hard to convince the new European Parliament and European Commission of the City of London's value as the leading global financial centre for the whole of the EU. A vibrant, successful City is a unique asset, key not only to the UK's prospects, but also to the future prosperity of the EU."