The Eurozone: IN and OUT relations

25 February 2016

This paper seeks to consider the problems posed for the EU by having most of its members using the euro while others remain outside it. How can these problems be solved – or merely mitigated? Will the solutions help or hinder PM Cameron’s renegotiation of the UK’s relationship with Europe?

Executive Summary and Conclusions 

NOTE: This paper was finalised before the letter from Council President Tusk to Prime Minister Cameron on 2nd February 2016. The proposals are in line with the analysis in this paper but they may yet be subject to significant change by the Heads of Government – either at the Summit of 18/19th February 2016 or later. Moreover, the European Parliament – as co-legislator – will have to agree to some of the proposals. 

• The 1992 Treaty of Maastricht set up the legal and political framework for all EU members to use the single currency – but two states (UK and Denmark) had an opt-out that was expected to be temporary. The Treaty specifies the goal of one currency in the EU with good reason – to provide a mechanism to encourage good economic governance. Political accountability in Europe is delivered by a two-chamber system: Council and Parliament. The size of national populations – over time - plays a key role in allocating voting power. Britain’s population is set to overtake that of France in the next (perhaps five) years, so the UK would become the second-most influential power within the world’s largest trading bloc of more than 500 million people. 
• European `visions’ are not received well in the UK and are usually ignored, but the chances of reaching a particular goal are much reduced if you do not have a vision of where you want to go! Unsurprisingly, the EU has struggled so far to create a robust and incisive response to an economic crisis that should never have happened if `the rules’ had been obeyed. Once the darkest moments of the crisis had passed, EU leaders began to create a vision of a union that would not have to endure such problems again. Following the election of Commission President Juncker, this somewhat vague vision has been crystallised as the Five Presidents’ Report (see p. 17) with a final deadline of 2025 – a decade ahead – to complete the economic and monetary union. There are many problems to be resolved – not least migration. However, the core problem for Britain is that if anything approaching the `Favourable Scenario’ materialises as a natural result of the improving competitiveness that Prime Minister Cameron seeks, then the Eurozone is likely to expand substantially. It is quite conceivable that there will be only one OUT at the end of this decade: the UK. 
• Britain is already `out’ of many core policies of the EU – as is evident from the lengthy list (see p. 38). There is great goodwill towards the UK and a real willingness to find a `fair’ solution. But if an agreement cannot be reached and fears of a de-stabilising Brexit materialise, then it is difficult to see the goodwill remaining and producing a harmonious exit deal on trade relations. This would have a particular impact on the City – the Favourable Scenario for the deepening integration of EU27 already makes the status quo of today – Brin EU/Brout Euro – look increasingly difficult to sustain by the end of a further decade of evolution. 
• The British Government’s `demands’ are encapsulated in four `baskets’: economic governance; competitiveness; sovereignty and immigration. These can be broken down into at least 14 specific items and 11 of those (so at least 80%) are easily met – or already have been. The politically neuralgic topic of immigration may be able to be shoehorned into existing Treaty `safeguards’. But the economic impact of reduced public spending on in-work benefits appears minor (£1.5 bn) when compared with potential Brexit losses of some of the City’s more than £60 bn contribution to tax revenues. The tough proposal for a European Border and Coast Guard is unlikely to have been implemented by Referendum Day and any acrimonious failure even to agree it may be particularly unhelpful. The UK does not seek a veto over Eurozone actions and wants to ensure it is not liable for the cost of any Eurozone problems. The obverse must also be true: the Eurozone cannot be liable for any costs arising from another financial crisis in the City. 
• If the EU turns out to be successful in achieving the vision laid out in the Five Presidents’ Report (see p. 10) for implementation during the next decade, then EU27 may well have solved its problems by attracting all EU states into euro membership – except the UK. Prime Minster Cameron accepts that the UK cannot demand a veto, partly because its abolition was one of Prime Minister Thatcher’s greatest achievements. At that stage, the UK’s situation would only be marginally different from a de facto Brexit: `bound by EU rules but only marginal influence upon them’ – as opposed to `bound but no influence at all’ under formal Brexit.

Full paper on Federal Trust

© Graham Bishop