In statements by some politicians in recent months, one could assume that they had forgotten that we are in the most serious economic position since the 1920s. It cannot be put better than in the Economist, which commented on 10 December that “in 2008 the world dodged a second Depression by avoiding the mistakes that led to the first. But there are further lessons to be learnt…the crisis in Europe looks eerily similar to the financial turmoil of the late 1920s and early 1930s, in which economies fell like dominoes under pressure from austerity, tight money and the lack of a lender of last resort”. All those taking decisions, whether in the UK or on the continent, need to remember this central observation.

After the last European Union Council on 8-9 December, some questions arise about where we are headed next:

What was the outcome of the European Council?

Reporting to the European Parliament in Strasbourg on Tuesday 13 December, the President of the European Council observed that there was a remarkable degree of consensus on the content and objectives but more discussions took place on the legal instruments necessary to implement them.

Not only was an agreement reached to make additional resources of up to 200 billion euro available to the IMF, but, more importantly, a new fiscal compact with new fiscal rules was agreed. Member States will transpose the new agreement into their national legislation at the constitutional or equivalent level. Key elements of this new approach include a requirement that Member State budgets must be balanced in structural terms, building on the Stability and Growth Pact.

The intention is to make this fiscal compact binding through an intergovernmental treaty to be signed by early March. All countries, except the UK, have given their approval to this course of action, but a few, such as Sweden and the Czech Republic (not members of the eurozone) may have problems.

Is this sufficient to prevent the euro from collapsing?

As the dust settles from the European Council last week, it looks very much as though the reaction, similar to that after previous European Councils, is setting in where expectations before the Council were too high with respect to what was actually decided. Jeremy Warner made a typical comment in The Daily Telegraph on Tuesday, saying that “the summit’s failure to come up with anything remotely credible to address either the single currency’s existential crisis or the gathering economic slump”.

Countering this pessimistic view is a more optimistic one given by German Chancellor Angela Merkel to the Bundestag on Wednesday, where she underlined that “…if we consistently move towards a fiscal and stability union, if we actually complete the economic and currency union… then what I have always stated as our goal since the beginning of the crisis will come to pass”(see BBC News). This echoed her comment on 2 December that, “The path ahead is long and it is difficult but it is the right path for the joint good of a strong Germany in a strong European Union”.

The key to the euro’s survival, I suspect, not only lies in these disciplinary rules being fully applied by all eurozone Member States; it will also rely on whether the European Central Bank President, Mario Draghi, considers that the measures taken by Member States give him sufficient room for manoeuvre  to intervene more in the bond markets. From the outside, this looks as if it is a race between the tortoise and the hare (but, remember, the tortoise won!).

Did the UK take the right approach?

In the run up to the summit, the UK Government consistently supported need for fiscal integration of the eurozone (even if we are not members of it) - see David Cameron’s speech in the House of Commons on Monday. Indeed, the consequences of a collapse of the euro would be horrific for Britain, Europe and the global economy. Comments by London Mayor Boris Johnson that the euro is “a project that is intellectually, morally and democratically bankrupt” show his opportunistic nature rather than his capacity for loyalty and straight thinking (see the The Daily Telegraph on Monday).

As things turned out, David Cameron had no choice but to use the veto. But, as we have now learnt, submitting a detailed protocol the day before the European Council, asking for the restoration of unanimity in some aspects of financial services affecting the single market, was never likely to be accepted by the others - the more so as it had been the pride of place for Margaret Thatcher in agreeing to the single market through qualified majority voting to promote UK financial services. Not one of the finest hours for the Foreign Office!

An interesting twist was revealed by the European Commission during the debate in the European Parliament. During the European Council discussion, it had tabled a clause which said that “any measures adopted by the Council and applying to the euro area only, must not undermine the internal market including in financial services nor constitute a discrimination between the euro area Member States and the others”. Could it be that this general approach might give better protection to the City than the detailed protocol originally suggested?

What next for Britain?

David Cameron could not have been clearer in his speech in the House of Commons of his determination for Britain to remain in the EU, not least because of the millions of British jobs which would be put in jeopardy should we withdraw. And yet, despite the very unstable economic conditions we find ourselves in today globally, this does not seem to stop many in the Conservative Party from arguing vociferously to open up a big debate on repatriation or complete withdrawal from the EU after a referendum.

One point of clarification to be made to those arguing for significant repatriation of policies such as the Common Agricultural Policy and the Common Fisheries Policy, is that we are already out of the two other major EU initiatives, the Schengen area and the euro. If we start asking for more exemptions of this nature - so that in the words of some we can become more like Switzerland - this will encourage other EU Member States to suggest that we withdraw under Article 50. After all, what is the point of belonging to a club if you do not participate in any of its activities?

A more sensible approach is to see how to improve EU competitiveness by campaigning for the alteration or removal of those directives which have an pernicious effect on business, and in particular on SMEs, such as the working time directive or the agency directive. Could such an approach be successful? It might be so, judging by the comments by José Manuel Barroso when speaking to the European Parliament on 13th December:

“It is indeed very important that member states agreed a fiscal compact, but let me say that this is not enough. The problems in the euro area are not only fiscal, but also financial. And above all, problems related to lack of competitiveness. We need to restore growth and promote employment! The commitment to fiscal discipline is indispensable for Europe, but the reality is that structural reforms for competitiveness and growth enhancing measures are the key to restore not only the confidence of investors, but also, above all, the confidence of our citizens.”

Last Thoughts

Given that we are in a situation similar to that of the 1930s, the last thing we need to do in Europe is to indulge in narrow-minded nationalism which will lead to a proliferation of barriers running across the continent. Perhaps Josef Ackerman, the CEO of Deutsche Bank, had something like this in mind in his speech on 23 November in Brussels, when he said that,

“I am convinced: A united Europe is our only chance to retain influence in the 21st century, economically, politically and culturally. Each European nation individually today already is too small to shape its own destiny – and given demographic and economic trends they will lose even more power over time. Only a united Europe will be able to actively participate in the making of global rules, as individual nations we will be relegated to the ranks of rule-takers. And only as a united Europe will we stand a chance of preserving our prosperity. So European integration is no longer primarily about peace. It is about self-determination, the freedom to choose and the power to design – and ultimately about the ability to safeguard our prosperity, identity and liberty.”

In the months ahead, to resolve this impasse resulting from the European Council, we will needto see if there is an effective way to provide the guarantees needed to protect the City from developments in the eurozone.  Mr Jacek Rostowski, the Finance Minister of Poland, claimed in The Times on 13th December that the stand-off would not continue for long. He said, “My guess is that within not too long a period of time, the compromise that was not achieved on Friday morning will be achieved, probably at the time when the intergovernmental treaty is brought into EU law”.

Last, and perhaps not least, on the subject of referenda and the need for British participation in decision-making, we need urgently to wake up to the fact that a referendum has actually been proposed to take place in Scotland before 2015 by Alex Salmond, the SNP leader, to determine whether Scotland should become independent from the UK. This is, in my view, more menacing to the future of our country than a referendum on any eventual treaty change in the European Union. Let’s hope more people voice their concern about this subject in 2012.

This blog will resume on Friday 13th January 2012. In the meanwhile, wishing you a very happy Christmas!

European Union