Historian EP Thompson remarked on our tendency to see history as a series of events which lead up to the present, and our own time, therefore, as the end of the story. So, for example, we say that capitalism eventually beat communism. The End. Rarely do we consider the possibility that, 100 years from now, things might be very different and communism might have reasserted itself. We think of the present as the end of the book, rather than simply a chapter in an ongoing story.
The debate about whether or not Britain should join the Euro has taken a similar tone. It is now almost taken as read that Tony Blair, Will Hutton, Adair Turner and Ken Clarke were wrong about Euro. If we had joined, as they suggested, we would be in an even worse state than we are now. Given recent events, and especially after investors fled even from AAA rated Eurozone countries this week, few people now are making the case for Britain to join the Euro. Though you can still find the odd one.
That said, being outside the Euro doesn’t protect us from the impact of a Eurozone country defaulting, let alone a complete collapse of the currency. Being outside the EU wouldn’t help either, which is why the Americans, Chinese and Japanese are worried about the Eurozone too. Britain still has a large financial sector and it is, inevitably, exposed to public and private debt in the Eurozone. For a good explanation of the mechanics of Eurozone contagion, have a look at this Forbes article from Tim Worstall.
So much, then, for the present but what of Britain’s longer-term future outside the Euro?
Given the horrendous impact of a Eurozone collapse, it is probable that, eventually, the ECB and the Germans will do what needs to be done to save the currency. As Oscar Kent powerfully argues, it is unlikely that the Euro will be allowed to fail. Among the measures to make sure that it doesn’t will almost certainly be a more integrated Eurozone. There is a certain logic to this. The way markets and ratings agencies treat sovereign debt has as much to do with a country’s government and political stability as its level of borrowing. Countries believed to lack the will or the means to service their debts are seen as higher risks. In the Eurozone, Greece and Italy are perceived as such. Both are locked into the Euro, a currency without a government. Are the governments of Greece and Italy able to do what needs to be done to grow their economies and reduce public spending? Do the Eurozone’s central authorities have the power and the will to defend their currency? At the moment, investors seem to think the answer to both questions is no.
To avoid the currency’s collapse, then, a more integrated Eurozone with more centralised powers seems to be a logical solution. Some have argued that Eurozone integration would have happened eventually anyway and that the financial crisis has just speeded things up. Many people who rejected the Euro ten years ago did so because they feared the inevitability of ‘a country called Europe’. In any case, the Eurozone now seems firmly on course for further integration.
We are moving, therefore, to a three-tier Europe. Tier One will be the core Eurozone, currently seventeen members. Tier Two will be the countries like Britain, inside the EU but outside the Eurozone. Tier Three will be the EFTA members who pay into the pot and have to abide by most of the rules but don’t get to vote.
This is what many of the EU sceptics have said they wanted all along – to be part of a trading bloc but to be able to opt out of any further integration. Not everyone is convinced though. As the implications of this sink in, the fear is growing that the Eurozone bloc will eventually decide EU policy. It will be like those meetings you go to when a few people have had a ‘pre-meet’ beforehand – they have been there for an hour or so, discussed the agenda and are on top of the issues. Then you walk into the meeting and wonder why you can’t make any headway and everything seems to have been stitched up before you arrived. The integrated Eurozone could turn into an EU version of a ‘pre-meet’ with our politicians left playing catch-up as they arrive at summits to find that most of the issues have already been discussed and half the biscuits have been eaten.
OK, there is a danger of overplaying this. The countries of the Eurozone are as different from each other as they are from the UK. Getting seventeen of them to work as a bloc will be a lot harder than it sounds. There enough differences of opinion and interest to prevent the Eurozone from becoming a homogeneous bloc.
Even so, the fact that they will meet together and discuss policy on a regular basis is bound to have some effect. Over time, the number of Tier Two countries will shrink as, in spite of everything, countries like Poland are still keen to join the Euro. New countries may join the EU but not at the same rate as in recent years. The UK is therefore likely to find itself as part of an ever shrinking group of countries inside the EU but outside the Euro.
Both David Cameron and George Osborne have expressed concern that exclusion from the Eurozone might make it more difficult to fight attempts to impose regulation on the City. Even without the threat of regulation, the longer term position of London could be threatened. Does it really make sense to have Europe’s main financial centre outside the borders of its main currency bloc? The question is already being asked and, sooner or later, the countries of the Eurozone might decide to do something about it. As Anthony Hilton said last week, Eurozone integration is the elephant in the City’s front room:
This is potentially a huge issue. If the eurozone crisis is resolved by much closer fiscal union, where does that leave Britain?
On the outside in the slow lane of a two-speed Europe is the stock response, and given the stranglehold eurosceptics have on the Tory party in and out of Parliament, it is probably the likely outcome.
It does, however, beg an interesting question voiced by a leading City figure at a private dinner last week. His view was that being in the slow lane was a non policy. It would position this country where Norway is today – having to implement most EU policy to maintain alignment with what remains our major market, while having no influence on the discussions which formulated that policy. It would also highlight a potential schism between the non-financial and financial sectors. While it would make sense generally for the non-financial businesses to comply closely with EU standards and regulations, that might not necessarily be the case for the financial sector.
Cutting to the chase, the point no one is talking about is that a world which features a closer European Union from which the UK chooses to exclude itself, is one with major regulatory and competitive implications for the City. The UK finance sector has enough trouble with legislation when it is consulted and can vote as part of the decision-making process; it is seriously unnerving to think what might happen if it was deprived of even its current opportunity to influence developments.
This paper, which put case for joining the Euro, now looks so old-fashioned that it could have been written on parchment. But some of the fears it expressed ten years ago about Britain’s loss of influence and the risks to the City still stand. They sound very similar to those raised by Anthony Hilton only last week:
Continental determination to avoid London’s dominance would undoubtedly increase if it became clear that Britain’s absence from the euro was permanent. And British exclusion from euro-zone finance ministers’ discussions would permit the use of that forum to develop initiatives aimed at enlarging the roles of Continental centres at the expense of London.
None of this is to say that we must inevitably join the Euro. At the moment, having our own currency still has plenty of advantages. However, if Britain is to say ‘never’ to the Euro it must be prepared for the consequences of that decision.
Britain’s future in the EU, as part of an ever depleting group of Tier Two countries, will be uncomfortable, as anyone who has ever walked into a meeting where there has been ’pre-meet’ beforehand will understand.