Europe’s currency tussle

A lot of eyes will have been turned towards the European Union over the last few weeks, and particularly last week, as its member governments met to seek to try and bring some closure, at the level of policy agreement, to the issue of coping with what is now called the Eurozone crisis. And by the same token, there will have been a strong sigh of relief within the EU itself at the end of last week, when all the members, with the exception of Britain, arrived at an agreement intended to bring some relief to the economic situations of the affected countries on the basis of their accepting severe measures of fiscal and financial discipline.

The crisis, originally having to do with serious debt issues affecting some member states, in particular Greece, Spain and Portugal, has been transformed, over time, into a debate on the future of the Eurozone, then on its implications for the European Union as a whole, in particular on the future of the relationship between the United Kingdom and the rest of the EU, and therefore on the fate of the European integration process as a whole. The issue has attracted worldwide attention, not only because all countries have a deep interest in seeing to it that the recessions now affecting the United States and much of Europe do not come to more seriously affect the rest of the world, including dynamic economies like China and the BRICS which well know that the fate of the US economy in particular, is still significant for sustaining reasonable rates of economic growth in their own countries.

The Eurozone in particular has been shaken by the virtually simultaneous economic crises involving a combination of high debt and diminishing rates of growth of some of its members. There has been an inability on the part of Greece, Spain, Portugal and then Italy, to cope with their debt, and with the necessity to accept severe measures that are likely to induce deep recessions in those countries in the medium term.  Consequently, the EU has been forced to treat their situations as a collective problem, and to focus on the possibility, if their situation is left to worsen, of a severe weakening of the currency. At first, the leading Eurozone governments, Germany and France, found themselves at odds over economic and financial measures to deal with the crisis. Germany has been careful about agreeing to commitments that would make it too involved in responsibility for helping with the debts of countries in difficulty, particularly in respect of purchasing bonds to sustain the market in the Eurozone and thus give some recourse for obtaining additional finance to the countries in crisis.

The crisis also brought into relief the somewhat differing attitudes of Germany and France. Actually, since the establishment of the EU and a ruling by the German Constitutional Court and subsequent lower courts, on the limits to which the German Federal Government could commit itself, particularly in financial and budgetary matters to the EU system, Chancellor Angela Merkel has been particularly careful about going beyond the bounds of what the constitution can bear. This is particularly so since the individual German states have the right, as they have done, to contest federal government commitments in the EU system in the courts. On the other hand, President Sarkozy of France has been more committed to enhancing the EU process, and has been forthright in his statements in recent times. He has actually spoken of a “federal core” and a “confederal outer band,” insisting that “You cannot make a single currency without economic convergence and economic integration”; and going further to say, “I don’t think there is enough economic integration in the Eurozone.” His remarks have been met with the comment from the President of the European Commission (and former Prime Minister of Portugal) Jose Manuel Barroso, that “a split union will not work.”

As time has elapsed, however, and the situation has got more and not less serious, the two leaders have found space for a rapprochement, specifically expressed at last week’s meeting of all 27 members of the EU. This agreed, in particular, to a major requirement that countries – the ones in crisis in particular – accede to greater fiscal coordination and budgetary discipline within the Eurozone, under the watch of the European Central Bank; without, however, the Bank, as distinct from the member states, becoming a direct “lender of last resort” as is the Federal Reserve Bank of the United States. So Chancellor Merkel could well say that the enhanced integration agreed to has not reached the stage of the federal system that is the United States. And part of that agreement is that the chief lender of last resort will remain the International Monetary Fund (as it has been, for example, in the earlier case of the Irish debt crisis – Ireland being a member of the Eurozone) – though the ECB will also have as its mandate, intervention in the bond market. What, however, the German Chancellor has achieved that is important for her constituents, is a cap on both spending and borrowing with penalties for those countries which violate the relevant limits. This brings in an enhanced legal aspect to the European system of economic governance.

The crisis, however, opened up a wider issue that has been simmering for some time in the EU. For as has been widely indicated in the press, the United Kingdom has found itself isolated in deciding to be the only EU member state unwilling to agree to the new consensus. The British Conservative government, hostile, and particularly so in the last few weeks as parliamentary backbenchers piled on the pressure, to any suggestion of enhanced EU integration, seems to have thought that it might have the support of other countries on the continent in resisting the emerging solution. However, Prime Minister Cameron seems to have miscalculated the effect a Franco-German rapprochement would have on other countries who are not in the Eurozone, for example, Denmark and Sweden. Specialists in this matter will recall a similar isolation of the United Kingdom when the European Community was founded in 1958, that left the country outside of the community until 1973.

Mr Cameron has returned to Britain a hero of his parliamentary supporters, but isolated even from those countries in the EU as a whole, which were initially lukewarm towards the Franco-German position. But the game is not over for either Britain or the Eurozone states, in the sense that the British government, on the one hand, remains mired in a recession which forecasters say will worsen during the next year; while on the other hand the Eurozone states are still left uncertain as to whether the delinquents among themselves will, in spite of the agreement, be able to keep their side of the bargain in the face of populations fed up with the recessions they are experiencing, and skeptical of governments which have hitherto done more or less what they liked in the last few years.

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