Saving the Euro? - 11th December 2011

Overwhelmingly the reaction to the outcome of the European Council, as far as my post-bag is concerned, has been positive. Some people have asked me why our demands were so modest –confined as they were to guarantees on financial regulation. Why did we not seek to reverse some of the damage done by earlier European treaties? Why not repatriate fishing or re-establish our Social Chapter opt out?

The answer is that we really wanted an agreement and we suspected that some of our partners were not too fussed about getting one –whatever they may say afterwards. The Euro-zone crisis is hurting us by reducing demand in our principal export market, causing even slower growth in our economy and the world economy too. We believed that measures to sort out the Euro’s problems would be more credible if backed by the EU institutions on the basis of a treaty signed by all members of the EU.

My suspicion is that Mr Sarkozy is quite content with the outcome and never really wanted a treaty that included the UK, whereas Mrs Merkel is genuinely disappointed. The Germans tend to see the British as allies in favour of greater efficiency and rigour, in contrast to more lax southern European attitudes. The French, having deprived Germany of its powerful UK ally, now has an agreement to proceed balanced in favour of the ‘Club Med’.

In the knowledge that France was content –if not eager- to proceed without us, it was prudent to make our demands as modest as we reasonably could.

So why did we want an opt out on financial services as our big ask?
The fact is that it counts for 10% of our tax revenues, 7.5% of our gross domestic product, well over a million jobs, and is one of our chief export earners. Our financial services sector is most of Europe’s. We need to regulate it both more rigorously and more sensitively than they do. Furthermore, they show increasing interest in the sector as a ‘cash cow’ for new tax revenues, secure in the knowledge that we Brits would be paying the lions share.

To put a premium on protecting this vital UK industry from the processes that gave Europe the disasters of the common fisheries, common agriculture, and the Euro seemed a reasonable request- even if it proved to be too much for them to grant.

In many ways the summit was an attempt to solve the next Euro crisis rather than the current one. It was an undertaking to have rigorous rules and to really, really, obey them this time. Of course, they did have rules in the past but they all broke them, including Germany and France, and that is why the currency is in intensive care. What has yet to be provided is the ‘big bazooka’ cure for the current problem. Given that the summit was billed as the last chance, does this mean that we now face the collapse of the Euro with disastrous consequences for our trade and economic outlook?

Not necessarily. When frightfully clever people tell you with frightening and unanswerable logic why awful things must follow, they tend to ignore the possibility that people –however illogically- have an ability to just muddle along, but let us assume that the Euro does break up. Will it be as dreadful as we are told?

Well, it might be, but then it need not necessarily be. I am always reminded of General William Slim (the victor of the Burma campaign) and his principle that nothing ever turns out to be as bad as first reported. If the currency broke up with an orderly exit by those countries that otherwise face years of stagnation and austerity, then they would have a competitive exchange rate and would start to grow again, and economic recovery is catching. There are examples of currency blocks that have broken up since the last war to general mutual benefit –not least the Soviet Union's.

If I were a politician in a Euro-zone country I would be seriously considering this potential alternative rather than the straight-jacket that they have chosen. Frankly, I think they have taken leave of their senses, but then, I thought that about the whole enterprise when they first embarked on it.