Why the European summitto end debt crisis failed

By Chris Graeme [email protected]

‘In My View’ is written by freelance journalist and photographer, Chris Graeme, who lives in Lisbon and enjoys subjects such as world economics and politics.  He is also Editorial Director of People & Business magazine.

It was widely billed as the summit that would either see the Euro reinforced or witness the beginning of its demise.

Over the weekend, in Brussels, the leaders of the 27 European Union countries and the International Monetary Fund held crucial crunch talks that began on Friday evening and lasted until the 5am on Saturday morning.

The results announced to the world that same day were frankly disappointing and fell far short of the kind of package needed to calm market nerves and stop the speculation and contagion spreading inexorably to Italy, Spain and on to France.

Instead of the announcement of the creation of a European central ministry of finance to regulate and equalise the taxation, spending, budgets and finances of the EU member states, the only concrete measures on the table were tighter spending regulations and stiffer penalties for those countries who do not keep within strict spending limits.

Instead, the leaders of the Euro zone signed up to adopting a tough but unbalanced framework of more austerity measures designed to please investors and the markets.

By March next year, it will demand that these tighter budgetary rules will be enshrined in national constitutions and policed by the EU’s Court of Justice. Tough sanctions will be imposed on states that fail to comply.

Some sort of European Stability Mechanism will also be designed over the next few months which will be stricter and more encompassing than the 3% GDP debt level Stability & Growth Pact that even Germany failed to comply with.

Despite more austerity measures, which will kill any type of growth in Portugal, Spain, Italy, Greece and Ireland, countries having difficulties paying their debts won’t, under the new framework, be able to restructure them.

Instead countries will be given a further €200 billion credit card facility through the International Monetary Fund which will mean already indebted countries will be offered the likely choice of getting even more into debt.

These are all desperate, short-term measures which I fear in the long run simply won’t work.

In fact, it has the remarkable hallmark of the unrealistic reparations demanded from Germany after World War I, which resulted in more debt, sluggish growth, inflation, then hyperinflation, default and ultimately war.

The problem with the European Union’s single currency is that the project can only work as a political and economic venture whereby all members agree to abdicate fiscal and financial sovereignty and have them transferred to Brussels.

Europe simply does not have the conditions to make a single currency work; it never did and was fatally flawed from the start.

In order to make a monetary union work successfully over a large and diverse land area, you need the sort of system that exists in the United States.

There the single currency, the dollar, works because of four main reasons: labour mobility is fluid and people go where the jobs are; there’s a common language and a highly flexible labour market.

But the most important aspect is that taxation and budgets are decided largely at a federal level. None of these things, save labour fluidity, happens in the European Union.

Political union

History also shows that if you want an economic union then the first step is to make a political union.  

The summit showed just how far all the member states were from that reality. Britain will never sign up to further erosion of its sovereign powers because over 60% of the people don’t want it.

Although David Cameron will likely be blamed for the failure of consensus in Brussels last weekend, he was right to stand firm and not sign up to what was on the table.

Although Europe represents 40% of UK trading market, the city of London is far too important to its economy – an estimated 10% of its GDP – to risk tough supervision and regulation, no matter how desirable, driving financial institutions abroad to the Far East.

The city of London is recognised worldwide as a world-class financial centre, the most important in Europe and one of the most important in the world.

It’s crucial for Britain’s interests and our national financial service-led economy to protect its status. It is true there has been some appalling behaviour on the part of bankers around the world, particularly in the United States, but that doesn’t alter the fact that the City is of huge importance to Britain and Europe.

There is something fundamentally wrong with the idea that the City of London, its continental counterparts in Paris and Frankfurt, and their laisser-faire policies were somehow responsible for the current Eurozone crisis.

Europe has a massive sovereign debt crisis, with countries, their public sectors, their companies and their populations spending far too much – that is at the root of this current problem.

That said, although Cameron was absolutely right to oppose controls on the City, the way he flatly refused in Brussels was a very stupid way to begin negotiations.

And if we think that we can fall back on the special relationship with the United States we may find ourselves sadly disappointed.

There has been a rather limited ‘special relationship’ between the United States and the United Kingdom since the late 1960s.

The United States wants to do business with the big players in Europe where it has considerable market interests and that means France, Germany and, in the future, Poland as well as the United Kingdom.

What this meeting in Brussels was about was saving the euro: and from what I saw over the weekend only served to confirm that the euro zone is doomed.

That should come as no surprise. As far back as 1989 many economists and analysts explained exactly what the flaw was in the project – which of course was never an economic project as it should have been.

It was always a political project to achieve a United States of Europe without really thinking through the economic and financial aspects of the union.

The only way it will work is if its members sacrifice national budgetary and fiscal control. Otherwise the Euro and the project, will, like the Titanic, inevitably sink.