IN that overworked phrase, this week is likely to be a landmark one for the euro, if landmark is not too solid a metaphor for the single currency. It also marks some striking European anniversaries and is an opportunity for some reasonably well-informed analysis from a pro-European standpoint of what will happen next.
The week began with a curtain-raising double act by Angela Merkel and Nicolas Sarkozy – “Merkozy”, to those of us who have been following the slow motion decline of the euro.
They are partly responsible because of their disagreements, for example, over the role of the European Central Bank. Unlike the US Federal Reserve, the ECB has, formally, no wider economic goal than inflation control. In that it has been successful: in nearly 10 years inflation in the eurozone has stayed around two per cent and this stability is credited with creating some 14 million jobs.
It was Merkozy’s predecessors, Gerhard Schröder and Jacques Chirac, who started the rot in 2005 by departing from the strict financial criteria first set out in the Maastricht Treaty, negotiated this week 20 years ago.
The Maastricht Treaty – which also introduced the EU’s foreign and defence policy, the Single Market and its flanking social policy – was Jacques Delors’ blueprint for the euro. It was succeeded in 1997 at the request of the Germans by the Stability and Growth Pact, which insisted that member states must respect an annual budget deficit no higher than three per cent of GDP.
What these agreements failed to do for the euro, born on January 1, 2002, was provide any binding mechanism to prevent slippage and the result was that sovereign governments, especially in the south, simply ignored the guidelines.
What Merkozy proposed on Monday was:
Automatic punishment for any government that allows its deficit to exceed three per cent of GDP.
Making permanent the European bailout fund, which now stands at 440bn euros.
Help from the IMF and investors, with monthly meetings of the euro leaders.
It was possibly this last point which led the exasperated credit rating agency Standard & Poor’s to issue its statement downgrading the eurozone countries. In particular, it criticised “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members”. In other words Standard & Poor’s is making the same arguments as the pro-Europeans: there is a desperate need for the EU to be given more responsibility because inter-governmental deals of the Merkozy type have simply run out of road.
While Jacques Delors’ comments last weekend that the structure of the euro was flawed from the outset had no effect on the markets, Standard & Poor’s comments certainly did, and worldwide markets slumped.
So the EU summit starting tomorrow evening will probably see a decision about whether a new EU treaty is necessary to stabilise the euro – and that is why David Cameron visited President Sarkozy last Friday.
Cameron is desperately anxious that any future structure does not trigger a referendum in Britain.
The clamour for a rebellion is insistent and the rebellious attitude of Cameron’s Eurosceptic backbenchers was encouraged last weekend from within the Government itself by the serial rebel Iain Duncan Smith, who so undermined John Major and who is now Work and Pensions Secretary.
Duncan Smith was leader of the Conservative Party 10 years ago this week when an EU summit issued the Laeken Declaration. This aimed at making the EU more transparent, efficient and “closer to the citizen”. Lisbon provides a tougher political framework but it made no provision for improved management of the euro.
What is at stake during this week’s Brussels summit is the money used and saved by some 350 million people, and which is the world’s second largest international currency. Perhaps those with an equally close interest would be Yorkshire’s farmers, who have been benefiting from some of the 3bn euros which flows from Brussels into British agriculture each year.
According to Barclays Bank, the value of these and other EU subsidies to Britain have been benefitting from the depreciation of sterling against the euro.
It is also likely that a new EU Convention will be set up to plan Brussels’ next big idea, a fiscal union for the eurozone. The question for Cameron is how he can keep British interests at the table while politically committed never to join the euro.
Another is how he can persuade his MPs and the country at large that these matters do not significantly affect the United Kingdom which, under the recent Europe Act, would trigger a referendum.