It is a relationship that will be profoundly affected by the changes and restructuring that the eurozone will have to undergo if it is to endure and if economic and monetary union mark 2 is to be successfully created.
Whatever the virtues and successful record of the single currency itself, the design problems of the eurozone, on the other hand, are clear. A single collective monetary policy operating alongside a set of 17 national and insufficiently co-ordinated fiscal policies is not optimum. A currency union operating outside a single sovereign framework is certainly complicated. The absence of a central bank acting as a lender of last resort is not ideal. Convergence of the eurozone economies, much anticipated at the outset, has not happened and has become a serious impediment.
Those issues all need addressing. No doubt there are those who relish the eurozone’s predicament as a precursor to its inevitable demise. I say to them: be careful what you wish for. There is no bad outcome for the eurozone that is not also bad for the United Kingdom. Europe is our home, domestic market. Europe’s growth is our growth. Europe’s prosperity is our prosperity.
If the European currency collapses amid a string of sovereign, corporate and banking defaults, the knock-on effects for all of us will be calamitous.
That is why, in my view, the Chancellor of the Exchequer is right to play a constructive role in helping to get through this crisis. The rest of the Government and the rest of his party – and, I might say, the Labour Party – should support the Chancellor, including in respect of the IMF’s involvement in helping to get through this crisis.
These, however, are just the preliminaries. In the months and the year ahead, the Government will be confronted with some big policy choices and substantial decisions on Europe and the future direction of the European Union.
The eurozone will have to address its original design flaws. In effect, it will have to reinvent itself to sustain itself. The steps that the eurozone will have to contemplate and prepare for, politically and institutionally, will make the current negotiations over the fiscal treaty look like a casual walk in the park.
It will be no good saying, “We are not in it, so it does not concern us and we needn’t bother”. For Britain, that is not an option. The Government will find themselves in a substantial dilemma.
Essentially, the dilemma is that the UK is actually willing the eurozone to integrate further. We are – I think rightly – telling the eurozone member states to follow the construction of the currency union to its logical political conclusions.
That is what the Prime Minister and the Chancellor are saying, and I think they are right, but, at the same time, they are pretending that that can happen without a cost to Britain’s position and influence, standing as we do outside the core.
If EMU mark 2 emerges, as I think it should and will, Britain’s terms of engagement not just with the eurozone but with Europe as a whole will change seriously. We will see an inevitable gravitational pull in focus and decision-making to the eurozone from the EU of 27. Instead of an EU that the Government would like to see as wide and shallow, the eurozone means that it must deepen. That will call for much smarter, much more intense engagement by the Government, not less.
As it happens, the Government got off to a reasonable start, one that was engaged in Europe, if not overwhelmingly enthusiastic, at the beginning of their term.
However, the feeling in Brussels now is that that engagement has waned since the early days of the Government. That is bad news for Britain and bad news for Europe. As the Government’s dilemma, which I have described, gets deeper, their ambivalence will become less and less useful and their lack of a plan for our longer term relationship with the European Union will become more and more obvious.
That is dangerous for one reason above all. As Trade Commissioner and as Business Secretary, and now in the work I do outside Parliament, I have spent a lot of time in the rest of the world. It is naive not to realise that the rest of the world sees us in Britain as no different from Europe. Of course, we have been largely sheltered from the investor nerves and capital flight that has blighted the EU’s periphery, but the credibility problem that we have in the eyes of the world is a European one that includes Britain.
People in the United States and Asia say that, as an asset class, Europe is over and that Europe, including Britain, belongs to the old world, and that we cannot fix our problems because we lack the mechanisms and the political will to do so.
That hurts us all as an investment destination, and we need to repair it. Of course, it is a caricature, but it is none the less a perception. As it happens, given the constraints, I think that EU institutions have moved a long way to face up to the eurozone’s problems in the past year. New Governments in Italy and Spain are doing so now.
However, Europe as a whole, including Britain, urgently needs to show the world that it has a plan both to reboot the eurozone and to re-engineer growth in Europe – one that rethinks EU structural funding and intervention, uses the European Investment Bank to better effect and deepens the single market for services.
We have to show once again that Europe is investment-grade. Floating Britain off somewhere into the mid-Atlantic, to quote Lord Heseltine, the former Deputy Prime Minister, will not help us put together that plan to signal to the rest of the world that we have our act together and know where we are going.
In my view, that is what the Government have to face up to and, in doing so, face down the rather unworldly figures in their own ranks. They have to do so with a darn sight more courage and, above all, a darn sight more rigour than they are showing at the moment.
*This is an edited version of a speech that Peter Mandelson delivered in the House of Lords on Europe.