Edward McMillan-Scott: Politicians left in quandary as EU confronts its financial future

German Chancellor Angela Merkel, center, reacts as she attends  a panel discussion with students from 16 countries about the future of Germany at the chancellery in Berlin
German Chancellor Angela Merkel, center, reacts as she attends a panel discussion with students from 16 countries about the future of Germany at the chancellery in Berlin
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DAVID Cameron’s warning of “stagnation” at the G20 summit is aimed squarely at eurozone leaders. Europe is in a state of suspended animation as its most significant joint project – the euro – apparently for now continues to create more problems than it solves.

The Greek vote on Sunday showed people running for cover to the more credible centre-right but also for a radical shake-up of the two-party status quo in a massive increase for the extreme left-wing Syriza party.

Europe’s politicians are in a quandary, but increasingly there is a consensus that the 17-member eurozone needs much tighter fiscal discipline and new structures.

The EU summit at the end of next week is widely seen as the starting point for a shake-up with “more Europe” – and a political union – being argued for by Chancellor Angela Merkel with the new French president, Francois Hollande, in apparent agreement.

For Britain, it is not surprising that the appetite for an “in-or-out” referendum on the EU has become a clamour; we are outside the euro but affected deeply by it.

We are within the Single Market upon which official statistics state that 3.5 million British jobs depend (one in every 10 British jobs); 50 per cent of British trade is with other EU member states; and the City of London being Europe’s leading financial centre.

The UK is a beneficiary of the EU’s “structural funds” aimed at job creation, and yet we have an increasing interest in the booming economies elsewhere in the world.

A referendum in Ireland recently showed a large majority for the EU’s “fiscal compact” – a European requirement demanding that national budgets are in balance or surplus, which David Cameron walked away from in December.

However, the stagnant growth, high unemployment and inflexible banks are typical of the outcome of economic stringency which many have felt is necessary to restore confidence. Probably as many now feel that this classical remedy needs to be supplemented by careful economic stimulus.

Indeed, the French parliamentary elections which concluded on Sunday showed a large majority for President Hollande’s pro-growth approach.

The presidential and parliamentary elections showed something else: the surge in support for the National Front. The party now has two deputies and a new credibility. This rise of the extreme right is part of the political malaise, as I see it, across Europe.

The mass demonstrations and sit-ins of the Occupy movement worldwide started with the indignados in Spain, mostly young, educated and unemployed. With 40 per cent youth unemployment, Madrid’s new centre-right government imposing austerity measures is an easy target. The banks are mistrusted and there has been a well-documented flight of capital to what are seen as more secure economies. The same goes for Italy and Cyprus. The markets remain turbulent. Almost alone, Germany thrives. It could be argued that through the euro, Germany has devalued the Deutschmark and created an export-led boom. It should be added that changes in employment laws have made it a leaner and fitter economy.

So where is Europe likely to go? Unlike Americans, who understand subsidiarity – taking decisions at the appropriate level – most Britons fear federalism, the “F” word. Yet the concept of “fiscal federalism” has now been espoused even by the right-wing Economist as the only answer to the euro crisis.

George Osborne’s announcement at the Mansion House last week of a massive stimulus through the banks aimed at pump-priming lending is part of a wider change of approach.

Many now agree that a “mutualisation of debt”, the development of Eurobonds – however defined – and increased burden-sharing are the only way forward. In the Brussels jargon, we are talking about EU economic governance, to replace the incoherence of the Merkel/Sarkozy “directoire”.

The potential of the European Central Bank in Frankfurt depends on German acceptance of greater activism. The EU’s other “bank”, the lesser-known European Investment Bank in Luxembourg, is already supporting some 120,000 small businesses through its 60 billion euro lending, much of it for job creation in tackling climate change.

For Yorkshire and the Humber, the ongoing negotiations about the next phase (2014-2020) of Brussels’ “structural funds” are important.

How much of the £500m dedicated largely to employment will actually arrive here depends on the overall cuts demanded by London. In the end, the key question to be answered is whether all this creates “additionality”, in other words, greater economies of scale and the avoidance of duplication, such as in research.

Next week’s AGM at Bradford University will find that its second-largest source of research is Brussels. The present is uncertain, but we must build for the future with conviction.