Friday, July 22, 2011


Osborne Green Lights Two Tier Europe

We have been so entranced by the phone hacking affair that we have so some extent lost sight of the crisis over the euro. Not so Simon Jenkins whose striking piece today suggests a great turning point in Europe's history may have occurred. It always seemed to me a huge gamble that all EU members could be well served by a common currency. Given the great regional variety of European economies, both in terms of development and productivity a 'one size fits all interest rate' always seemed a dubious concept. For example, it could surely not help an economy with incipient inflation, nor those in need of reflation?

Some discussion has suggested that the euro-zone either has to relax controls to recreate something like pre-euro conditions, or to tighten controls to advance monetary, and by implication, political union. A compromise suggestion is to allow the 17 strong euro-zone to proceed at its own speed, enabling a 'slower' EU tier to remain outside. In the past Britain has spurned such an idea but, surprisingly, Osborne has apparently embraced it, as 'Bagehot' on The Economist's website reports his interview in the FT^:

Thanks to a great scoop by George Parker of the FT, it is clear the government now believes the following: (a) a big leap towards fiscal union is the only way of saving the single currency, (b) Britain has a strong interest in the survival of the single currency, (c) Britain must play no part in bailing out the single currency and will stand aloof from fiscal integration, thus (d) our national interest now lies in allowing Europe to divide into markedly different zones of integration, with us on the outside.

Here's the key passage from the interview:

"George Osborne says the “remorseless logic” of monetary union takes the single currency members in the direction of greater fiscal union, even if that did not necessarily mean having a single European budget or a single EU finance minister.

I think we have to accept that greater eurozone integration is necessary to make the single currency work and that is very much in our national interest,” he says. “We should be prepared to let that happen.”

Mr Osborne admits this flies in the face of traditional British policy, which has always suspected such a union as being the precursor of an elite group of EU members, which would ultimately dictate policy to those on the outside.

The chancellor seems more relaxed about that possibility, but insists that key decisions must still be taken at the level of all 27 member states, not least on matters affecting the single market.

If this happens, Jenkins thinks the end of the EU project might not be too far away. I can see that it would create a bloc dominated by the German economy and its related policies. This might presage the emergence of a 21st century Zollverein which itself opened the door to a united Germany. Or it could see nationalist resistance to such an outcome splinter what has been achieved since 1945. Either way, it's a huge gamble, but one Osborne now thinks less risky than allowing the weaker economies to default on their dents and possibly, in consequence, lay waste to the constituent economies of Europe.

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