The eurozone is failing: the EU must further integrate with or without the UK
Justin Protts, 9 June 2016
In stark comments today, Mario Draghi, President of the European Central Bank (ECB), has been highly critical of the state of the eurozone and called for the eurozone to press ahead with further integration. Draghi pointed out what has long been known; the eurozone crisis cannot be contained by monetary stimulus and austerity alone. Targeted fiscal policy is necessary to boost growth and productivity, reducing long-term unemployment and skill levels across Europe.
Part of the problem is that while some countries are recovering and have the money to invest, other parts of the eurozone are remaining uncompetitive and, facing forced austerity budgets, are unable to increase fiscal spending to boost employment or productivity effectively.
From an economic perspective, it has always made logical sense that if a country is to give up monetary independence, it must follow that at least some level of fiscal independence will go with it. For a currency union to be effective, monetary and fiscal policy must complement each other. Having one central organisation managing monetary policy and multiple different approaches to fiscal policy that contradict each other makes it impossible to have a coherent strategy to boost the euro economy.
As such, tackling the ongoing problems in the eurozone and its ‘ageing crisis’ will require the eurozone countries, and future members of the eurozone, to either further integrate their economic policy, allow countries to withdraw from the project, as advocated by the former Governor of the Bank of England, or face continuous stagnation and underperformance.
With Greece the EU has shown that whatever the crisis they are committed to keeping the euro, so for there to be any hope of full economic recovery, and any confidence that the euro economy will be able to deal with future economic shocks, there will need to be substantial reform, allowing more centralised policy for the eurozone.
The problem is that the euro is fundamentally founded in the EU treaties. This means that either the eurozone group of countries will have to push through changes using their majority voting bloc to secure what reform is allowed under the treaties, or, push for further treaty change.
In the UK there is a tendency to ignore the impact of the ongoing euro crisis on the UK, and the implications changes in the eurozone will have on us. As part of a single market with barriers against much of the world, we are extremely exposed to the impact of reduced demand and economic crisis in the EU. However, at a time when the country is heavily focused on the UK and EU relationship, it is worth examining the impact of the eurozone, in its current and future states, becoming the focus and driver for much of EU policy. This was evident from the publication of the Five Presidents’ Report and is now especially pertinent, as Draghi has called for action ‘without delay’.
In the agreement negotiated by David Cameron on reforming the UK-EU relationship ahead of the referendum, the PM managed to make it clear that although we reserve the right to be listened to when the eurozone makes decisions without us, there is nothing we can do to stop legislation on eurozone matters. This is a sure sign that UK influence within the EU will be severely limited in the future. The rest of the EU will continue to integrate and reform focusing on the single currency, and the UK will be left out of most of the important decisions facing the EU. Instead it will be relegated to the sidelines, complaining about small amounts of regulation, as the rest of the remaining members focus on building an EU focused around the success of the eurozone and the single market.
It is foolish to think that in this new order we will even get a hearing when we are represented internationally by the European Commission. The Commission’s terms for negotiating will be dictated by the eurozone qualified majority, and the UK will find itself increasingly forced to accept euro focussed reforms, or find itself in the way of the future prosperity of Europe.
Realistically, if the UK votes to leave, it will give the rest of the EU the perfect opportunity to rally around the euro and focus on creating a more centralised system of economic governance, which is the only hope for the future of the euro. Any attempt for us to prolong our EU membership will only result in conflicting economic interests dragging on each other’s economies, the weak eurozone dragging on our exports, and the UK preventing the reform needed to unify EU economic policy.
Furtherstill, any sensible leaders within the EU, should, in the event of a vote to leave, rally around the idea of an amicable exit and a refreshed agenda for reform. The reform process may allow other countries unhappy with euro membership the opportunity to follow. Also, any reshaping of the EU could happen calmly with the central view of a single market and ever closer union of members intact.