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Analysis
'Lucky Cameron’ and the euro

'Lucky Cameron’ and the euro

Merkel’s losses could be UK prime minister’s gain

by David Marsh

Tue 22 Mar 2016

David Cameron, British prime minister, has been keen to put maximum distance between the UK and the euro. He might well agree with the gloomy sentiments of Mervyn King, former governor of the Bank of England, who wrote in his just-released book* that Germany might have to leave the European single currency as a means of allowing its real exchange rate to appreciate, and that German claims on debtor countries might be ‘little more than worthless paper’.

This is remarkably similar to my own findings in a newly republished book+ that Germany’s greatly expanded financial claims – built up via giant trade surpluses – are a source of vulnerability, since a sizeable proportion will never be repaid. However, Cameron has always benefited from a strong streak of good fortune. Whatever his long-term qualms over the euro’s solidity, ‘Lucky Cameron’ – in his bid to win a June referendum vote for the UK to stay in the European Union – may benefit during the next few months from an improved euro area economic performance.

German regional election setbacks on 13 March for Chancellor Angela Merkel may turn out to be a blessing in disguise. With Merkel domestically on the ropes and most Germans wanting the UK to stay in the EU, Cameron can expect a stream of supportive remarks from German leaders in the run-up to the 23 June poll.

Border controls imposed by Austria and other transit countries, which have significantly slowed the refugee influx into Germany, vindicate Britain’s traditional scepticism on the Schengen border-free system for European migration.

Whatever Europe’s longer-term problems, short-term economic buoyancy after fresh easing from the European Central Bank may provide a welcome continental shaft of light, just when Cameron can use less dire UK press headlines about the euro economy.

Greece’s multiple failures to meet restructuring targets now matter a great deal less as a result of the country’s much bigger challenges dealing with massive migration via Turkey, which has replaced Greece as the main focus of European diplomatic wrangling.

On the domestic front, Cameron is feeling the political heat. His Conservative party is in the throes of civil war over controversial welfare cuts announced in last week’s budget, and then rescinded. Iain Duncan Smith, the former Conservative leader and long-time Cameron adversary, resigned last week as work and pensions secretary (social security minister). Duncan Smith has savaged Cameron and George Osborne, the chancellor of the exchequer (finance minister), over proposed spending reductions shelving the Tories’ commitment to the worse-off and disabled.

The attacks on Cameron loyalist Osborne, backed by a variety of Conservative MPs, undoubtedly weaken Cameron’s authority too, especially as Duncan Smith commands considerable support from traditional Conservative supporters backing his hostility to EU membership. However, the Tory squalls will probably die down after Easter. Moreover, Cameron may not be displeased to see Osborne’s normally unctuous self-confidence punctured by a failure to heed Conservative sensitivities.

Cameron’s windfalls stretch from the providence that pitted him electorally in 2010 against failed Labour Prime Minister Gordon Brown to his mastery over his Liberal Democrat coalition partners, and his good fortune in first winning the 2015 election and then being matched against Jeremy Corbyn as Labour leader – widely regarded as a prime ministerial no-hoper.

Cameron may still be under a lucky star. Beyond the troubled contours of domestic politics, European developments – perhaps for no more than a few months – could be moving his way.

David Marsh is Managing Director at OMFIF.

*Mervyn King, The End of Alchemy (Little Brown)

+ David Marsh, Europe’s Deadlock – How the euro crisis could be solved and why it still won’t happen (Yale University Press)

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