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Analysis

EU must change – or collapse

Elections and euro scepticism

by Brian Reading in London

Fri 17 Feb 2017

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The European Union and the single currency are coming unstitched. The British referendum vote to leave the EU was the forerunner of what may become a breakdown. Economic and monetary union is in crisis, and time is running out for pretending otherwise. This is especially true of Greece. Creditor governments won’t get their money back. Taxpayers are aware of this. Of €323bn of Greek government debt, only €36bn of is privately held.

Non-European International Monetary Fund directors say Greek debt is on an explosive trajectory. Only some form of debt relief can prevent Athens defaulting. European directors disagree with such proposals. Forgiveness might open the way to back-door fiscal union, a dangerous precedent that the Germans won’t accept.

Meanwhile, tough loan terms inhibit Greek growth, increasing the debt burden. The Greek government under Prime Minister Alexis Tsipras and its creditors may agree on a compromise under which Greek bonds can be included in the European Central Bank’s quantitative easing – but such a deal is likely to be ultimately inadequate.

Pretence is concealing irreconcilable differences. July will be crucial. Greece has committed to repaying official creditors €5bn, plus €2bn to private lenders. It needs the next tranche of bail-out loan funds to do so – new loans to repay the old. Any new deal must relax the unattainable target of a 3.5% primary budget surplus in Greece.

This comes at a difficult time, with general elections in the Netherlands and France in the next two months. The political centre-ground is expected to persevere, despite significant losses to populist anti-European parties. But expectations are often mistaken. Most Germans want Greece out of the euro. Many other observers want Germany out. It will be hard for Chancellor Angela Merkel to agree to easier terms with Greece and simultaneously win the German federal election in September.

The EU never lived up to its founders’ expectations. The 1957 Treaty of Rome declared their aim was ‘ever closer union among the peoples of Europe’. Nothing in EU law has ever obliged governments to consult the people. The Rome treaty was democratically flawed, leading to greater disunity.

Since then three treaties have fundamentally changed Europe. The 1986 Single European Act impelled the creation of the single market. The 1992 Maastricht treaty committed signatories to EMU with opt-outs for the UK and Denmark. The 2007 Lisbon treaty established a European constitution. There were 54 signatures to these treaties, though only 10 were backed by referendums, some on second asking. The Lisbon treaty included terms on which an EU member could leave, while the Maastricht treaty stated the single currency was irrevocable. Detailing a way out of the euro was, at the time, unthinkable.

The German people have never been properly consulted on Europe. At the time of German unification, Chancellor Helmut Kohl had little choice but to speed up and make firmer the existing vague plan for monetary union as a means of gaining French acquiescence in the re-emergence of a new German nation at the centre of Europe. As part of the bargain, the Europeans agreed to create the ECB in the image of the Bundesbank. This has backfired – a one-size ECB has fit none.

Scepticism about EMU and the EU is the dominant election issue in 2017. Even if the political centre holds, many centrist politicians will espouse the anti-European cause for the sake of accumulating votes. In the UK, 90% of Conservative members of parliament opposed Brexit during the referendum campaign. Of their constituents, 70% voted in favour of leaving the EU. All Conservative MPs, bar one, have subsequently endorsed Brexit by granting Prime Minister Theresa May permission to begin divorce proceedings with the EU.

Whatever the outcomes of Europe’s elections, irreconcilable differences remain. The EU must change, or it will collapse.

Brian Reading was an Economic Adviser to Prime Minister Edward Heath and is a Member of the OMFIF Advisory Board.

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