Britain and the Eurozone: on the outside looking in

Alison Sutherland
British public and political reactions to the crisis of the Eurozone arising from the indebtedness of the single currency’s member states have been almost uniformly negative.[1] The crisis itself is widely seen as justifying Britain’s decision to remain outside the single currency and as definitely having the potential to destroy the Eurozone. The following analysis from the British perspective of the differing elements of the Eurozone’s crisis and its possible resolution must be set against a political context in which Britain is extremely unlikely to join the single European currency for many years to come, if ever; in which there is now little public support in the United Kingdom for British membership of the Euro; and in which what support there may have been a year ago for British membership of the Euro has been greatly reduced by the Eurozone’s continuing crisis.
Greek sovereign debt
At the time of writing in late May 2010, it is generally believed in the United Kingdom that Greece is now protected against the imminent threat of debt default, but that this threat may well return in the medium term, particularly if other countries in the Eurozone, such as Spain and Portugal, find themselves confronted with similar problems to those of Greece in regard to their public indebtedness. A number of commentators in the United Kingdom believe that in the longer term the Greek government will inevitably be forced to restructure its sovereign debt. There is in addition to this pessimistic expectation a widespread perception in this country that the governments of the Eurozone have only taken action over the past six months when forced to do so by global markets, reacting to events rather than shaping them. The ill-coordinated response of the Eurozone to the Greek debt crisis is generally seen in the United Kingdom as reflecting serious faults in the governance of the single European currency. Some criticism is directed particularly at the German Chancellor, Angela Merkel, for her supposed uncertain handling of the crisis.[2] Other commentators stress what they see as the systemic weaknesses of the Eurozone’s governance arrangements.[3]
The Stability and Growth Pact
It is generally accepted by British commentators that the Stability and Growth Pact needs reinforcement in such a way as to ensure that its provisions are better observed in future.[4] There is however considerable parallel concern that a more rigorous application of the elements of the Pact relating to governmental deficits may, in the specific economic circumstances of the next decade, restrain the economic growth necessary to help the countries of the Eurozone escape from their underlying economic difficulties. This concern is sometimes linked to a familiar criticism of the whole basis of European monetary union, the criticism that the economies of the European Union are so diverse in their degree and type of development that any “one size fits all” policy within the Eurozone must inevitably produce sub-optimal results.
Coordination of economic policies
The crisis of the Eurozone provoked by high levels of indebtedness among its member states has reinforced an already widespread belief in the United Kingdom that the Eurozone was set up with inadequate structures of governance.[5] These structures have seemed able neither to prevent the burgeoning crisis, nor to react effectively to it once it had emerged. Nor does the Eurozone yet seem capable of developing an overall strategy to prevent the necessary reduction of governmental debt among its member states over the coming years from acting as an intolerable brake upon economic growth.
Against this analytical background, opinion is divided within the United Kingdom as to whether the Eurozone will be able to develop what is widely accepted in this country as a desirable goal, namely the better, specifically growth-related, coordination of economic policies. Some British commentators doubt the willingness of the Eurozone countries, particularly Germany, to engage in such coordination. Others believe that the real prospect of the destruction of the Eurozone, evoked by among others Merkel, will persuade European leaders to remedy the structural deficiencies of the Eurozone in such a way as to seek a better balance between economic reform, economic growth and sound government finances.
It is worth noting that neither the greater coordination of national economic policies within the Eurozone, nor its absence, will make it more likely that the United Kingdom should join the Eurozone. The absence of this coordination would provide an economic rationale for this country’s remaining outside the Eurozone. Its presence would provide a political, sovereignty-protecting rationale for the same policy.
Europe 2020 Strategy
There has been no significant public or political discussion of the Europe 2020 Strategy in the United Kingdom. The Europe 2020 Strategy’s predecessor, the Lisbon Agenda, is regarded in this country as having been at best only moderately successful in its ambitious goals. The crisis of the Eurozone will certainly provide ammunition to those critics arguing that the Europe 2020 Strategy is unlikely to improve on the modest achievements of the Lisbon Agenda.

[1] Financial Times passim in 2010, particularly W. Munchau: The Eurozone must take responsibility or it will split, Financial Times, 9 May 2010; W. Munchau: To save the Eurozone, reform its governance, Financial Times, 16 May 2010; M Wolf: Eurozone plays “beggar may neighbour”, Financial Times, 18 May 2010.

[2] Kaletsky: It’s Lehman the sequel, with Merkel as Bush, The Times, 26 May 2010.

[3] Redwood: The Eurosceptic case for saving the Euro, The Times, 27 May 2010.

[4] J. M. Aznar: Europe must reset the clock on stability and growth, Financial Times, 17 May 2010.

[5] T. Barber: Europe: a tent to attend to, Financial Times, 16 June 2010.