The Future of the Euro

Off on a Sonderweg?

Jonathan Faull / Dec 2011

London's financial district. Photo: Wikimedia Commons

The financial and economic crisis which started in 2008 has had devastating effects in Europe and elsewhere. It is far from over and its political ramifications are still being played out.  EU decision-making processes in an international market maelstrom highlight the difficulty of producing effective and reassuring measures in a multiple democracy with constitutions, governments, coalitions, oppositions, referendums, courts, elections at various levels, opinion polls, demonstrations, social unrest and riots.  Europe is revealed as what it is: work in progress in the EU as a whole and in the eurozone.

Beyond the eurozone lie concentric circles encompassing would-be eurozone members: "maybe one day" eurozone members, countries closely linked to the major eurozone economies and unwilling to be left on the periphery and, finally, the UK which seems happy to remain at a distance, if only because Europe has been such a divisive issue for the main political parties that the less they have to think and talk about it, the better - or at least the more united they feel.

The EU's single market encompasses all member states and the UK has consistently championed efforts to create and sustain a single market including financial services.  It is therefore the EU which implements across its member countries international commitments to repair and regulate the banking sector reached in the G20 and Basel's Financial Stability Board.

Capital requirements, definitions of that capital and the risk-weighted assets in relation to which the requirements are measured, payment of salaries and bonuses to bankers, where and how derivatives are traded, how banks should fail and die in an orderly fashion without taxpayer support, special rules for systemically important institutions: these and other matters are inserted into law and practice by  EU legislation, proposed by the Commission and enacted by the Parliament and the Council.

So what does this mean for British EU policy? The UK is deeply involved in international and European discussions of financial reform leading to commitments, agreements, recommendations, proposals and ultimately law. This is hardly surprising.   Britain has long and rich experience of successes and failures in nurturing and regulating financial services.  It has advocated for several decades a single European market for the sector. The City of London may see the world as its market, but Europe is its hinterland.   

Nevertheless, British voices are now heard calling for a veto or an opt-out in respect of EU financial regulation, perhaps as one of the "repatriations" to be demanded as a condition for supporting treaty amendments to enhance eurozone governance. Will the other member states change the rules to allow the UK to withdraw from such an important single market policy?  Veto, opt-out or in, "emergency brake":  none of these will be a welcome intruder in core single market policies.  

Continental observers will ask if the UK's largely autonomous national system of regulation and supervision in the years preceding the financial crisis was a success. They may think that the UK's "light touch" led to an artificial and unsustainable boom and a crisis which spread from London to the rest of Europe.  Even assuming that a case could be made for uncoordinated national regulation in financial services with the UK picking and choosing among EU rules, is that really the approach the UK wants to encourage in the EU's single market?   Does it want other countries to have emergency brakes, vetoes or opt-outs in core single market policies?  

That way lies the end of the common market, to use the original jargon, leaving Europe prey to protectionism and resurgent nationalism ready to be exploited by already well-established xenophobic parties. The promises held out to the countries which joined the EU in 2004 and 2007 would be torn to shreds, abandoning them to an uncertain future in a hostile environment.

British banks are European banks, not suspended somewhere between New York and Hong Kong.  Look at the annual reports of major banks: RBS's cross border exposures in seven EU Member States are about twice what they are in the US and more than ten times the figure for Japan, the only Asian country mentioned. Barclays records 15% of its income in "Europe" (but includes Ireland in a "UK and Ireland" category).

This is true of British business in general. The euro crisis seems to have reminded some people that Britain is a European country. The FT wrote on 26 November 2010 that: " A statistic has surfaced in the past week that casts significant doubt on the hype about Britain’s trade relations with emerging markets: British exports to lowly Ireland are greater than its exports to Brazil, Russia, India and China – the mighty Brics – combined. Can this be true? And if so, should Britain be doing more to promote its products in emerging markets? The latest data from the International Monetary Fund confirm that it is indeed correct. In June, British exports to Ireland were $1.93bn (6.1 per cent of total exports), while exports to the Brics were $1.5bn (5 per cent of total exports). This was not a one-off: exports to Ireland have made up a greater proportion of total exports than those to the Brics since at least 2005." That is just Ireland.

Let us assume that the UK is happy to observe EU and eurozone developments from a distance, except for core single market, competition and trade policies. Let us further assume that the 26 others manage to muddle through to a system of economic policy commitments and coordination backed up by credible enforcement mechanisms.  That assumption is perfectly credible. Why 26, not 17. The eurozone countries are moving (some would say slouching) towards a system of coordinated economic decision-making.  The other nine non-euro member states will not want to be isolated.  Nordic and Central and Eastern European countries are often allies with the UK in EU affairs. The emphasis in that sentence is on "in EU affairs". They are unlikely to follow the UK to the sidelines.

This will be more apparent to future historians than it is to today's pundits or political scientists searching for immediately visible patterns and principles. But it is happening before our eyes.

So what should the UK do? Stand by and watch a continental system built largely on German principles develop? Here is the challenge for British eurosceptics: what is your strategy for the country in the 21st century? We hear incessantly what you don't like or want.  From the xenophobic rants of the blogs and the tabloids to the reflections of those who question EU policies and are more deserving of the honourable adjective "skeptical", I see little constructive thinking about the future.

Hong Kong, Canada, Norway? Who are we and where are we going? Is this a British problem or an English one? These issues are bound up with national self-consciousness, a sense of self which the UK needs to define more clearly for itself and in its dealings with the rest of the world.  Europe has too often been a scapegoat for post-imperial disappointments and failings. It can be a catalyst for serious thought about where the UK is going. The pro-European view is clear. Britain is a European country with similar challenges and opportunities to those facing its neighbours. It should be involved in major political developments, the latest of which is likely to be a thoroughgoing coordination of economic policies. It should influence that process, not suffer it. Otherwise, Britain will be the Channel Islands of the EU. Formally apart, with lovely pageantry and some economic successes, but following rules and policies made elsewhere.

Jonathan Faull

Jonathan Faull

December 2011

About this author ︎►

Related content