Eurozone crisis is just getting started

Switzerland’s referendum vote against the free movement of labour, the ruling by the German Constitutional Court on the European Central Bank’s (ECB) attempts to save the euro, and the warning to Scotland that it won’t be allowed to keep the pound if it votes for independence – these might seem unrelated, but in truth they are all part of an increasingly explosive stand-off between the forces of national sovereignty on the one hand, and political and economic integration on the other.

With elections in May likely to give rise to the most Eurosceptic parliament in the EU’s history, Europe’s long-running financial and economic crisis is threatening to spill over into an all-encompassing political one. According to Berlin and Brussels, Europe’s dark night of the soul – its most serious crisis since the Second World War – is now essentially behind us, with the promise of a slowly recovering economy and renewed political harmony to come. To my mind, it has hardly begun. Europe’s epic attempt to impose political union on widely divergent countries is being broken on the back of economic hardship, popular discontent, and financial disintegration.

Virtually all successful currency unions start with political union, and then proceed through shared insurance, institutions, and fiscal arrangements to a common form of exchange. Europe, it hardly needs saying, is trying to do it the other way round; it has forced monetary union on an unsuspecting public, and now, via the resulting financial crisis, hopes to bulldoze through the shared fiscal and political arrangements that might eventually make it work, culminating ultimately in a United States of Europe.

Supporters of Scottish independence propose a still stranger approach. They want to scrap what hitherto has proved a relatively successful political and fiscal union but, for the time being at least, keep the pound. Yesterday, George Osborne, Ed Balls, Sir Nicholas Macpherson and other members of the Westminster elite came together to deliver the inevitable verdict: the Scots cannot have national sovereignty as well as monetary union with the rest of the UK, whatever fiscal rules might be put in place to help sustain such an unstable construct. They must choose between self-rule and economic union.

It is a similar choice that now faces Switzerland, and indeed, Europe as a whole. Even in Germany, which so far has largely escaped the ravages of the eurozone crisis, the schism is becoming ever more apparent.

Last week, the German Constitutional Court did a remarkable thing; it outsourced final assessment of the ECB’s policy of doing “whatever it takes to save the euro” to the European Court of Justice (ECJ). This seemingly innocuous passing of the buck can be read two ways. To believers in the European project, it’s a positive development which removes a key threat to evolution of the single currency into a more sustainable form. Germany seems to have given up its right to veto whatever it deems to be monetary financing of struggling governments, and instead given the final say to the ECJ, which because it nearly always adopts an integrationist approach, is almost certain to give the thumbs up.

But there is a less benign way of looking at the German court’s ruling, for it contained a sting in the tail. Yes, the ECJ must decide, but the judges then went on to say that the ECB’s policies did indeed amount to monetary financing and were therefore in all probability illegal.

Next to God and the Bundesbank, there is no higher or more trusted authority in Germany than the Constitutional Court, so when the ECJ determines to contradict it, there’s going to be an almighty backlash. German acquiescence in the euro will begin to fracture.

In countries more obviously affected by the euro’s financial crisis, disillusionment with the European project and its institutions is already extreme. Traditional centrist parties are finding it ever harder to hold the line.

One of the points made in the Treasury’s analysis of Scotland and the pound is that if political commitment to currency union is thought to be lacking, then financial speculation against it will become self-fulfilling, creating capital flight, reinforcing economic problems and increasing the pressures for an exit.

In the eurozone, the will among senior policymakers to make the single currency work is undoubted, but they are increasingly out of touch with voters and are steadily losing their legitimacy. This progressive disconnect between the mainstream political class and its support base was at its most evident in reaction to the outcome of the Swiss referendum. Immediate retaliation was threatened. A similar kind of invective is reserved for British proposals to limit labour migration.

Yet Europe’s elite must know that all high-income countries would vote the same way as the Swiss given the chance. The arrogance of political leaders who think they know better may have been tolerable as long as Europe was growing. But today they deliver only economic ruin, making their position, and the legitimacy of the EU project, ever more vulnerable.

Source: 

http://www.telegraph.co.uk/finance/comment/jeremy-warner/10636290/Eurozone-crisis-is-just-getting-started.html