A game-changer: that’s how Christine Lagarde, new boss of the IMF, described last week’s eurozone crisis summit, which agreed revised bail-out terms for Greece and far-reaching new capabilities for EU financial institutions, virtually creating a European Monetary Fund.
There is no doubt that the decisions taken in Brussels on July 23 2011 opened a new chapter in the story of European integration. Europe will not be the same again. As so often, it was German Chancellor Angela Merkel who took much of the credit (and some of the cost) for reaching a deal. In the face of the Greek crisis the eurozone is developing new institutions and policies.
For those of us who argued in favour of UK euro membership way back in the ’90s our greatest concern was British exclusion from the eurozone policy-making process. For years this was an empty fear, but it now seems to have been well-founded, although I must confess it is hard to see how the British economy would have fared if Britain had joined then, with no devaluation against the euro – by about 30 per cent since the autumn of 2007!
Britain’s finance minister George Osborne appreciates the challenge that more muscular eurozone policy-making could pose for Britain. He does recognise the “inexorable economic logic of the single currency” (towards greater fiscal integration) and sees the Brussels decisions as “something of turning point”, but he writes in Sunday’s Telegraph that the UK government will ensure that “we are not in any way excluded” from key decisions such as single market and financial service regulation, which require adoption by all 27 member states. Put another way, he is worried that the euro group will indeed seek to adopt policies without much regard for Britain’s interests.
The change of mood at the Brussels summit is striking. The political commitment to protect the eurozone is almost absolute. “To do whatever is needed” to ensure financial stability, says the communiqué. No equivocation, no conditionality. Battle is joined. Eurozone leaders want to underline that it is they, not the markets, which have the weapons to determine the outcome and dictate the terms. Even the ratings agencies get a critical mention.
The new deal provides special help for Greece, with a total package of official aid amounting to €109bn. The terms of the deal extend the maturity of future loans from the European Financial Stability Fund to between 15 and 30 years, with no repayments for 10 years and low interest rates. Voluntary arrangements from the private sector will offer other terms to ease debt repayment.
The whole deal is on the basis that “Greece requires an exceptional and unique solution”, but Portugal and Ireland will also benefit from the relaxation of debt repayment terms. Ireland’s 12 per cent corporation tax rate is spared the axe, but we are told darkly that the Irish are willing “to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive” and other discussions on tax policy issues.
As well as specific support for the most vulnerable eurozone member states, the agreement gives more flexibility to the EFSF, so it can pre-empt trouble, intervening on the basis of a precautionary programme and recapitalising financial institutions through loans to those governments which have not been subjected to reform programmes. Thus do the eurozone institutions take over the role of the IMF in supporting member countries in trouble or threatened by it – an embryonic European Monetary Fund, as President Sarkozy described it, although not to the exclusion of the IMF, which continues as the stern disciplinarian of national policies.
Notwithstanding the political will, it is clear that without economic growth last week’s unequivocal commitment to protecting the euro is destined for further trouble, even if it can survive unchanged for two or three years. Further commitments to economic reform and the use of EU funds to stimulate growth and employment may help, but lower debt and stronger economies are the essential ingredients for long-term sustainability.
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November 4, 2022