Much has been made of the so-called failure of David Cameron in Brussels on Thursday. That is, failure to have his demands accepted over special treatment for the City of London in new European financial regulations and failure to stop a new agreement going ahead without Britain, when Cameron declared he could not accept it absent the aforementioned demands. Whether one considers it a failure to try to protect one of the largest sectors of the British economy from stifling taxes, among other things, imposed by Brussels is surely a matter of opinion, but that is neither here nor there when the question is how to prevent the breakup of the Eurozone. Unfortunately, following Thursday’s summit, the answer to that question remains entirely unclear.
The agreement that emerged from Thursday’s negotiations, which will apparently pave the way for fiscal union in the EU, does about as much good in addressing the Eurozone crisis as it would to tell a patient requiring knee surgery that rather than operate, you will provide him with a strict set of guidelines for how not to injure his knee in future. To the extent that financial markets responded with cautious optimism to the news on Friday, one is led to wonder whether the markets are as desperate as the rest of us to avoid a global economic meltdown and so have decided to join the fantasy world where structural imbalances in the Eurozone are left unaddressed, and promises to follow budgetary rules will actually mean something this time around. In this fantasy, such promises are somehow meant to solve the entirely unrelated problem that Spanish cajas continue to require bailouts in order to get out from under bad debt incurred during the housing boom, a repeat of which is no more preventable with this ‘stability pact part II’ than it was under the then current stability and growth pact. Of course, once it became clear that the ECB was not buying the bonds of indebted peripheral states en masse, regardless the grandstanding that surrounded this new treaty agreement, the markets were forced back to reality and commentary suggests a surge in peripheral bond yields in the weeks before Christmas, as well as the downgrading of sovereign debt in multiple Eurozone states is a strong possibility
None of this is to say that progress toward fiscal union in the Eurozone and wider EU is a bad thing, nor that it will be a good thing if Britain, an often lone supporter of the liberal, open economies that the EU was meant to facilitate across its member states is, along with the European Commission, increasingly shut out of the EU decision-making process. It is merely to say that this is all irrelevant to the more immediate problem of prohibitively high bond yields in the Eurozone periphery and the looming downgrade of French sovereign debt. What might have been a more effective use of the time that went into this most recent summit is if it were spent examining actual and modeled trajectories of the German export market since the launch of the euro and over the next two years, to see how the economic motor of Europe would have fared and will come to fare with a currency anywhere near the value of the D-mark or a ‘northern’ Euro. In that case, we might have gotten an impassioned plea to Mario Draghi to buy the bonds of peripheral member states while a stimulus plan was drawn up for the Eurozone’s core – in other words, a more practical solution to the crisis, rather than the theoretical fix that was opted for in the form of a new treaty.
If this treaty, which may anyway fall down in the midst of legal obstacles, turns out to be bolder and more effective than I anticipate, it will be one of those rare times when I feel genuinely happy to be proven wrong. Otherwise, it will be cold comfort to have been proven right in assuming that the refusal of Europe’s leaders to face this crisis head on, to enact far-reaching and meaningful reforms to rebalance the Eurozone economy, will eventually spell the end of this half-hearted attempt at economic and monetary union.