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Tuesday, May 24, 2011

The big three and the eurozone crisis

On Friday, the FT revealed that France is leading a majority group of eurozone governments in opposition to German demands that the permanent eurozone bailout mechanism include clear language providing for the inclusion of private bondholders in negotiations on any restructuring of government debt post-2013. This seems like a pretty dangerous game on France's part, but it also goes to show that the removal of Britain from the eurozone equation doesn't equal spontaneous Franco-German agreement.

If France isn't careful it could find itself as the only somewhat functioning economy representing and leading the Eurozone South, finding itself pitted against Germany and the Hawkish North more often than it might feel comfortable with.

But what does this mean for the wider political dynamics within the EU and for Britain?

While the huge financial implications the eurozone crisis has for Britain - not just its liabilities through the bailouts but also via the exposure of its banks to interconnected European financial markets - are beginning to sink in, the potential political outcomes for the UK's role in Europe are rarely considered with as much rigour.

With EU leaders no nearer a credible plan to fix the eurozone's economic mess, the political dynamics of the EU are in flux. It's clear that things can't remain the same, whatever happens over the next five to ten years in the eurozone.

Much of the analysis so far has been rather lazy, with commentators reaching for the "this is the beginning of a two-speed Europe" line, with the UK outside the 'eurozone core' and therefore in the 'slow lane'. However, while there may be an element of truth, these analyses seem unwilling to face up to the fact that the logical extension of this particular argument is that the UK should join the euro in order to maintain its influence in the EU - which no right-minded soul is prepared to even contemplate.

Even more importantly, it's clear for everyone to see that the "slow" and "fast" lanes in Europe are now defined by economics - that is by debt and deficits and by levels of competitiveness - rather than Treaty opt-outs or domestic constitutional measures, such as the UK's EU Bill. (Faced with numbers that are hard to ignore, people are being forced to re-define what they mean by a two-speed Europe - the more-often-than-not sound Economist, for example, which seems to have quietly dropped its narrative that institutional arrangements rather than economic fundamentals are the main fault lines in Europe).

Writing in the Mail a week or so ago, Iain Martin offered an alternative to the 'UK in the slow lane' hypothesis, suggesting the eurozone crisis presents "an historic leadership opportunity for David Cameron". The whole "Britain should lead in Europe" thesis has been done to death, but on substance, there is much reason, as well as a practical necessity, to believe that he is right - as we've been arguing for a while now.

Much of the logic that underpins those who have condemned the UK to life in the European slow lane's argument is that, by steering clear of plans for greater economic governance of the eurozone, Britain has pushed Germany into the arms of the French. This, the story runs, will lead to a more protectionist hardcore at the expense of Britain's more liberal economic interest.

Traditionally, Germany, to its advantage, has often been able to play British liberalism off against Gallic mercantilism. But, as we are beginning to see, forcing France and Germany together may start to reveal how many things that the two countries do not agree on.

How long, for example, can the two countries share the same currency while France runs deficits to pay for its generous pension system (plans to raise the retirement age to 62 resulted in mass protests) and Germany saves and raises its retirement age (which since 2007 is being phased in at 67)? The Franco-German alliance remains strong but there are also some deep disagreements between the two countries on economic policy (on the role of central banks, spending and deficits etc) that were pretty much swept under the carpet when the Single Currency was forged. If times get worse, expect more flare-ups.

It is hard to see how remaining 'excluded' from these kinds of rather uncomfortable questions will damage Britain's influence in the wider EU. And with many countries reconsidering a rush into the single currency, which they seemed destined for not so long ago, there is nothing inevitable about Europe's future political make-up. On the contrary, the current uncertainty in Europe has opened up space for those who believe in a better way forward for the EU to make their case.

That being said, the UK cannot make its voice heard if it doesn't say anything.

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