The Greek financial rescue plan is likely to be the first stage of a move towards European economic governance Are we witnessing the first, nervous steps by the euro currency countries to move to a European "economic government"? The outline "deal" reached by the euro's key EU partners to come to the aid of the stricken Greek economy may have more significance for the long-term future of the currency, than its short-term impact on the Greek financial crisis. Even so it would not be surprising if those global hedge funds and other speculators who have wagered heavily that they could force Greece out of the euro now get their fingers badly burned. They will presumably now think twice before laying similar – and even less plausible bets – on forcing a devaluation crisis in Portugal and Spain. The general idea of support for Greece is likely to be approved in broad terms by the special EU heads of government summit taking place in Brussels today. But we may not know until EU finance ministers gather next week the precise details of the measures France, Germany and, critically, the European Central Bank, will take to help give Greece the time and space to correct its massive budget deficit. The current left-of-centre Pasok government in Athens inherited the disgracefully fiddled government financial books from the discredited outgoing conservative administration. Whatever the mixture of EU purchase of Greek debt, loans and possible joint EU/Greek debt issues, the onus will remain on the new Greek government to show that it can bring the budget deficit down over the next year or two. The domestic politics of the drastic austerity programme already announced in Athens will be critical. Most attention has focussed on the cuts in pay, public employment and pensions which have aroused understandable outrage. But a great deal will depend on the parallel massive crackdown on the Greek rich and professional classes who have – for decades – simply avoided paying tax. It is going to be far more difficult in future for wealthy Greeks to salt away their assets in foreign banks as even the Italian rich have begun to realise. Maybe this is why opinion polls show a clear majority of public opinion behind what Athens is trying to do. The global agreement to force banks in Switzerland, Liechtenstein and other "off shore" banking centres to reveal tax avoidance secret accounts is already producing results. Foreign depositors are pulling their money out of Swiss banks and are negotiating settlement of their long over due tax bills at home. This process was begun by the Germans who paid for information on secret bank accounts held by many of their wealthy citizens in Switzerland and Liechtenstein. The kind of return of capital to Greece which we have seen recently in Italy would make a real impact on the budget deficit. The readiness of the EU single currency group to show solidarity with Greece is not altruistic. Were the speculators to succeed in pushing Greece out of the euro area, EU banks heavily involved in Greece would be hit hard. The resulting crisis turning a severe Greek recession into a slump would also weaken the already fragile economic recovery elsewhere in the EU. Some critics will say the support is too little, too late: others will complain that undermines the strict terms of the Maastricht treaty setting out the way the euro system should work. There is some force in the first point. It has been clear that the eurozone has had a strong monetary pillar but a weak economic pillar. The Greek rescue plan is likely, however, to be but the first stage of a more fundamental overhaul of what is called euroland economic "governance". In the end this must involve the single currency states finally accepting sharing sovereignty over key fiscal and budgetary decisions. This will not happen overnight but the first steps to strengthen economic decision-making within single currency group are likely to be revealed soon by the president of the euro group, the Luxembourg prime minister, Jean Claude Juncker. The currency future underlines the validity of an old adage: the European Union moves towards greater integration in fits and starts and most often under the pressure of crisis. Globalisation in all its manifestations presents EU governments and institutions with an awkward choice. Just as a cyclist has to continue to move forward or risk falling off, the EU will have to move further and faster to share sovereignty, simply to be able to manage the new economic, financial, environmental and security challenges, or risk growing irrelevance. It is not only in the area of economic decision making that tectonic plates are moving within the EU. Note the British defence white paper last week which – for the first time ever – confessed that it will have to co-operate far more closely with its EU partners (first and foremost France) if it is to have any coherent security strategy. It will be fascinating to see how the Tories begin to grapple with the scale of these changes in Europe if they win the election. The economic and financial crisis has triggered another shockwave now moving through the EU. The political reaction against the dominant centre-right governments and the neo-liberal economic strategies they have pursued is leading to a chorus of demands not merely by the fighting left but the mainstream green and social democratic left – as well as some Liberals and Christian Democrats – for much stronger EU policies on social justice and against wealth inequality. It now looks as though the left is set to regain power in countries as diverse as Sweden and France. If so, these pressures will force a policy rethink by the commission and the other EU institutions. Meanwhile, where will the next currency explosion occur? Might it conceivably be here in Britain where the scale of budget deficits could threaten an eventual credit re-rating and lead to massive currency speculation against sterling? If so who will then show solidarity in coming to the aid of sterling? Being outside the euro might yet prove a very cold and vulnerable spot to be in.
Thursday, 11 February 2010
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