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all in it together better apart

Following the eurozone crisis, the smart thinking is that more financial integration is required. What will that mean for countries that argue for less? By Rodrigo Amaral


But markets have signalled that a more coordinated Europe looks like a good idea. This is one way that recent strengthening of the euro can be interpreted. It has followed progress by EU authorities in negotiations towards closer banking and fiscal unions among the countries that share the common currency. But if investors appear to be happy with a Europe that is moving closer together, how are they likely to view those countries that are heading in the other direction?

The standard bearer of the latter group is the UK, whose prime minister, David Cameron, has promised a 2017 referendum on the country’s membership of the EU. In 2011, the UK caused havoc in a crucial meeting when it blocked changes to euro treaties that would have enabled the enforcement of tough fiscal rules.

By doing that, Cameron forced other countries in the group to look for a creative solution in order to pass the changes, which usually have to be approved by a unanimous vote. He also empowered the British political and media factions that want to see the UK as far away as possible from the EU.

Less, not more

The woes of the eurozone in the past three years have given fodder to the argument that less, rather than more, integration is the best path for EU countries that are lucky enough to have opted out of the euro.

Long-running grievances about human rights laws, immigration rules, health and food standards, and even the imperial system, have helped convince many Britons, Swedes and others that they do not want to place their fates in the hands of Brussels-based bureaucrats, Spanish bankers and Greek public accountants.

Today there is much more regulation in the eurozone than before the crisis. The rules are going well beyond the mere focus on public finances contained in the Maastricht Treaty alt=''

Johannes Mueller
chief economist, DWS

It is not surprising then, that many analysts believe a two-speed EU is taking shape. The alternative to the British approach has been embraced by eurozone members, along with countries that plan to adopt the common currency at some point in the future. They are boosting the capabilities of institutions like the European Central Bank (ECB), and the process of delegating ever more power on fiscal and monetary issues to European bodies is unlikely to stop.

“The eurozone will have to become more integrated,” notes Johannes Mueller, chief economist at DWS. “There is no other way.”

Closer than ever

A symbolically important leap in that direction was taken by EU members, excluding the UK and Sweden, who launched the embryo of a European banking union by setting up a single supervisory mechanism for banks in the eurozone.

The adoption by 11 countries, including Germany, France, Spain and Italy, of a new tax on financial transactions is another example of a far-reaching measure that was pushed forward by euro members, rather than the EU as a whole. Every such step implies that eurozone countries are increasingly relinquishing some of the old attributes of national sovereignty to unelected supranational bodies. A trend that, in truth, should have surprised nobody.

“It is certain that the times of individual national efforts regarding employment policies, social and tax policies are definitely over,” said former German chancellor Gerhard Schroeder. “This will require us to bury finally some erroneous ideas of national sovereignty.”

As apt as the remark sounds today, it was uttered by Schroeder back in 1999, when countries were still preparing for the arrival of the common currency. Indeed, deeper integration of eurozone members may have been delayed for a decade, but it has never been out of the equation altogether.

“The eurozone was built on the idea that everybody should be very disciplined, and everyone should take care of their fiscal balances,” Mueller says. “But the stability criteria of the Maastricht Treaty focused mainly on public finances, and this was not enough. Today there is much more regulation in the eurozone than before the crisis.

“The rules are going well beyond the mere focus on public finances contained in the Maastricht Treaty. And they will require much more coordination among members.”

Forced compliance

The lack of coordination at the outset of the crisis meant that Greece, Ireland and Portugal have been forced to rely on the goodwill of wealthier EU member states – especially Germany – to get their bailouts. They have had to bend to demands for austerity policies that have all the hallmarks of a German-inspired ECB, and to submit domestic economic and social policies to the approval of Brussels-based technocrats.

This has not gone down well in any of the countries affected. The sight of Spanish prime minister Mariano Rajoy repeatedly, desperately looking for the approval of his German counterpart, Angela Merkel, is galling for a country proud of its brave bullfighters and exploradores. But it could have some worthwhile long-term results, and not only on the economic side.

The recent disclosure of a long string of corruption scandals involving politicians in Spain has highlighted the fact that trusting European bureaucrats, rather than elected officials, is not necessarily a bad idea. And the alignment with the policies of better performing peers has helped polish the image of the country too: a Morgan Stanley report even raised the prospect that Spain could become a new Germany, thanks to the reforms it has been implementing.

But the creation of institutions with a clear mission of dealing with pan-eurozone troubles has become a necessity in order to avoid, in the next crisis, all the political and national wrangles that the current turmoil has created. And the stability of the common currency has been lifted to the top of the eurozone priority list, likely to the detriment of countries that have not adopted it yet.

In a recent editorial, French business newspaper Les Echos bluntly made the point that, “given that the club of 27 is doomed to powerlessness, strategic reflections need to happen at the eurozone level.” This is far from an isolated view within euro countries.

Flexing its muscle

The consequences of this possible shift of decision-making centres in the EU could be dramatic for other countries, as the strength and eventual cohesion of eurozone members is certain to extend well beyond the stability of the common currency. The London-based Centre for European Reform (CER) has noted that the 17-strong group could impose its views on issues that are vital for the UK and other non-members, such as the future of the single market.

The threat of taking activities away from London, such as the clearance of euro contracts, could grow if the new eurozone structures find a way to realise their aims outside the purview of EU institutions, thus dodging the influence of the UK government.

“Britain’s policy of standing on the margins of many discussions, and the expectation that in the long run it may well leave, are visibly weakening its influence in EU councils,” the CER pointed out in a report.

UK the new Norway?

EU sceptics in the UK have argued that the ideal situation is the relationship forged by non-members Norway and Switzerland with the bloc. Such countries benefit from the single market, without the burden of having to embrace all EU regulation in other areas. But they also have no say in the direction taken by the single market and have to swallow any trade rules approved by Brussels – like horsemeat in a pack of frozen beef lasagne. It is hard to see how the UK, a much larger country, could accept such an unequal relationship.

Non-member countries therefore face a dilemma. They have to choose either to embrace a more integrated Europe, which looks inevitable, or disengage from it altogether. Cautious Sweden appeared to have the first option in mind when it rejected the banking union with the caveat that it might join later.

In the UK, however, there are growing pressures for an outright exit from the bloc. It is hard to see, however, how an isolated Britain can hope to have a voice in global economic affairs in a world where even the EU, with all its demographic and economic weight, is fast becoming a secondary player.

“It is much easier and quicker to take a decision when you are alone,” says Alain Pitous, deputy chief investment officer at Amundi. “But in the long run, it is probably better to be in the eurozone than to be out, especially if structural reforms are already under way.”

This is an opinion shared by many people in the market, as the recent robustness of the euro has demonstrated. Gradually, doubts about the future of the common currency have abated, and investors have set their sights again on the expected advantages of the eurozone.

“We saw in past years investors leaving Europe to go to the US and emerging markets,” says Stefan Scheurer, senior capital market analyst at Allianz Global Investors. “Now they are coming back. They seem to value the eurozone, and especially companies based in the region”.