As David Cameron stays in Brussels for his third European summit as PM, it’s becoming increasingly clear that the EU's approach to the eurozone crisis – put up short-term cash and pray – isn’t convincing anyone.
On Wednesday, Moody’s threatened to downgrade Spanish government bonds another notch, citing the fact that, between them, the country’s government and banks have to raise €290bn next year to keep the party going. And, across the eurozone, banks and governments face daunting refinancing targets in 2011, which begs the questions: at what cost? And what happens if they fail to meet them?
Taking into account the countries that themselves have received support and the need to maintain retain a ‘triple A’ rating for the rescue fund, the real amount available in the EU/IMF bail-out pot could well be something like €410bn, as opposed to the €750bn outlined on paper earlier this year. This will probably not be enough to put Ireland, Portugal and Spain on life support at the same time, should things get messy.
Viewed from London, it’s worrying that the Cameron government has so few ideas and strategies in place for how to take Europe out of this mess. They may have circulated a letter calling for spending restraint, and received the backing of France and Germany. But, given the interconnectivity of Europe’s trading books, without a fundamental solution, the eurozone’s problems will remain Britain’s problems.
So what, then, should Cameron be pushing for at today’s summit?
Firstly, he should back Angela Merkel’s attempts to allow for a restructuring of eurozone (Greek, Irish and Portuguese) debt in the medium term, including hair-cuts for investors. At the same time, Europe’s banks, not least Spanish ones, should be pushed to come clean on their loan losses, so that we can flush out Europe's sick banking system once and for all (here genuine, rigorous stress tests could help to identify how big the problem really is).
Secondly, make common cause with fiscal conservatives in Germany, Scandinavia and the new member states, in arguing against more fiscal harmonisation in the EU, which, predictably, there are now calls for. Perpetual bail-out outs and common eurozone bonds merely collectivise irresponsible fiscal behaviour while doing nothing to strengthen Europe’s competitiveness. Cameron is also right to seek legal assurances that the UK will not automatically be liable for future eurozone bail-outs – the EU Treaties were flagrantly ignored to implicate the UK last time around.
The ECB must also stop acting as a rubbish dump for bad government and bank debt and become a solid, independent central bank again – its current role is simply unsustainable and poses a long-term threat to stability.
Thirdly, while not saying it in public, Cameron should explore the possibilities for a complete restructuring of the eurozone, including changes to its membership. The fact is that Greece, Portugal and others will never be able to compete with Germany inside a currency union. An orderly solution before the patchwork unravels is far better than a chaotic end to the venture in the midst of a crisis.
But, perhaps most importantly, it’s time for Cameron to play European politics. As we’ve argued on Coffee House before, the eurozone crisis, and the fluid situation it has created, presents a huge opportunity for a British Government to finally make some headway in the EU. It’s not entirely clear if Cameron actually got anything substantial in return for backing Merkel’s calls for changes to the EU treaties, but he should have. There’s a power vacuum in Europe just waiting to be filled with new ideas.
A radical reform agenda for growth, jobs and democracy (including bringing powers back home) wouldn’t obstruct Europe’s efforts to save the eurozone, as some have argued. If the end result is a more adaptable, legitimate and competitive Europe, it will do far more for the euro – in whatever form it’ll exist in future – than any of the proposals that have been floated so far.
Cameron must show enough confidence in the UK’s diplomatic and political capabilities to push this line.
Mats Persson is director of Open Europe