Saturday 25 January 2020

Brendan Keenan: Signs of EU division would present an awful dilemma

THE quotable quote of 2011 must go to the French diplomat who likened David Cameron's tactics at the EU summit as going to a wife-swapping party without your wife.

One shudders to think what would happen to an American official who said such a thing. But to continue a la Francais, even if Mr Cameron had nothing to offer, what did he fancy?

Nearly all of the comment focused on his desire to get protection for the London financial services sector in any changes in financial regulation. It is assumed that the idea of a tax on some financial transactions -- the so-called "Tobin tax" -- was uppermost in his mind.

As only a well-honed diplomat can, the French wit went straight to the point with his bon mot.

How can one seek protection from discussions that have not even begun? The British prime minister seemed not only to bring nothing to the party, but not to know exactly what he wanted either.

I share the view that he made a serious error, which will cause him endless difficulty.

Departing train

Within days, he was starting to run down the track after the departing train -- a simile used by a previous wit over British attitudes to Europe. But I refuse to believe that Mr Cameron had no clue as to what he was doing.

The answer to what he was doing could be important for everyone, not least the Irish. Mr Cameron did have another objective, which got less publicity -- a derogation from the EU working-time directive. Boring stuff, compared with the fortunes of the City, but perhaps more fundamental in the end.

Mr Cameron faces serious economic difficulties at home. So do most EU leaders, but Britain stands alone in another way, as the only large European economy that still has its own currency.

It has made maximum use of that freedom, but the results have been unexpected, and unexpectedly poor.

Despite devaluation, and hundreds of billions in money creation through "quantitative easing", the UK economy has performed no better than the core eurozone economies, and in some ways worse.

Growth is flat, unemployment was rising quickly until this month, and inflation is high. The last bit may have been intentional.

Higher prices feed into the "nominal" value of the economy, which is what debt is measured against.

On nominal growth, Britain's figures are better than eurozone economies which have recorded higher real growth in output over the period. This week saw encouraging news on government borrowing, but Mr Cameron would have hoped for better real growth, especially from sterling's depreciation.

He needs all the growth he can get to help reduce the budget deficit, which is projected as larger than Ireland's next year.

These things are measured as percentage of nominal output (GDP).

In such circumstances, governments welcome inflation rather than complain about it, although the popularity of inflation-linked UK bonds has added to debt-servicing costs.

The Irish Government does not issue such bonds. It will have had no qualms about the inflationary impact of the rise in Vat and other indirect taxes in the Budget.

Indeed, Ireland's deflation has been deeper and longer-lasting than one would have thought possible in such an open economy.

It now looks likely that, while there may be some small real growth in 2011, the nominal value of national income (GNP) will fall again, for the fourth year in succession.

Whatever the precise figure, the horrifying fact is that the cash value of national income is now €35bn (20pc) less than it was in 2007.

Reducing deficit and debt ratios in those circumstances is like swimming in treacle, but I don't suppose the British coalition government looks across the water and counts its blessings.

Things are moving against it. Inflation is a relative measure, which compares one period with another.

The UK rate has probably peaked, even if the Bank of England has another crank at the printing press. And real output may well fall, if the euro area goes into recession.

It does beg the question as to whether the supposed national currency advantages of devaluation are all they are cracked up to be.

I see that the Honda factory in Swindon is returning to full production this week, after floods in Thailand had disrupted the supply of vital parts.

In a world such as this, exchange rate movements may have little short-term effect on exports and imports.

The advantage of a currency has turned out to be something else -- the confidence of lenders to governments that they will get their money back in nominal terms in the same currency.

The eurozone needs to provide that confidence. It can be done, but one is not sure that it will be.

Mr Cameron must now try to crank the real economy. That may have been what he was at in Europe, and where the idea of "repatriation of powers" from Brussels comes from.

Much economic theory -- and all of Tory theory -- would say that rules like maximum working hours, restrictions on part-time labour, limits on state aid etc, hamper growth. Abolish them and growth will improve.

Others would say that this is too narrow a definition of growth, and that wider well-being is better served by the EU approach. Take your pick.

The argument I fail to understand is the frequently-voiced one that the EU is driven by a capitalist agenda, and that a more integrated euro area will be even more dedicated to the pursuit of growth and profit.

The opposite seems more probable. The EU -- still more the eurozone -- is an uneasy compromise between creating free movement of capital, goods and people across borders, and the desire to mitigate the effects of such movement on individual companies and citizens.

The British government seems tempted to try to reverse some of this compromise, with growth taking precedence over individual comfort and security.

The debacle at the summit may have reduced its chances of success, but the planned developments in the euro area present new opportunities.

Every EU leader will decry the idea of a two-tier Europe, but not all of them will mean it.

Mr Cameron might like the chance to make Britain more Thatcherite, and Mr Sarkozy might like to make the eurozone more dirigisme (corporation tax included).

Irish leaders will really mean it when they condemn the possibility of such a division, not least because of the appalling prospect of having to choose which path to follow.

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