A eurozone recovery could tear the Conservatives apart

A successful fiscal union, as supported by Cameron, would force the party to choose between re-engagement and isolation.

When the financial crash erupted in 2008, the eurozone was at first a haven of stability. The epicentre of the storm was in London and New York, and it seemed for a time that the European economies might be only mildly affected. The financial crisis, however, mutated into first a fiscal crisis and then a sovereign debt crisis which gripped the eurozone economies from 2010. The eurozone was exposed as the weakest link in the international economy, because unlike the US or the UK there was no central bank to act as lender of last resort, no political authority standing behind the single currency to take decisive action to defend it. In its conception the euro was a federal project, but it was established without the federal institutions needed to sustain it. As some of the architects of the euro foresaw, at some stage eurozone members would be forced to choose, between a move to fiscal union and the creation of a political authority to stand behind the currency, or an abandonment of the currency and a return to national currencies.

At this stage it is still impossible to know how and on what terms the eurozone crisis is likely to be resolved. However, there are three plausible scenarios: eurozone disintegration, continuing stalemate, or eurozone fiscal union and recovery.

Britain has so far chosen to distance itself from the eurozone crisis, most notably at the summit in December 2011 when David Cameron refused to join the other members of the EU in backing measures to resolve the crisis. But as the government urging the eurozone to move quickly to a full fiscal union.

The first scenario, eurozone disintegration, is the one which many eurosceptics predict, and which many anticipate with relish, since it would mark a major setback for the European project from which it might not recover. But since its consequences are likely to be dire for the British economy it is not something any responsible British government is likely to wish for or actively promote. The current slowdown in the European economy is already blamed for Britain's double-dip recession by the chancellor. If there were to be major defaults by Greece, followed by Spain, Portugal and Italy, there would be serious consequences for UK banks and UK exporters. The belief held by many eurosceptics that Britain can swiftly replace its European markets with markets in east Asia and Latin America is fanciful. The British economy would be plunged into a deep depression. This, rather than any love of the euro itself, explains why British ministers urge Germany to do the responsible thing and agree to a full fiscal union, creating the kind of unified political authority in continental Europe which it has been British policy to oppose for the last 300 years.

The second scenario, continuing impasse, implies that the eurozone will continue making small adjustments which will be sufficient to avoid the single currency's implosion, but never enough to resolve the crisis definitively and prevent its recurrence. The European economy remains stagnant, with grinding austerity, high unemployment and little prospect of growth. Somehow, governments manage to contain the unhappiness of their citizens and also to keep the markets at bay, but there is no reason to expect a final resolution. The impact on British politics of this scenario would be to reinforce the negative images of the euro and the EU which have flourished in the last 20 years. It would add to the growing pressure for an in-or-out referendum, and it would be difficult for party leaders to find convincing arguments as to why Britain should remain tied to a EU which is becoming so dysfunctional and seemingly unable to solve its own problems.

The third scenario is fiscal union. Against the odds and widespread expectations, the eurozone halts at the brink and decides after all that the costs of collapse outweigh the costs of reform. The members agree to a major pooling of their sovereignty, which creates a serious federal power to govern the economy of the eurozone and stand behind the euro. The main obstacle to this is how to ensure its legitimacy. It would need to be accompanied by an imaginative plan, a European version of Marshall Aid, to lift the European economy into growth, ease the burden of austerity, and give the citizens of Europe some hope. The political difficulties of doing this are immense, which is why many remain sceptical as to whether it can be achieved by the European political class, without a major new popular endorsement of the European project. But if this or something like it were to come about, it would place Britain in a very awkward position.

In the first two scenarios, Britain continues to be disengaged from Europe, and even more disposed to exit the EU altogether, treating the EU as dysfunctional and failing. In this third scenario, with the EU now succeeding, Britain would be more isolated than ever. Only the Czech Republic is an ally at present. All the other non-eurozone countries have made it clear that they would work with this new emerging federal power. In this situation, Britain would either have to do as Count Lambsdorff, the former German FDP politician, suggested and withdraw from the EU and negotiate associate status (like Norway), or it would have to find a way to re-engage with Europe.

A re-engagement will not be easy, but there are precedents. In the 1980s, Nigel Lawson decided that the best hope of financial stability was for Britain to start shadowing the deutschmark. Leading members of Margaret Thatcher's cabinet supported Britain's membership of the exchange rate mechanism, against her opposition. The same pragmatic voices could be expected to re-emerge again in the Conservative party if the eurozone proved itself a success. The UK is too big to be just an offshore financial centre, and the political necessity of retaining privileged access to European markets could become overwhelming. There has always been a strong strain of euro-realism in all parties which acknowledges that Britain might eventually have to swallow hard and integrate.

Circumstances in the 2010s are, however, very different from the 1980s. Positions on Europe have hardened, and the Conservative party in particular has moved in an increasingly eurosceptic direction. A successful fiscal union would create an embryonic European state, from which Britain would be largely excluded. Many Conservatives would want to avoid this isolation, but any hint of the re-emergence of a new pro-European grouping would divide the party and might well lead to a formal split. So passionate is the euroscepticism of a large part of the Conservative party and the Conservative media that any form of serious re-engagement with the EU would be very hard to accomplish.

One conclusion, then, from this assessment is that Cameron's government is currently urging Europe towards the very approach which might lead to the greatest problems for his party in the long term. Because the government sees serious negative consequences for the British economy of eurozone disintegration or stalemate, it is rational to want fiscal federalism to succeed. Yet, if the eurozone does survive and recover this would pose deep dilemmas for the Conservatives, with a large section of the party being unable to stomach the pro-European policy that would be required for a future re-engagement with Europe.

Andrew Gamble is professor of politics at the University of Cambridge.

A longer version of this piece appears in IPPR's journal Juncture.

Cameron is urging Europe towards the very approach which might lead to the greatest problems for his party. Photograph: Getty Images.
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Shadow Scottish secretary Lesley Laird: “Another week would have won us more seats”

The Labour MP for Kirkcaldy and Cowdenbeath on the shadow cabinet – and campaigning with Gordon Brown in his old constituency.

On the night of 8 June 2017, Lesley Laird, a councillor from Fife and the Labour candidate for Kirkcaldy and Cowdenbeath, received a series of texts from another activist about the count. Then he told her: “You’d better get here quick.”

It was wise advice. Not only did Laird oust the Scottish National Party incumbent, but six days later she was in the shadow cabinet, as shadow Scottish secretary. 

“It is not just about what I’d like to do,” Laird says of her newfound clout when I meet her in Portcullis House, Westminster. “We have got a team of great people down here and it is really important we make use of all the talent.

“Clearly my role will be facing David Mundell across the dispatch box but it is also to be an alternative voice for Scotland.”

At the start of the general election campaign, the chatter was whether Ian Murray, Labour’s sole surviving MP from 2015, would keep his seat. In the end, though, Labour shocked its own activists by winning seven seats in Scotland (Murray kept his seat but did not return to the shadow cabinet, which he quit in June 2016.)

A self-described optimist, Laird is calm, and speaks with a slight smile.

She was born in Greenock, a town on the west coast, in November 1958. Her father was a full-time trade union official, and her childhood was infused with political activity.

“I used to go to May Day parades,” she remembers. “I graduated to leafleting and door knocking, and helping out in the local Labour party office.”

At around the age of seven, she went on a trip to London, and was photographed outside No 10 Downing Street “in the days when you could get your picture outside the front door”.

Then life took over. Laird married and moved away. Her husband was made redundant. She found work in the personnel departments of start-ups that were springing up in Scotland during the 1980s, collectively termed “Silicon Glen”. The work was unstable, with frequent redundancies and new jobs opening, as one business went bust and another one began. 

Laird herself was made redundant three times. With her union background, she realised workers were getting a bad deal, and on one occasion led a campaign for a cash settlement. “We basically played hardball,” she says.

Today, she believes a jobs market which includes zero-hours contracts is “fundamentally flawed”. She bemoans the disappearance of the manufacturing sector: “My son is 21 and I can see how limited it is for young people.”

After semiconductors, Laird’s next industry was financial services, where she rose to become the senior manager for talent for RBS. It was then that Labour came knocking again. “I got fed up moaning about politics and I decided to do something about it,” she says.

She applied for Labour’s national talent programme, and in 2012 stood and won a seat on Fife Council. By 2014, she was deputy leader. In 2016, she made a bid to be an MSP – in a leaked email at the time she urged Labour to prioritise “rebuilding our credibility”. 

This time round, because of the local elections, Laird had already been campaigning since January – and her selection as a candidate meant an extended slog. Help was at hand, however, in the shape of Gordon Brown, who stood down as the MP for Kirkcaldy and Cowdenbeath in 2015.

“If you ever go out with Gordon, the doors open and people take him into their living room,” says Laird. Despite the former prime minister’s dour stereotype, he is a figure of affection in his old constituency. “People are just in awe. They take his picture in the house.”

She believes the mood changed during the campaign: “I do genuinely believe if the election had run another week we would have had more seats."

So what worked for Labour this time? Laird believes former Labour supporters who voted SNP in 2015 have come back “because they felt the policies articulated in the manifesto resonated with Labour’s core values”. What about the Corbyn youth surge? “It comes back to the positivity of the message.”

And what about her own values? Laird’s father died just before Christmas, aged 91, but she believes he would have been proud to see her as a Labour MP. “He and I are probably very similar politically,” she says.

“My dad was also a great pragmatist, although he was definitely on the left. He was a pragmatist first and foremost.” The same could be said of his daughter, the former RBS manager now sitting in Jeremy Corbyn's shadow cabinet.

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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