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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Commons Confidential: Dave's picnic with Dacre

Revenge is a dish best served cold from a wicker hamper.

Sulking David Cameron can’t forgive the Daily Mail editor, Paul Dacre, for his role in his downfall. The unrelenting hostility of the self-appointed voice of Middle England to the Remain cause felt pivotal to the defeat. So, what a glorious coincidence it was that they found themselves picnicking a couple of motors apart before England beat Scotland at Twickenham. My snout recalled Cameron studiously peering in the opposite direction. On Dacre’s face was the smile of an assassin. Revenge is a dish best served cold from a wicker hamper.

The good news is that since Jeremy Corbyn let Theresa May off the Budget hook at Prime Minister’s Questions, most of his MPs no longer hate him. The bad news is that many now openly express their pity. It is whispered that Corbyn’s office made it clear that he didn’t wish to sit next to Tony Blair at the unveiling of the Iraq and Afghanistan war memorial in London. His desire for distance was probably reciprocated, as Comrade Corbyn wanted Brigadier Blair to be charged with war crimes. Fighting old battles is easier than beating the Tories.

Brexit is a ticket to travel. The Independent Parliamentary Standards Authority is lifting its three-trip cap on funded journeys to Europe for MPs. The idea of paying for as many cross-Channel visits as a politician can enjoy reminds me of Denis MacShane. Under the old limits, he ended up in the clink for fiddling accounts to fund his Continental missionary work. If the new rule was applied retrospectively, perhaps the former Labour minister should be entitled to get his seat back and compensation?

The word in Ukip is that Paul Nuttall, OBE VC KG – the ridiculed former Premier League professional footballer and England 1966 World Cup winner – has cold feet after his Stoke mauling about standing in a by-election in Leigh (assuming that Andy Burnham is elected mayor of Greater Manchester in May). The electorate already knows his Walter Mitty act too well.

A senior Labour MP, who demanded anonymity, revealed that she had received a letter after Leicester’s Keith Vaz paid men to entertain him. Vaz had posed as Jim the washing machine man. Why, asked the complainant, wasn’t this second job listed in the register of members’ interests? She’s avoiding writing a reply.

Years ago, this column unearthed and ridiculed the early journalism of George Osborne, who must be the least qualified newspaper editor in history. The cabinet lackey Ben “Selwyn” Gummer’s feeble intervention in the Osborne debate has put him on our radar. We are now watching him and will be reporting back. My snouts are already unearthing interesting information.

Kevin Maguire is the associate editor (politics) of the Daily Mirror

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 23 March 2017 issue of the New Statesman, Trump's permanent revolution