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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Chuka Umunna calls for "solidarity" among Labour MPs, whoever is voted leader

The full text of shadow business secretary Chuka Umunna's speech to Policy Network on election-winning ideas for Labour's future, and the weaknesses of the New Labour project.

There has never been an easy time to be a social democrat (or “democratic socialist” as we sometimes call ourselves in Britain). Whereas the right can demonise the poor and extol the virtues of the market, and the hard left can demonise the market and extol the role of the state, our position of constraining the domination of markets and reforming the state is, by definition, more complex.

It is nonetheless the case that social democracy has a historic responsibility, in every generation, to renew democracy and preserve a civic culture. This is achieved not through soundbites and slogans, but through the hard-headed development of a progressive politics that reconciles liberty and democracy, new comers and locals to our communities, business and workers, in a common life that preserves security, prosperity and peace.  This historic mission is all the more urgent now and my determination that we succeed has grown not weakened since our election defeat last May.

But, in order to be heard, it is necessary to make balanced and reasonable argument that both animates and inspires our movement, and which is popular and plausible with the people.  The first is pre-requisite to the second; and there is no choice to be made between your party’s fundamental principles and electability. They are mutually dependent - you cannot do one without the other.

We are in the midst of choosing a new leader and it is clear to anyone who has watched the UK Labour Party leadership election this summer that amongst a significant number there is a profound rage against Third Way politics – as pursued by the likes of Bill Clinton, Tony Blair, Gerhard Schröder and others - as a rejection of our fundamental values.

In the UK there is a view that New Labour accepted an uncritical accommodation with global capital that widened inequality, weakened organised labour and we were too close to the US Republicans and too far from the European left.

I do not believe this is fair, not least because we rescued many of our public services from the scrap heap when we came to office in 1997 and there were very significant achievements  we should celebrate.  New Labour renewed our National Health Service in a fundamental way; we built new schools and improved existing ones; we set up new children’s centres all over the country; we brought in a National Minimum Wage; we worked with others to bring peace to Northern Ireland; we introduced civil partnerships.  Just some of our achievements.

However, though we may take issue with the critique, I do not think we can simply dismiss out of hand those who hold critical views of New Labour. Like any government, the New Labour administration made mistakes - it could and should have achieved more, and done more to challenge the Right’s assumptions about the world. In the end, it is not unreasonable to be ambitious for what your party in government can achieve in building greater equality, liberty, democracy and sustainability. It is far better we acknowledge, not reject, this ambition for a better world, as we seek to forge a new politics of the common good fit for the future.

Realising our values in office has been disrupted by globalisation and the surge of technological forces that are displacing and reshaping industry after industry.

Some argue that globalisation as an ideological construct of the right. But we must recognise that we live in an increasingly integrated world in which markets have led to an unprecedented participation of excluded people in prosperity, a rise in living standards for hundreds of millions  of people and a literacy unprecedented in human history – this is particularly so in emerging economies like my father’s native Nigeria. And the internet has led to a level of accountability that has disturbed elites.

Yet, this has been combined with a concentration of ownership that needs to be challenged, of a subordination of politics that requires creative rather than reactive thinking, and these global forces have exacerbated inequalities as well as helped reduce poverty.

So it is important that we understand the sheer scale and impact of new technologies. At the moment we are engaged in a debate about Uber and its threat to one of the last vestiges of vocational labour markets left in London, those of the black taxi cabs and their attainment of 'The Knowledge'. But the reality is that within the next decade there will be the emergence of driverless cars so we have to intensify our exploration of how to support people in a knowledge economy and the realities of lifelong learning, as well as lifelong teaching. As people live longer we will have to think about how to engage them constructively in work and teaching in new ways.

Once again, I'm addressing all of this, Social Democracy requires a balanced view that domesticates the destructive energy of capital while recognising its creative energy, that recognises the need for new skills rather than simply the protection of old ones. A Social Democracy that recognises that internationalism requires co-operation between states and not a zero sum game that protectionism would encourage.

Above all, Social Democratic politics must recognise the importance of place, of the resources to be found in the local through which the pressures of globalisation can be mediated and shaped. Our job is to shape the future and neither to accept it as a passive fate nor to indulge the fantasy that we can dominate it but to work with the grain of change in order to renew our tradition, recognising the creativity of the workforce, the benefits of democracy and the importance of building a common life.  Sources of value are to be found in local traditions and institutions.

This also requires a recognition that though demonstration and protest are important,; but relationships and conversations are a far more effective way of building a movement for political change.

One of the huge weaknesses of New Labour was in its reliance on mobilisation from the centre rather than organising. It therefore allowed itself to be characterised as an elite project with wide popular support but it did not build a base for its support within the party across the country, and it did not develop leaders from the communities it represented. It was strong on policy but weak on strengthening democratic politics, particularly Labour politics.

Over half a million people are now members, supporters or affiliated supporters of our party, with hundreds of thousands joining in the last few weeks. Some have joined in order to thwart the pursuit of Labour values but many more have joined to further the pursuit of those values, including lots of young people. At a time when so many are walking away from centre left parties across the Western world and many young people do not vote let alone join a party, this is surely something to celebrate.

So it is vital that we now embrace our new joiners and harness the energy they can bring to renewing Labour’s connection with the people. First, we must help as many them as possible to become doorstep activists for our politics. Second, I have long argued UK Labour should campaign and organise not only to win elections but to affect tangible change through local community campaigns. We brought Arnie Graf, the Chicago community organiser who mentored President Obama in his early years, over from the U.S. to help teach us how to community organise more effectively. We should bring Arnie back over to finish the job and help empower our new joiners to be the change they want to see in every community – we need to build on the links they have with local groups and organisations.

I mentioned at the beginning that in every generation Social Democracy is besieged from left and right but the achievements of each generation are defined by the strength of a complex political tradition that strengthens solidarity through protecting democracy and liberty, a role for the state and the market and seeks to shape the future through an inclusive politics. Solidarity is key which is why we must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office.

Yes, these are troubled times for social democrats. All over Europe there is a sense among our traditional voters that we are remote and do not share their concerns or represent their interests or values.  There is surge of support for populist right wing parties from Denmark to France, of more left wing parties in Greece and Spain and in Britain too. There is renewal of imperial politics in Russia, the murderous and abhorrent regime of ISIL in the Middle East, volatility in the Chinese economy and in Europe a flow of immigration that causes fear and anxiety.

But, the task of Social Democracy in our time is to fashion a politics of hope that can bring together divided populations around justice, peace and prosperity so that we can govern ourselves democratically. We have seen worse than this and weathered the storm. I am looking forward, with great optimism to be being part of a generation that renews our relevance and popularity in the years to come.

Chuka Umunna is the shadow business secretary and the Labour MP for Streatham.