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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In Kezia Dugdale, Scottish Labour has picked an unlikely winner

The party leader is making gains internally at least. 

Kezia Dugdale did not become the leader of Scottish Labour in the most auspicious of circumstances. She succeeded Jim Murphy, who lasted just six months in the job before losing his Westminster seat in the 2015 general election. She herself has survived one year, but not without rumours of a coup.

And so far, she has had little reward. Labour lost 14 seats in the 2016 Scottish parliament elections, and not just to the auld enemy, the SNP, but a seemingly decrepit one, the Tories. She backed the losing candidate in the recent Labour leadership contest, Owen Smith. 

Yet Dugdale has firm fans within Scottish Labour, who believe she could be the one to transform the party into a vote-winning force once more. Why?

First, by the dismal standards of Scottish Labour, Dugdale is something of a winner. Through the national executive committee, she has secured the internal party changes demanded by every leader since 2011. Scottish Labour is now responsible for choosing its own Westminster candidates, and creating its own policy. 

And then there’s the NEC seat itself. The decision-making body is the main check on the Labour leadership’s power, and Dugdale secured an extra seat for Scottish Labour. Next, she appointed herself to it. As a counterweight to Jeremy Corbyn’s supporters, Dugdale now has influence within the party that extends far outside Holyrood. The Dundee-based Courier’s take on her NEC victories was: “Kezia Dugdale completes 7-0 Labour conference victory over Jeremy Corbyn.”

As this suggests, Dugdale’s main challengers in Scotland are likely to come from the Corbyn camp. Alex Rowley, her deputy leader, backed Corbyn. But Labour activists, at least, are battle weary after two referendums, a general election and a Scottish parliament election within the space of two years. One well-connected source told me: “I think it's possible we haven't hit rock bottom in Scotland yet, so the scale of the challenge is enormous.” 

Polls are also harder to ignore in a country where there is just one Labour MP, Ian Murray, who resigned from the shadow cabinet in June. A YouGov exit poll of the leadership election found Smith beating Corbyn in Scotland by 18 points (in every other part of Britain, members opted for Corbyn). Observers of Scottish politics note that the most impressive party leaders, Nicola Sturgeon and Ruth Davidson, were given time and space to grow. 

In policy terms, Dugdale does not stray too far from Corbyn. She is anti-austerity, and has tried to portray both the SNP and the Tories as enemies of public service. She has attacked the same parties for using the Scottish referendum and the EU referendum to create division in turn. In her speech to conference, she declared: “Don’t let Ruth Davidson ever tell you again that the Union is safe in Tory hands.”

So long as Labour looks divided, a promise of unity will always fall flat. But if the party does manage to come together in the autumn, Dugdale will have the power to reshape it north of the border, and consolidate her grip on Scottish Labour.