The Duke of Wellington’s description of the battle of Waterloo in 1815 as “a damn close-run thing” seemed to fit the European Union’s negotiations which led on 21 July 2011 to a new euro-area “bailout” agreement. The process may have been protracted and tortuous, the final moments in Brussels frantic, but the far-reaching implications of the outcome have surprised many.
The British media in particular had been full of dire warnings that the there would be no agreement, and that inevitable failure would be followed by an apocalyptic backlash on global financial markets which would lead to the disintegration of the euro-area and possibly even the wider EU.
I never accepted this chiliastic reading of what is, undeniably, a profound crisis at the heart of the single-currency system. In January 2011, I suggested that not only would the Euro-area survive but that eventual measures forced on governments to tackle the crisis would open the way to further and deeper European integration.
That now seems to be coming to pass. The measures to ease the appalling financial and economic pressures on Greece (and by extension Portugal and Ireland) have bought time to strengthen the currency’s defences. But - more importantly - the creation of the European Financial Stability Facility (EFSF) lays the foundation for a full-blown European Monetary Fund and together with other changes points in the direction of a euro-area economic union, not just a monetary union.
The president of Germany’s Bundesbank - who is opposed to a euro-area fiscal transfer union - now believes this will be the likely result of the summit. In Britain, right-wing Eurosceptics have jumped to the same conclusion. They now demand a renegotiation of the terms of United Kingdom participation in the EU, thus threatening a serious new split in the heart of the Conservative-Liberal Democrat coalition headed by David Cameron.
The performance of euro-area and European Union governments has been grotesquely irresponsible as they have dithered, delayed and prevaricated in the face of a deepening crisis. What finally drove them to a more comprehensive than expected agreement in Brussels had nothing to do with their “European vocation” - they have little or none. It had everything to do with a sober realisation that the costs of a disintegration of the euro project would dwarf those arising from closer future integration and could result in a banking catastrophe.
This crab-like crawl towards economic union will require further important decisions if it is to become reality. The euro-area states will have to implement the agreements already reached under which they will, in future, take most key economic and financial decisions collectively rather than separately. There will also be new euro-area powers of scrutiny over, and more meaningful sanctions against, governments which try to conceal their genuine financial position (as earlier Greek administrations did).
But to secure potential future support (for Spain and/or Italy, for example) will need still greater financial firepower. The almost certain instrument is the issuing of eurobonds collectively guaranteed by all the euro-area states (Germany included). This dynamic makes it possible to see the emerging outlines of a future euro-area treasury at the heart of a euro-area economic government.
The political challenge
This leaves one huge question unanswered: what substantive policies will the EU/euro-area adopt to reverse the drift to further and deeper recession and a disastrous social crisis in the so-called euro-area “periphery”? The urgent system-changing economic and political reforms required should now become the focus of an EU-wide democratic debate involving civil society and organised labour as well as governments, the EU institutions and the emerging European political parties.
The EU majority in the council of ministers and the commission, dominated by the centre-right, has allowed a slide to economic disaster proceed without serious challenge. The more strident eurosceptics, especially those on the populist far right, have no answer except to vilify immigrants and the EU itself. But in France and Germany there are signs that the social democrats and the greens will form governments in both countries after the next elections in 2012-13.
In the European parliament there is growing support for investment on a Marshall-plan scale in sustainable energy, economic and social infrastructure to spearhead economic recovery. There are also signs of renewed intellectual life on the European left as it wrestles with the complexities of forging a pan-European alternative to mindless austerity and social regression.
In Westminster there is much gleeful talk of gradual British disengagement from the European Union. But if (or, more likely, when) the coalition has to abandon its cuts and austerity Plan A for some less extreme Plan B, will the financial markets start to dump sterling in earnest? London would then need all the friends it can find elsewhere in the European Union. But if the Eurosceptic bandwagon pushes Britain into ever deeper isolation, those friends may be harder to find. The stakes on all sides are high, but the events of July 2011 may be the start of a turning-point in the European Union and the euro-area’s evolution.