Apres le deluge – the political fall-out from the eurozone debacle

by Atul Hatwal

It’s coming. Don’t say you weren’t warned. Peter Watt and Rob Marchant among others have been ringing the bell, but the gaze of Britain’s political class has been elsewhere.

Theresa May’s turn at Tory conference, as Mrs Slocombe, commanded more attention than the looming cataclysm. And now the shadow cabinet reshuffle is occupying Labour thoughts.

But as the eurozone ministers inch towards action, the shaking earth cannot be ignored for much longer.

In all of the furore around this rolling crisis, reams of newsprint have been written on the economics of the impending eurozone crash, but comparatively little on its political consequnces.

Yet it’s the political fall-out of this economic disaster which will utterly change Britain’s future.

Because after the eurozone finance ministers are finally driven to act, and the necessary billions are committed to securing eurozone, there will be a new European settlement.

The cost of Germany and France putting up the funds to save the euro will be pooled economic sovereignty in the eurozone, or more specifically a European bloc of 17 nations, where monetary and fiscal policy is run by the Franco-German alliance.

This will recast Europe and with it Britain’s economic prospects and security in three ways.

First, Britain will be vulnerable to increased eurozone protectionism, second the UK’s position as the preferred location for foreign direct investment in Europe will be threatened and third, Britain’s international defence commitments will likely need to be redrawn.

Protectionist voices have long been a central part of French economic policy.

Two years ago, the Sarkozy government received a formal slap on the wrist from the commission when one of its more hapless trade ministers admitted that Renault had shifted production of a model from Slovenia to France, in return for billions of euros of soft loans.

Although Germany has been less blatant, it also protects its own.

When General Motors looked like it was going to sell its German subsidiary, Opel, the potential suitor, Magna, anointed by the German government, committed to keeping all German plants open.

Not a guarantee that Magna was prepared to give to Britain about Opel’s Luton plant.

Expect more of the same as the eurozone picks up the pieces following the crash. Except this time, the measures won’t just be in France and Germany, but orchestrated across the eurozone 17, in the interests of the eurozone leadership.

On the most conservative of estimates, 40% of Britain’s trade is with the EU. A more protectionist bloc dictating Europe’s destiny will inevitably hurt the UK.

It might be completely against the spirit and letter of the treaty of Lisbon, but the reality is about power. The French and Germans will have it, the British won’t.

If Britain’s outsider status will hit direct trade with the eurozone, it will also impact this country’s attractiveness for foreign direct investment coming from outside Europe.

At the moment, Britain is the leading net recipient of foreign direct investment in the EU, at €16bn per year, followed by Ireland on €14bn per year.

The biggest investor is the US, but the largest growth potential is with India and China. Currently neither is anywhere near the top ten of investors into the EU. Governments across Europe are eyeing the new honeypots of potential investment.

There’s a reason David Cameron’s most significant foreign visit after being elected was his trade charabanc to India.

The question is whether the industrialists of India and China will view a UK outside of the single eurozone bloc as giving them sufficient access to Europe. Particularly when low tax Ireland is next door and Angela Merkel is shifting German trade policy to boost foreign investment.

Without full access to Europe’s markets, it hardly needs saying that Britain will be a far less appealing investment destination.

The economics are worrying, but Britain’s problems will be exacerbated by the third of the major changes – the new security structures of the eurozone bloc.

At the government’s strategic defence and security review last year, co-operation with European partners, most notably France, was put at the heart of future plans. By working with France, the UK could afford to dispense with some of its stand alone capabilities.

For example, the defence pact signed by David Cameron and Nicolas Sarkozy in November last year made provision for British jets flying from French aircraft carriers and was integral to the decision to scrap Ark Royal.

That was then.

Going forward, an economically integrated eurozone bloc will inevitably become more politically aligned when it comes to defence.

At the start of September, Italy and Spain joined France and Germany in pushing for common EU defence structures. Britain is opposed, but what will be the relevance of Britain’s voice as the eurozone forges ahead with its new policies.

A common eurozone defence policy will become a reality after economic integration, as surely as night follows day. And when that happens, the basic assumptions that underpinned the SDSR are will become hopelessly out of date.

David Cameron basked in his conference speech in the afterglow of his successful call on Libya. He should enjoy it. A common eurozone defence policy will mean interventions like that don’t happen again.

Even if the French are up for a bit of military adventurism, the German’s aren’t and the common defence policy will mean that they effectively have a veto on Britain’s defence policy.

As David Cameron and George Osborne urge the eurozone to follow through on the logic of monetary union with ever closer fiscal co-ordination, they might pause to reflect on the fuller consequences for Britain of what they are calling for.

Careful what you wish for chaps.

Atul Hatwal is associate editor of Labour Uncut.

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4 Responses to “Apres le deluge – the political fall-out from the eurozone debacle”

  1. Atul,

    The Eurozone crisis is indeed a slow motion car crash. The unresponsiveness of the key participants is matched only by the inability of this country to get round to having the serious debate about our role in Europe and the wider world that this crisis and its consequences, obviously, demands. You’ve set out some of the issues here, as I tried to do as far back as January this year on Uncut:


    I would say, however, that you are perhaps moving a little too quickly to conclusions here. You talk about the UK losing “full access to Europe’s markets” but there is no serious question of the UK coming out of the single market (outside, at least, of the Tory right). And if the terms of market access within the single market are threatened by the consolidation of the Eurozone, then this is precisely the kind of the issue that a government which is serious about protecting British interests, not just empty posturing, would now be addressing.

    I see more possibility than you perhaps do that a UK government that was committed to mature membership of the EU, while outside the Eurozone, can secure the British interests that you rightly see as threatened. The real issue is that the government is neither mature nor serious about UK membership of the EU on this basis.


  2. Nick says:

    So what’s going to be the outcome of Labour’s integrate with Europe plan where you agreed to qualified voting. After all, what you’ve described can’t be vetoed because you gave up those rights, and agreed to hand over lots of cash.

    Even Darling bound us into the bailouts.

    Well, lots of unemployment in Europe means they will come here looking for work.

    Now all we need to do is to get the unemployed here to go to Germany because they can claim more money. See the latest court cases about that.

  3. Dr Barry MacEvoy says:

    “where monetary and fiscal policy is run by the Franco-German alliance”

    Other members of the EU, which has a Constitution built along bureaucratic rather than democratic lines, have every reason to fear and resent growing German dominance.

    “Except this time, the measures won’t just be in France and Germany, but orchestrated across the eurozone 17, in the interests of the eurozone leadership.”

    We shall see. Your thesis is predicated on the notion that German voters can be hoodwinked (again) into paying for the profligacy of their poorer cousins.

    Greece, Ireland and Spain are being forced to pursue deflationary fiscal policy and have no means of promoting growth. The Eurozone as it stands has an inbuilt deflationary bias.

    Another possibility is that the US will slowly, but surely, set up tariffs and barriers and recover behind this wall. Under those circumstances, would we join a pact with the Americas or tie ourselves to the EU deflation machine?

  4. swatantra says:

    A Franco-Prussian Alliance always ends in disaster.

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