Ahead of the Sarkozy/Merkel summit tomorrow, France and Germany have ‘completely ruled out’ the idea of a Eurobond to calm the nerves of the markets – which remain understandably worried about the lack of enough collective collateral behind EU debtor nations. Among credit and Hedge Fund opinion leaders, France has now clearly joined the list of dodgy debtors. So, looking at the potential consequences of the French losing their Triple A status, a eurobond should be the obvious answer. But the Germans especially believe fiscal Union must come first.
In a nutshell, the Eurobond would be a game changer: by mutualising the debt, eurozone members would become severally rather than separately responsible for EU debt. This would have an immediately calming effect on the markets; but from Berlin’s viewpoint (and it’s hard to blame them) this would in practice mean them picking up most of the tab…while the debtor motivation to reform would be vastly reduced. That is, Fritz in der Strasse paying out in all directions while getting nothing in return. Merkel is therefore making Fiscal Union the stick towards then getting the carrot of several responsibility. Very neat.
However, it would be naive to suggest that European idealism is the only thing driving the Germans. The goal remains what it has been since the end of 2008: a Europe run financially by the Germans, and administered by the French. While we should perhaps be thankful that it isn’t the other way round, the achievement of such a goal would be disastrous for Britain.
But there’s a large and noisy fly gallumphing around in the ointment – French debt. For some considerable time now, The Slog has been pointing up how the Gallic deficit is out of control (7.1% of gdp at the last count) and yet there are no signs of any slowdown in Government expenditure. Suddenly awake to the size of the problem, Sarkozy last week ‘demanded’ that it be reduced. The lady who caused it is, of course, long gone – to the IMF. We can thus look forward to Christine Lagarde breezing in to France in the near future to condemn her own cock-up.
But that’s water under the bridge: the problem is that, the river being dry, France is a major guarantor of the EFSF – the oddly shaped, ever-mutating ‘mechanism’ that Brussels invented rather than have a eurobond. Effectively, the EFSF is rapidly turning into a joke fund: it could bail out an Ireland or a Portugal (just) but Sarko made it clear last month that wouldn’t be allowed anyway. It’s sole purpose is thus as a bailout mechanism for other members in danger – none of whom it could afford to bail out. You really couldn’t make this up.
I’ve asked umpteen sources (including my Brussels mole) why exactly the Irish and Portuguese can’t avail themselves of the EFSF. There is no rationale at all for this exclusion zone really…other than the truth: that the Franco-German axis is keen not to prolong the agony by bailing out minnows who, as far as they’re concerned, are of no import. But the bottom line remains lose-lose for Angela Merkel: she pays the bill if there’s a eurobond, and still pays the bill if France is targeted following a downgrade. I’m sure that, like me, you can imagine all the potential for pressure and corruption in that mix. Putting that aside, the only win for Germany will be getting to run the show ever afterwards. The French get to survive, and carry on as before. This is always the French strategy.
The two Georges Osborne and Soros are very keen on there being a eurobond – and the British Chancellor in particular is bigging up his role as a key power broker in all this. This is pompous bollocks, a fact that must be obvious even to those who are mainly asleep these days in the UK. Britain has close to zero influence in Europe today – and after the Franco-German lockout, that influence will be like our trade balance with the EU – in enormous deficit. The Sarko-Merkel double-act aren’t remotely interested in what Britain has to say.
In this context, I’d like to explain what the William Hague/Foreign Office strategy is, going forward. Unfortunately, I can’t because there isn’t one, beyond the Stepford Wife response of “The EU is an imponderable to whose destiny we are inextricably linked”. Nobody is interrogating this nonsense, because other more important issues keep on intervening – for example, the senior Ministers snorting coke with Elizabeth Murdoch, the Royal Wedding, American insolvency, riots – and a flatlining UK economy alongside cuts that don’t seem to be making any difference to the PSBR (public expenditure).
People sometimes ask me how we might look back on the Coalition’s formation last May, and its record to date. I think the judgement will be almost universally harsh, but entirely fair. It will be that the starting point was to cut the public deficit (which it failed to do), improve law and order (failed), reshape Britain’s defence safely (failed), reform the NHS (failed), reform welfare (done, but unfairly to the old), reform education (in progress, not looking good), and stop the issue of Europe splitting the Tory Party and/or the Coalition (done, at incalculable cost to Britain’s interests).
What the Government gave no thought to in the first place was police officers losing the plot, restructuring the economy, a real (as opposed to daft) foreign policy, the threat of Islamism near to the EU, and diversification of foreign trading policy.
The bottom line is that both members of the Coalition have put Party and career before country – rather like New Labour before them. And until that changes, the rest of it is pretty academic, really.