Bill Jamieson: Blame EU debt crisis on state of union

From the onset of the debt crises within the Eurozone, two statements have been repeatedly asserted. The first was that talk of an emergency bail-out was utterly far-fetched: no such bail-out was necessary. The second (once the request for bail-out was confirmed) was that there was no question of contagion. But still the crisis rolls on.

Behind these declarations lies a determination within the EU to defend the single currency project at any cost, even if this meant deepening the crisis within the stricken countries of the Eurozone. The path mapped out is "ever closer union". It is this assertion of geo-politics over economics that links the individual tragedies of Greece, Ireland and Portugal into a greater and more pitiful story.

In this analysis, we cannot absolve the governments of these countries for a large measure of responsibility for the desperate state their economies are in. Greece fiddled the figures it supplied to the Eurozone authorities to qualify for entry. Its statistics now have to be independently verified.

The Irish government turned a blind eye to the galloping personal and corporate debt explosion that occurred under its watch. Portugal has failed to modernise its industries and undertake restructuring to stop its economy becoming ever more uncompetitive.

But there is another factor, one that explains the greater failure within the Eurozone and the inter-connectedness of these seemingly separate, individual country resorts to emergency bail-outs. No event has more starkly revealed the self-inflicted nature of the crisis at the heart of the Eurozone than the juxtaposition within 24 hours last week of Portugal's admission of the need for financial assistance and the announcement of a rise in interest rates by the European Central Bank (ECB).

It is now painfully obvious that a "one size fits all" interest rate regime was a fatefully simplistic project - poorly thought through, blind to potential problems and wilfully insouciant to warnings that across such dissimilar economies, problems and tensions were bound to arise. Whoever thought that Germany's strict anti-inflation culture would allow for the different economic composition and dynamics of countries as unlike Germany as Portugal and Spain?

In Britain, those who questioned the single currency project and were sceptical of the benefits to the UK of membership were treated by the political and business establishment as swivel-eyed eccentrics. "Europe" was the project and "ever closer union" both the means and the end. Now, some 15 years later, the truth has emerged. There is no convergence. Last year GDP grew by a robust 3.6 per cent in Germany and by 3.1 per cent in Finland. But Greece's economy contracted by 4.5 per cent, Ireland's by 1.0 per cent, while Portugal struggles to show any growth. And the policy prescription now? Batter the poorest economies with yet more eye-watering austerity.

In the early years of the euro, low interest rates may have been appropriate for the modest level of inflation within Germany. But this was quite unsuited to the "Club Med" economies where it came to fuel an explosive property bubble - Spain in particular. In Ireland, the ECB's low interest regime proved ruinous. Now, when these countries are on their knees, the ECB has decided to begin pushing interest rates up - fine for Germany, ruinous for the poorest members.

But it is not just the fateful one-size-fits-all irate regime that has helped to bring about resort to bail-outs. Membership of the common currency means that individual countries are denied the option of devaluation. "Soft" economies find themselves trapped in a hard currency zone.

Devaluation would lower the price of their products in world markets and help stimulate demand while re-structuring was undertaken. It would also attract tourist visitors in their millions, providing a vital lifebelt for the hotel and leisure sectors. Instead, they are saddled with a currency that is grossly over-valued relative to the state of their economies.

And now, far from these disparate economies being allowed to fix their own levels of tax, quite the opposite approach is being taken. The Eurozone crises have fuelled demands for faster progress towards economic and fiscal union. European Commission officials are itching to close down Ireland's ultra-low 12.5 per cent rate of corporation tax, this to eliminate "harmful tax competition". But it is precisely this low rate that offers Ireland the best means of recovery.

German taxpayers deeply resent picking up the tab. That the UK, which opted to stay out of the Eurozone now finds itself on the line for a 4.4 billion contribution to the Portugal bail-out almost beggars belief.

The emergency bail-outs may help defuse an incipient attack on the euro. But few are confident that these crises will be resolved without a re-structuring of government bonds - the polite term for default. Banks and pension funds that in good faith lent a Eurozone member country money by the purchase of ten-year bonds, assured that they would be paid back in full could now face a cut in capital repayments to 80p or 70p in the pound.

The alternative to all of this was a free trade area and cross border deals that would have helped inter-EU trade while helping to make EU goods competitive in world markets. The maintenance of separate currencies and interest rates until these economies had moved naturally closer together would both have provided firewalls against "contagion" and enabled individual countries to devalue.

Instead we now have crisis meetings, stringent terms attached to emergency funds, governments left with no discretion, more severe pain for households, rising unemployment and slower growth. We can blame Greece, Ireland and Portugal for their individual failures. But let's not lose sight of the one factor that has made this crisis so much worse: a Europe of the Bourbons who have learnt nothing and forgotten nothing, whipping onwards towards "ever closer union". The very opposite is the result.