Alf Young: Eurozone door may be closed to us

THE deal thrashed out at the euro summit in the wee small hours of Thursday morning has bought the troubled 17-member zone precious time. It is not, however, anything like an end to this traumatic story. Initially equity markets around the world greeted the agreement with a huge sigh of relief. Yet yesterday, Italy was still having to pay more in its latest auction of ten-year bonds than at any time since it adopted the single currency.

Will China or other creditor nations subscribe to the leveraged-up trillion-euro European Financial Stability Facility? Will the 50 per cent haircuts on holdings of Greek debt and more stringent capital requirements on European banks lead to a further squeeze on lending across the continent? Where is the new growth coming from to balance the austerity programmes already being imposed on deficit countries in the zone’s southern and western flanks? On these and countless other questions about this latest fix there are no definitive answers.

One thing does seem clear from Thursday morning’s summit statement. The monetary union we call the “eurozone”, as currently constituted, is headed for much closer fiscal integration, too. Paragraph 25 talks of making “further progress in integrating economic and fiscal policies by reinforcing coordination, surveillance and discipline”. At paragraph 34 it promises “we will strengthen the economic union to make it commensurate with the monetary union”.

In future, national budgets “should be based on independent growth forecasts”. And major fiscal or economic reforms at member state level with potential spill-over effects should be subject to assessment of their impact on the euro area as a whole. There will be an extended eurozone bureaucracy to propel and police this process of closer integration. In adversity, the long talked-about two-speed Europe, with Germany firmly in charge of the inner ring, finally appears to be taking shape.

The coalition at Westminster is struggling to decide what it thinks of these developments. Ever since the previous abortive euro summit in July, George Osborne has been urging the 17 zone members to move to closer fiscal union.

The Chancellor did so out of entirely pragmatic self-interest. The debt crisis across the North Sea has helped scupper early hopes of recovery in austerity Britain. If only full fiscal union can deliver stability to the eurozone, so be it. Just don’t ask us to help fund any bail-outs.

But a more-integrated and revitalised eurozone within the wider EU poses huge challenges for the UK. Within hours of that Brussels summit deal, David Cameron was telling journalists accompanying him to a Commonwealth summit in Western Australia that countries within the eurozone are already caucusing and colluding to do us down. He cited financial services, where the City of London is, he alleges, “under constant attack from Brussels directives”.

The Prime Minister promises to defend this “key national interest” against all-comers. But he does so at a time when he is under attack from his own backbenches over whether the UK should be thinking of getting out of the EU altogether. A majority of the new intake of Tory MPs voted against him on Monday evening. Some on the lowest rungs of the ministerial ladder chose principle over career advancement to join the rebellion.

This harder-edged euroscepticism within Tory ranks isn’t going to go away. Paired with the emergence of a two-speed Europe, it could yet define the Cameron years. On this part of these islands, it could help define the Salmond years, too. Since the SNP conference last weekend, the big talking point in Scottish politics has been about what questions will be asked in the promised referendum on independence and how its outcome will be settled.

On Thursday the First Minister had to go back to the Holyrood chamber to apologise to MSPs for misrepresenting the views of an academic, Professor Matt Qvortrup, on whether a two-option referendum on independence and so-called “devo-max” would be, as Mr Salmond had claimed, “fair, reasonable and clear”. It transpired that that judgement was not the professor’s – it came from the First Minister’s own senior special adviser.

But that row is as nothing to the blizzard of confusion blowing in from mainland Europe this week. The SNP used to argue that Scotland, once independent, would seek early entry to the eurozone, subject to a referendum of the Scottish people. With the euro project now in acute crisis, that script has had to be amended. An independent Scotland, we are now told, will keep the pound sterling until “the time is right” to seek membership of the eurozone.

Let’s assume Thursday’s fix eventually delivers and the eurozone survives. It will only do so as a much more integrated fiscal and monetary union. With Brussels – or rather Berlin – in the driving seat, eurozone member states will be expected to allow their tax and spending plans to converge. Fiscal discipline will be imposed. Attempts to win competitive advantage, through bargain basement corporate tax rates for instance, will be rigorously policed. Only then would transfers of wealth from the richer to the poorer members of the bloc be able to be legitimised in the eyes of all the zone’s citizens.

Is this the kind of independence dividend Alex Salmond and his colleagues are trying to sell to the Scottish people? The SNP government wants power over corporation tax so it can win more inward investment and undercut neighbouring states with higher rates. John Swinney tells us that, with control over North Sea oil and gas revenues, Scotland would be the sixth-richest nation on the planet. How does joining the kind of eurozone emerging from 11 hours of talks in the middle of Thursday night advance either the cause of business tax competition or investing all those oil riches on ourselves?

Of course the euro fix could fail. French president Nicolas Sarkozy thinks Greece should never have been allowed in in the first place. If the project begins to collapse and indebted member states either withdraw or are thrown out, what chance the eurozone will want any new members anytime soon? What chance the Scottish people would even sanction an application to join such a faltering monetary union?

That would leave an independent Scotland a member – in monetary terms – of the constitutional union it had been party to for the previous three centuries. We would continue to take our lead on interest rates from the Bank of England. But we would no longer have any political leverage on how the rest of the United Kingdom decides its future relations with the European Union as a whole. Were those MPs seated behind David Cameron to have their way, the exit door could be beckoning. Where that would leave an independent Scotland is even less clear than what questions we are eventually to be asked in that independence referendum.