Bill Jamieson: Explosive end of eurozone beckons

Even if support is given, the terms of a Greek default have still to be agreed, Slovakia is set to vote “no” and the eurozone continues to face disaster if a disorderly Greek default engulfs the region and intensifies pressure for a Greek euro exit.

At least seven out of 17 eurozone countries are said to want the country’s creditors to take a bigger hit on their debt holdings. The move, favoured by Germany, is ferociously opposed by France (whose banks would face even bigger losses) and the European Central Bank. And throughout all this there is intensifying pressure for urgent fiscal union and control of deficits and debt from a central authority.

Everywhere, it seems, guns are loaded and pointed to the head. Without agreement on so many fronts, a Greek default on its €300 billion of debt threatens to turn into a disorderly rout, with panic runs on countries and vulnerable banks.

What a ghastly mess the euro currency project has turned out. Markets and voters are urged not to panic and to retain confidence in the very personnel and institutions whose misjudgements paved the way for this debacle. And here in the UK, a strong hand on the policy tiller continues to be enjoyed by the very people who consistently urged Britain’s membership of the euro.

A paper just out entitled Guilty Men names and nails the politicians, the business organisations and government institutions which campaigned for Britain’s entry. On Tuesday evening its author, Peter Oborne, addressed a crowded meeting in Edinburgh organised by Andrew Hamilton & Co. How did so much of the British establishment and its political class get the biggest call in Britain’s post-war economic history so wrong? They did so because they were unable to see (or when they did were unwilling to spell out) the consequences in loss of sovereignty that a currency union would involve.

Had we joined the euro – as much of the political class urged through the 1990s – we, like Portugal and Greece, would have been unable to confront the consequences of the 2008 financial crash. The credit boom of the 2000s would have been worse, the excesses of the property market more extreme, the subsequent crash larger and more drastic. As Oborne reminds us: “denied the advantages of a floating exchange rate and monetary freedom (control of our own interest rates was described as ‘meaningless’ by Nick Clegg in 2001), the international markets would never have funded our deficit. Interest rates would have hurtled upwards, and the ECB and the IMF would now be dictating British economic policy.”

What was arguably most shocking about Oborne’s address was not the list of names in themselves – the title was inspired by Michael Foot’s book in the summer of 1940 naming those who championed appeasement in the 1930s – or the tactics used to brand euro-sceptics as mad, bad, swivel-eyed or plain deranged, but that the same people, the same institutions and the same pro-euro club are still largely in situ, where they have not been promoted.

Nick Clegg is now Deputy Prime Minister; Christopher Huhne sits in the Cabinet; Danny Alexander, PR director of Britain in Europe, is now Chief Secretary to the Treasury; Ken Clarke is back in the Cabinet; Adair Turner and Peter Mandelson were elevated to the House of Lords. Lord Patten is now governor of the BBC Trust and Diane Coyle, an economics journalist who scoffed at euro-sceptics, his deputy. So much for impartiality. The Foreign Office personnel are largely still in place. Neither the Confederation of British Industry nor the big cheeses who warned of disaster if we stayed out have uttered a word of apology or contrition. As for the SNP, its pro-euro policy is in tatters, as befits the intellectual shambles that lay behind it.

Across the eurozone, markets and voters are being urged to heed appeals for calm from the same elite whose flawed and dishonest prescription led the way to the current situation. What possible assurance can be drawn? Now may not be the time for recrimination. But a reckoning is surely due.

What might happen now if agreement cannot be reached in time for the next G20 summit in early November? An ultimate Plan B, which some eurozone finance departments may already be working on, would comprise emergency measures to staunch a capital flight out of Greece and other debt-laden euro countries through the imposition of capital controls. Money flight is already under way and can be seen in the frantic scramble into gold, works of art and assets deemed likely to hold their value.

The ECB may have to resort to flooding the whole eurozone with liquidity to stave off a chain reaction of bank defaults and collapses. But this is the “solution” of German nightmares, reawakening memories of the Weimar Republic hyper-inflation and its catastrophic consequences.

Where now lies the UK national interest in all of this? Should it be the policy of the British government to stay well clear and allow events to take their course – up to and including a Greek exit from the euro? That would leave much of the rest of Europe in the grip of a Deutschmark euro two and a powerful fiscal union with centralised debt and deficit control in Brussels as a polite proxy for Berlin. It would, in effect, be Deutschland über alles – the opposite of what the eurozone was supposed to create.

Or should our policy be to give succour and support to measures designed to keep Greece in the euro and avoid the risk of a financial catastrophe across Europe as capital flees other debt-laden countries seen to be next in line? Which option offers the least disruption to a region that accounts for some 46 per cent of our exports?

Many might be tempted by option one, as a Greek exit would offer the better long-term prospect of stability. But that presupposes the electorates of the countries involved will accede to a loss of control over their treasuries, budgets and fiscal policies, German voters accepting others’ debt obligations and other countries more austerity. Would France agree to this? Or Italy?

Here we come to the central flaw of the shotgun measures touted as “solutions”. Where is their democratic legitimacy? Without voter endorsement, this would be constitution-building at its most fickle, born in panic and bereft of democratic credentials. Its legal basis would be barely worth the paper it is written on. Who would bank on its survival after The Growth and Stability Pact came and went, and the Lisbon Treaty came and went? More likely, as the debacle unfolds, is that many may take to the streets as the only means of expressing their democratic will.

Add that to a financial panic and the euro may well be heading to an explosive endgame – led there with help from our own Guilty Men.