Michael Fry: Merkel wins euro battle

More than 60,000 expatriates have moved to live in the independent country and now we know that some even deposited their nest eggs in Cypriot banks, the poor fools: emergency supplies are being  to sent to the air bases to succour them.

A far greater number of Cypriots live in Britain, some already in the second or third generation, such as former Labour minister Andrew Adonis. The author Robert Winder wrote that “Haringey became the second biggest Cypriot town in the world”.

In the global economy, the city of Nicosia developed – at least until this week – into something like the City of London, with a lot more sunshine but the wine was not so good. The banks, and their behaviour, would have been familiar to anybody stepping straight off a plane from Lombard Street. It was a junior version of our very own British casino capitalism, with lower stakes but higher losses.

So, where was Britain in the great crisis that has now enveloped the formerly fortunate isle? Apart from the dispatch of a couple of banking boffins – not even carrying suitcases stuffed with sterling – it must be said we were pretty well nowhere. This has been a crisis managed in Brussels and Berlin, outmanoeuvring a Moscow that, anyway, was not keen on assuming the burdens of other people’s capitalism.

Benjamin Disraeli (the prime minister who annexed Cyprus in 1878) must be turning in his grave. So much for Britain’s imperial legacy, so much for our “influence in the world”. Disraeli also felt worried about the Russians, who wanted to establish a Mediterranean presence, but the Germans did not figure on his radar. The Russian empire has still not extended to Cyprus. The German empire has.

We should make no bones about it: this episode has been an only slightly tainted triumph for the German chancellor, Angela Merkel, and her vision of how Europe is to develop. The taint comes from the original arrangements for the euro that let its Mediterranean members act irresponsibly. At the start the Germans acquiesced, even indulged in a little irresponsibility themselves. But since Merkel got a grip, all has changed. Cyprus shows how this diminutive delinquent now accepts, squirming and squealing, that it must take her medicine. Margaret Thatcher would have put things another way: “There is no alternative.”

All this goes back to the European Union summit in Brussels on 8-9 December, 2011, and the fiscal pact then accepted by 25 of the 27 members. That came at the end of a long night when the adrenalin pumped by fear round their bloodstreams kept the European leaders awake. It was fear of the turmoil currently raging through the financial markets, threatening at any moment to bring catastrophe on several of them: financial collapse, followed by social and political crisis, even revolution – who could tell?

Except for the Brits and the Czechs, the leaders looked into the abyss and signed the pact. It gave them German financial support, but only in return for adopting German fiscal policies, with strict control of deficits and spending. To sign the pact was, of course, a rather simpler matter than implementing it, which is the process we are working our way through today. First in Greece, and now in Cyprus, it required devastating cuts of one kind and another. Normally no government would ever dream of such a course. Yet, as a matter of fact, two governments have now followed that course, and they may not be the last. What is in it for them?

The Cypriot minister of finance, Michael Sarris, put the matter at its simplest: he said his country had avoided “a disastrous exit from the eurozone”. For that we can read the financial aid available from the eurozone, €500 billion (about £425bn) altogether, of which about half is already used up. But the aid comes at a price – the price of abandoning whatever economic policy has been followed up to now and having it dictated for the future from Berlin in effect, or at best via Brussels.

Hostile commentators have not been slow to point out the consequent boom in the German economy, with growth of 3 per cent in a year with everywhere else in stagnation and recession – and with the outlook worst of all in the Mediterranean members of the euro. Yet the system has now been tested, and it has held.

Not only hostile commentators, but also the rioters in the streets have raised uncomfortable memories of Germany’s previous economic exploitation in Europe. But it has to live with such aspersions anyway, and nothing has deterred Merkel or her government (nor even the Social Democrats hoping to topple her in this year’s federal election) from setting out the bases of the German position – if a little more politely than I am about to do here.

If Europe is to have a currency that measures up to German standards of soundness and stability, then it is going to need the sort of German fiscal and economic policies that support this soundness and stability, not just in Germany but in every country. The issue was dodged in the first phase of the euro, which resulted the present crisis. Now the issue has to be faced.

Despite her impatience last week with the Cypriots, Merkel is conscious of the hardship all this entails in the interim. But she has begun to talk of the benefits that will accrue in the long term, while admitting they can only accrue in the long term, not in a few months or even a few years. What it all amounts to is that these lesser economies, by following German policies, will become German economies more or less. There was at the outset of the eurozone a delusion that it might accommodate greater variety and diversity. That delusion has been blown away by events.

Merkel often says she wants a European Germany rather than a German Europe, but I think a German Europe is what we are going to get. My question would be whether this is as undesirable as we in Britain might assume. Life in the financial centre of Frankfurt may not be as thrilling or as lucrative as life in the City of London can be (the same was once true of Nicosia). But the German model makes for a country behind boring Frankfurt that is safe, secure, stable, prosperous. It would be hard to argue that the alternative model of the British casino has, in that second respect, proved itself superior.