Monday, August 6, 2012
We have to prepare for the coming European storm
Just as the French president, François Hollande, may regret this week’s jibe at the early British Olympic medal tally, so the tide of events in Europe may also turn Britain’s way. The current prognosis is bleak. Greece remains tens of billions of euros short of staying financially afloat, Spain is back in the danger zone, and Hollande’s promises of higher income and business taxes combined with earlier retirement risk digging France further into a fiscal hole. Dutch elections next month are fuelling anti-bail-out rhetoric, while 200 German economists have warned Chancellor Merkel against “socialisation” of bad European debts.
Economic and political reality points to the restructuring or fragmentation of the eurozone. For Britain, either outcome means economic risk, coupled with political opportunity. How should we prepare?
Amid a European slump, the good news is rising opportunities in Asia, Latin America and the rest of the world. Last month, UK trade in goods there eclipsed our European exports for the first time since the 1970s. The Prime Minister has made global trade a foreign-policy priority, and this should be bolstered by domestic reform to help shield business from the looming eurozone meltdown. We can’t dictate eurozone policy, but we can find savings to cut corporation and payroll taxes further, giving our firms the best chance of swimming against the perilous European tide. Likewise, slashing the red tape facing small businesses, and striking out bogus employment tribunal claims, would cut business costs and boost job creation. This is the moment for a major supply-side shot in the arm.
The greatest risk to the UK is the domino effect if any eurozone country exits or defaults on its debts. This year, British banking liabilities reached 448 per cent of gross domestic product. The combined exposure of UK banks to Ireland, Spain, Italy, Portugal and Greece amounts to £190 billion – more than the comparable exposure of German banks. The taxpayer can’t afford another round of bail-outs and, after the Libor scandal, won’t stomach one. That makes banking reform a more urgent priority. Ring-fencing retail banks from investment arms, higher capital ratios, living wills and bail-in provisions may squeeze credit in the short term, but banking reforms are a vital buffer against potential eurozone liabilities.
Given these dangers, it would be short-sighted to derive any satisfaction from the eurozone crisis. However, the European kaleidoscope is in flux, and the inevitable changes to its political architecture will present a historic opportunity to renegotiate our relationship with Europe – and put it on a sounder economic and democratic footing. The Foreign Secretary’s audit of the EU will provide a valuable cost-benefit analysis, while plans for repatriation of powers are already being considered. Options include social and employment policy, fisheries, structural funds to poorer regions, justice and home affairs.