The praeternatural calm that has descended on the financial markets after Merkel-Sarkozy declared a ‘comprehensive’ bargain on Monday is unlikely to survive the Friday summit as the details sink in about what is involved, and even more about what is left out. Meanwhile back in Britain there is sound and fury from the Tory Right about a referendum as though the future of Europe and the Euro were just a convenient hook on which to pin the real action, the repatriation of powers from Brussels. Nothing suggests better how the Tory party is now marooned on the margins while the great issues of Europe are fought out without any significant British input.
This is bad politics and even worse economics. The so-called Franco-German grand bargain is pitted with flaws which will inevitably affect both our political and economic prospects, so seeking to influence the contents of the package should be an overriding British priority.
Most immediately, will Italian and Spanish bonds get a guaranteed back-stop? If so, is this not a German bail-out of the periphery (something which Merkel has sworn to avoid) and will the German coalition government let that pass? If not, or if the ECB offers only grudging support, the grand bargain falls apart.
Then there’s the crucial question of growth. It’s all very well demanding ‘more intrusive control of national budgetary policies’ in a situation of over-spending in a boom, but in the current situation of deepening slump, where is the growth to come from? The obvious answer is for Germany to increase its spending, but Merkel, once again putting German interests above those of the EU, has flatly refused.
How anyway will the budgetary controls be properly enforced? The Maastricht criteria of keeping debt to GDP within a 3% ceiling were not observed when it was inconvenient to themselves, so what’s different this time? Also the debt problems of Ireland and Spain were not the result of government over-spending, but rather of uncontrolled construction booms, yet there is nothing in the grand bargain about gaining control of asset bubbles.
And how exactly is the Greek conundrum to be fixed? Is part of the bargain to eject Greece from the Euro? If so, what ’haircut’ is being extracted from the banks and bondholders – 50% or perhaps 60%? If so, what plans are there to recapitalise the banks (particularly French banks, the most exposed) rather than letting taxpayers bear the burden of the bailout, which would unjustly dump even greater austerity on the public?