Guest blog from Lord Harrison:
The European Union has money troubles. The banking crisis in 2008 was a global disaster whose impact on the EU is still being felt. Just days ago Portugal’s government fell when its plans to cut Portugal’s enormous budget deficit were rejected. It is now paying over 8% interest (that’s compared to under 5% for the UK – an enormous difference when a country’s public debt is approaching 90% of its GDP) on its public borrowing.
I chaired a Select Committee inquiry that looked into the EU’s economic problems. We found that the euro area is paying the price for creating a half-way house monetary union in which monetary policy (such as interest rates) is set by a single authority, the European Central Bank, while Member States are allowed to set their spending and tax plans independently. At the same time, some countries such as Germany have become far more competitive than others such as Greece. These differences are cracking the euro area apart.
What’s the answer? Well, some people think there isn’t one – that the euro area is doomed to fail. Some have suggested that competitive countries such as Germany and the Netherlands might leave and start their own monetary union leaving behind uncompetitive and fiscally irresponsible countries such as Greece and Portugal.
I don’t believe that will happen, but something needs to be done – and soon. The European Commission has made suggestions about how to coordinate economic policy and defuse differences in competitiveness between countries such as Germany and Greece.
My Committee looked at these plans in detail, and the good news is that we think they’re a step in the right direction. If the EU sticks to the rules and makes them work they should make a real difference.
The bad news is we’re not sure that this is what will happen.
It hasn’t happened in the past. In 2002-3, France and Germany simply changed the rules to avoid being punished for breaching the EU’s Stability and Growth Pact.
That can’t happen anymore.
If the euro area is going to survive and grow, its leaders will have to enforce the rules properly. If not the euro may limp through the current crisis, and perhaps even the next one, but eventually it won’t be able to go on in its current form. That would be a disaster for countries in the euro area – and it would be bad news for the UK whose own economic health depends so much on countries in the euro area.
I’ll be keeping my fingers crossed that politicians in the euro area don’t disappoint.
Lord Harrison is Chairman of the Lords EU Economic and Financial Affairs and International Trade Sub-Committee. Its report on the future of economic governance in the EU has just been published, and can be found at: http://www.parliament.uk/hleua