By Phillip Souta
By Ariane Poulain
George Osborne, "follow the logic of the single currency" (Photo: HM Treasury)
The EU is heading for another round of the old game of official agenda versus events as they happen. EU leaders meeting at the end of the week are set to discuss energy policy. Their officials will have been toiling away, for months, on energy policy (it is, after all, a strategic issue for Europe). But revolution in Egypt and a possible deal on the euro zone are likely to dominate EU leaders’ discussions as they meet on Friday.
Beyond issuing what will probably be quite robust statement supporting democracy in Egypt, the European Council is likely to focus on a deal to address the problems of euro zone debt over the next couple of years. It feels like longer, but the €85bn Irish bailout happened a mere two months ago. Since then, debate about what needs to be done has been frenetic. Two particularly interesting pieces of work have been released. Graham Bishop, a leading analyst in this area, has written a book, “The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011” and Willem Buiter, chief economist at Citi, co-authored a paper on the “debt of nations”. They point the way to a euro zone very different to the one we see today.
A consensus has emerged, and it appears is being accepted by Germany, that debt restructuring of troubled sovereigns like Greece, Ireland and Portugal is inevitable. This should take place in an orderly way sooner rather than later, whilst we have control over how it might happen. The maturity of Greek debt is likely to be extended to 30 years, amongst other measures.
Berlin is also likely to agree to lend more to the European Financial Stability Fund (EFSF), but on very strict conditions, including requirements for peripheral countries to raise retirement ages, align their tax policies more closely with other euro zone members and enact balanced budget amendments. This is what ‘euro zone economic governance’ will look like.
Graham Bishop argues that we are likely to witness the emergence of a “political entity” which will be “characterised by a centralised funding of public debts that result from a collective oversight of many detailed aspects of economic life”. It looks like something along these lines is already happening.
David Cameron, the prime minister, has said that the euro zone needs to do what ever is necessary to ensure stability, and George Osborne has recently called on the euro zone to “follow the logic of the single currency” in the Financial Times. The euro zone is likely to look very different in five years, and British policy makers need to start thinking now about how the UK will exert influence on a bloc that is becoming far more integrated.