Tag: EU

The Euro end game

It’s been a tough year for Europhiles, especially those, like me, who have always supported the single currency and thought Britain should have been part of it.  Most of them have been very quiet, and no wonder.  Whatever one says quickly has the feel of being out of touch and in denial.  And now this week the Economist asks in a leading article  Is this really the end? that has been tweeted over 1,200 times and picked up over 500 comments.  In today’s FT Wolfgang Munchau article is headlined: The Eurozone really has only days to avoid collapse (paywall).  Is now the moment to finally let go, and admit that the whole ill-fated enterprise is doomed?

There is no doubting the seriousness of the current crisis.  While most of the headlines have been about sovereign debt (especially Italy’s) what is actually threatening collapse is the banking system.  It seems to be imploding in a manner reminiscent of those awful days of 2007 and 2008.  The Germans’ strategy of managing the crisis on the basis of “just enough, just in time” seems to be heading for its inevitable denouement.  Unless some of their Noes turn to Yeses soon there could be a terrible unravelling.

The most urgent issue is to allow the European Central Bank (ECB) to open the floodgates to support both banks and governments suffering a liquidity crisis.  “Printing money” as this process is often referred to, seems the least bad way to buy time.  Two other critical elements, both mentioned by Mr Munchau, are the development of “Eurobonds” – government borrowing subject to joint guarantee by the member states – and fiscal integration – a proper Euro level Finance Ministry with real powers to shape governments’ fiscal policy in the zone.  Most commentators seem to be convinced that some sort of steps in both these directions will be necessary to save the Euro.

I have a lingering scepticism about these last two.  I thought that the original idea of allowing governments to default, and so allowing the bond markets to act as discipline, had merit.  The problem was that the ECB and other leaders never really tried it before the crisis, allowing investors to think that all Euro government debt was secure.

Still the short term crisis is plainly soluble, and most people will bet that the Germans will give the ECB enough room to avert collapse.  But that leaves the zone with a big medium term problem, and two long term ones.  The medium term one is what to do about the southern members whose economies are struggling: Spain, Portugal and Greece especially, with Italy lurching in that direction.  The stock answer, which is to enact is reforms such that their economies become more competitive, seems to involve such a degree of dislocation that we must ask if it is sustainable.  This treatment is not dissimilar to that meted out by Mrs Thatcher to Britain in the 1980s (an uncompetitive currency was part of the policy mix here, deliberately or not), for which she is still widely loathed.  And she was elected (though “democratically” is a stretch given Britain’s electoral system).  How will people react to unelected outsiders imposing such treatment?  Better than Britons would, no doubt, since there is so little confidence in home grown politicians , but it’s still asking a lot.

And that leads to one of the two long-term problems: the democratic deficit.   A lot of sovereignty is about to be shifted to central institutions, and it won’t be possible to give electors much say.  The second long term issue is dealing with the root cause of the crisis in the first place, which is how to deal with imbalances of trade that develop within the Euro economy.  Germany simply cannot have a constant trade surplus with the rest of the zone without this kind of mess occurring at regular intervals.  But there is no sense that German politicians, still less their public, have the faintest grasp of this.  For them the crisis is the fault of weak and profligate governments elsewhere.

So if the Euro survives the current crisis, there is every prospect of another one down the road, either political (one or more countries wanting to leave the Euro and/or the Union) or financial (say an outbreak of inflation).

My hope earlier in the crisis was that it was part of a learning curve for the Euro governments.  As they experienced the crisis institutions would be changed and expectations made more realistic, such that zone could get back to something like its original vision.  I am afraid that there is a lot more learning to do.

The Norwegian Exception

Vigeland sculpture, Oslo

Last weekend my wife and I went to Oslo, to visit my brother and his partner (who is a local).  It wasn’t my first visit to Norway, but the first time was on a tour.  Norway comes up periodically in conversation here in the UK, especially as a country that does well outside the EU.  What to make of it?

The first thing to say is that Norway is a spectacularly beautiful place.  The weather was mostly dull when we were there, but we had sunshine on Saturday, rendering beautiful views of a totally calm Oslo Fjord.  The architecture is mostly pleasing, if unspectacular – with some lovely 19th and early 20th century houses.  We caught the short season of autumn colours perfectly.  And of course the mountains and fjords are justly famous.

And the second is that, unsurprisingly, it has a very Scandinavian feel, from the language to the architecture and the people on the orderly and tidy streets.  But there’s a difference, with Sweden and Denmark anyway.  Norway has only recently emerged into what we would recognise as civilisation, that is a city based culture, with the exception of Bergen, perhaps.  The medieval, renaissance and the baroque eras have left the country almost untouched, notwithstanding spectacular advance in the 19th century, in Oslo at least.  Push back into history and you are into the land of trolls in no time.  Of course what we call the Dark Ages was their Viking era, and that too was spectacular, though it has left relatively few traces.

Gol Stave Church at Folk Museum

The Norwegians appear to have had some struggle in coming to terms with this advance, with an excessive value placed on modernity.  The most spectacular old monuments, undoubtedly world-class, were the ancient wooden stave churches.  And yet many of these were torn down in the modern era as being old and useless reminders of a time they would rather forget.  This has changed, with many wonderful wooden buildings preserved in the open air Folk Museum, including one of the stave churches.  But family memories of the hard, poor rural life are widespread and fresh, especially compared to the long urbanised Britain.

All this has given Norway a clear national identity, albeit a more complex one that outsiders are generally aware of (is this not always so?).  In modern times the country suffered further trauma under Nazi occupation in the War.  And then came the oil.  But the oil wealth found a well educated and cohesive society with strong, honest government.  It has been socialised in a way that few, if any, other countries have managed, to make Norway one of the world’s wealthiest nations, while also remaining one its happiest.

Wealth comes with its problems.  The exchange rate is high, and labour in short supply.  Immigrants have been drawn in.  Swedes are working everywhere in Oslo, and black and brown faces are common.  High standards of political correctness (to give good manners their modern name) are maintained (plenty of brown faces in public ads and so on), but such changes naturally bring their own tensions.

So why does Norway stand apart from the European Union, unlike their Nordic neighbours?  Well it’s not because they dislike regulations.  Norway, I am told, is a much more regulated society than Britain.  Perhaps that’s one reason that they have been given a generous deal under the EEA – i.e. full access to EU markets in exchange for partial compliance with EU regulations and some contributions to EU funds – which many British Eurosceptics somewhat unrealistically think would be available to the UK if it left the Union.  While this deal exempts them from many aspects of EU regulation (notably competition laws), they still find that much of their law is based on EU directives over which they have no say.

No doubt Norwegians fear that, in the EU, the other members would eye up their wealth and seek to extract generous contributions.  If they think that, they are almost certainly right.  Norway is not ungenerous with its wealth, but no doubt prefers to contribute on its own terms.

The truth is surely that Norway is not in the EU because it does not need to be.  Oil provides the country with all the exports it needs.  It can negotiate other benefits.  It carries no weight in the development of EU law, but how much weight would it carry if it was in?  Norway is governed by a cosy elite that does not want to dilute its power.  The population seems basically content with their elite.  Not many lessons for the British there.

Solving the Euro crisis means a stronger ECB

I do not regret paying my access fee to the FT website.  This morning there are two excellent articles on the Euro crisis from the two regular Wednesday morning columnists: Martin Wolf and John Kay.  It has helped clarify the way ahead for me.

Mr Kay comes in at high level to give an overview of the crisis.  It is not comfortable reading for supporters of the Euro project like me, but, as usual for this author, pretty much spot on.  The main problem is not that the currency area lacks appropriate institutions at the centre, but that local institutions in many member countries are not strong enough to cope with the pressures of being in the single currency.

The eurozone’s difficulties result not from the absence of strong central institutions but the absence of strong local institutions. A miscellany of domestic problems – rampant property speculation in Ireland and Spain, hopeless governance in Italy, lack of economic development in Portugal, Greece’s bloated public sector – have become problems for the EU as a whole. The solutions to these problems in every case can only be found locally.

So the answer will not come from strengthening the EU’s central institutions.  This goes back to the original design of the Euro: the whole idea was to put pressure on governments to reform themselves, by denying them the easy escape route of devaluation. Unfortunately the EU’s politicians forgot this in the first decade of the Euro, so no real pressure was brought to bear, making the crisis infinitely worse once it hit.

This article does not say much about how to go forward from here, beyond suggesting that grandstanding at summits like today’s may be part of the problem rather than the solution.  Mr Wolf’s looks at one aspect of how to manage the crisis itself.  This in turn in is based on a paper by Paul de Grauwe of Leuven university, who literally wrote the textbook on the Euro (I know, since I read it as part of my degree course).

Professor de Grauwe points out an interesting fact: the bond markets are much harder on the Euro zone fringe economies of Italy and Spain than they are on the UK, even though the underlying positions of the countries is not all that different.  The difference is that the UK markets are stabilised by having the Bank of England as a lender of last resort which is able to deal with liquidity crises (i.e. an inability to raise cash for temporary reasons rather than underlying insolvency).  The European Central Bank does not do this, or not enough, for the Eurozone economies.  Mr Wolf, who structures his article as an open letter to the new ECB president Mario Draghi, argues passionately that it should.  This would stop the contagion spreading from the insolvent economies of Greece and maybe Ireland to solvent but challenged economies like Italy, Spain and indeed France.

This must be right.  The Germans, who are the main sceptics, must be persuaded – and convinced that such interventions would only apply to liquidity crises and not solvency problems, and that the ECB has the integrity and independence to tell the difference, in the way that politicians never do.

Giving the ECB a wider and stronger remit will be a big help.  This should extend to supervision of the European financial system (preferably for the whole EU and not just the Eurozone).  This will help deal with one of the biggest problems for modern central banking – that of coping with spillover effects, as described in this thought-provoking paper from Claudio Bono of the BIS (warning: contains mild economic jargon, such as “partial-equilibrium”).

So a reconfigured ECB will help the Euro through the crisis and prevent self-fulfilling prophesies of doom in financial markets having to be solved in grandstand summits.  That still leaves the longer term problem of how the less competitive Southern European economies can have a long term future in the zone.  But then again, I think they would have just as challenging a future outside the zone – even if it were possible to devise an orderly exit mechanism for them.

 

The tricky politics of an EU referendum

Last night’s drama in the UK parliament over the call for an EU referendum is over.  Will it all blow over?  For now, maybe, but the issue will come back.  Wise politicians will be thinking ahead about what they should do when it does. For David Cameron, it looks like trouble.

The starting point is that there is mounting pressure for a referendum on the European Union in the UK.  Why should this be?  We operate a representative democracy, after all, and the issues are complex – not the sort of thing that referendums are supposed to be particularly good at sorting out.  But there is a substantial body of public opinion who believe the country’s membership of the Union is an outrage to our constitution.  This has always been so – but while in the 1970s these were overwhelmingly older people, scepticism is now more widespread.  The Tory Eurosceptics who entered Parliament last year are a younger breed, and to many a focus on Europe has reached obsessive proportions.

This scepticism has been fanned by the press.  Why?  Clearly newspaper proprietors don’t like the EU for their own reasons – but surely it goes deeper than this.  The EU is an easy target for our frustrations, in much the same way as ethnic or religious minorities used to be.  They don’t answer back.  Exploiting this is one way to sell newspapers.  Add to this the growing frustration with the Union right across Europe, and the steady fading of European idealism, and you have a ready explanation for rising scepticism.

It all looks very different, of course, once you are responsible for running the government.  Here the thought of operating outside the EU, or even taking a detached stand within it, looks plain silly.  And so you have a tension between the governing elite and a substantial body of public opinion.  A referendum campaign seems to be one of the best ways of bringing this to a head.  A campaign in the right circumstances has the support of many Europhiles too.  They are sick of their steady retreat in face of the Eurosceptic onslaught, and long to turn and fight, even at seemingly hopeless odds – like the British soldiers retreating to the Marne in 1914.

So far so good.  Now it gets complicated.  Europhiles want a straight in-out referendum.  This would force pragmatic sceptics, including large parts of the Tory hierarchy, into the “in” camp.  To them, this is the basic question of principle anyway.  Trying to have referendums on carefully negotiated treaty changes is a misuse of this method of democracy.  Extreme Eurosceptics would be happy enough to go along with this, convinced as they are that the country would be much better off out, and that the public would rally to their cause.

But pragmatic Eurosceptics don’t want this, for exactly the reason that the Europhiles want it.  What they aim for is a changed relationship between the UK and the EU – and that a pre-emptive referendum on an in-out question would weaken their negotiating position.  For them the main job of a referendum is to put a spanner in the works of the EU itself, by blocking any changes they dislike to the treaties.  Pretty much everybody accepts that a UK referendum would have rejected any of the previous treaties (Maastricht or Lisbon in particular – though the former might have been quite close, in my view).  The idea of a three way referendum, with a renegotiation option, in yesterday’s motion was an attempt to win over these pragmatic sceptics.  But it didn’t really stand up to close examination – one of the bigger reasons why the motion fell so heavily.

But it is possible to see a the outlines of a deal coming out of this.  First negotiate a new deal with the EU, then have an in/out referendum on its outcome.  Sounds simple enough, but the renegotiation idea is fraught.  Is it a new deal for Britain, or a more general rebalancing of Europe?  I think the government has in mind the latter, drawing in allies from across northern and eastern Europe.  The idea would be to use the Eurozone crisis as leverage.  If the Union’s constitution needs to be changed to make the Euro work, then this can be made conditional on other changes.

The trouble is that it is difficult to understand what the shape of this deal might look like.  To the the EU core members (Germany, France, Italy and so on) the EU constitution is carefully balanced, with a free trade area on the one hand, and regulation to prevent a disorderly race to the bottom on the other.  Besides a treaty change will have to go through referendums right across the Union – a nightmare as European politicians learn that a rejection of a treaty can earn them extra goodies.

And so the risk is that the government returns from the “renegotiation” without very much to show for it, and then be forced to hold a referendum on it.  The prospects for a Britain-only renegotiation are even bleaker, as our bargaining position is so weak.  This will place the pragmatic sceptics, like David Cameron and William Hague, in an impossible position.  Yesterday’s debate has reduced their room for manoeuvre, as the Economist’s Bagehot column points out.  They will have to produce something relatively soon.

One of Mr Cameron’s main achievements has been to de-toxify the issue of Europe for the Tories.  But the issue could yet return to destroy him, his government and his party.  It will be the greatest test of his leadership.

 

Five Eurosceptic fallacies

I caught a bit of last night’s Radio 4 Analysis programme driving home from a meeting, on Euroscepticism in  Britain.  One speaker (I didn’t catch who) suggested that the case for Britain being in the EU was mainly economic – that we could put up with a bit of lost sovereignty because we were being hitched to an economic powerhouse that would do our economy good.  This he said, was now clearly nonsense.  In evidence he said that the EU used to be 26% on the world economy and now it is 18% (I may have misremembered the numbers).  “We are being chained to a corpse.”  I was apoplectic.  But it is typical of the drivel that is being spread across our media.  It’s worrying that so few people bother to argue back.

Let’s clear the decks with some points of general agreement.  The Euro is in crisis, and this crisis could lead to an economic disaster.  This in some measure results from severe mismanagement of the currency by the EU’s leaders, aided by the European Central Bank (ECB).  The stock of European institutions is low in public eyes, not just in Britain, but across most of the continent.  This has something to do with a democratic deficit – with the institutions wielding power with little apparent democratic consent.

But it is possible to accept all this, and to think that the EU, and even the Euro, is fundamentally a good idea, and that Britain would be mad to consider leaving it.  The country may even be forced to join the Euro – though that event is surely a long way off.

Let me try to help the feeble defenders of British membership by elaborating four critical fallacies behind the Eurosceptics’ arguments, and fifth that is a bit more arguable.

First fallacy: there is such a thing as “just” a free trade area.  It often said the the country joined something that was just a free trade area, but this has morphed into something else.  But free trade across borders is a complicated business – and not just a matter of border controls and tariffs.  Its implications quickly reach into vast swathes of ordinary life.  Most of the US Federal government’s powers rest on its right to regulate interstate trade.  And the unhappy experience of the North American Free Trade Area (NAFTA) shows how politics gradually undermines transnational free trade projects that do not involve a significant pooling of sovereignty.

Fallacy no 2.  Britain is being ripped off by the rest of Europe because we have a trade deficit with them. This leads to the idea that outside Europe we would get a sweetheart deal (like Norway of Switzerland, or at least in popular myth) because they need us more than we need them.  But the British trade deficit arises from the chronic mismanagement of the British economy, which led to a prolonged period (since the late 1990s) where the Pound was too high for many of our export businesses to be competitive.  This uncompetitive exchange rate has now been reversed, and so our trade balance with the EU will correct.  And as for bargaining power, there is a fatal flaw to this line of reasoning: the relative size of the UK against the rest of the EU.  EU trade is a major part of our economy; UK trade is not a major part of the EU economy.

Fallacy no. 3.  Being outside the EU means that we don’t have to comply with EU regulations.  This is largely true of the labour market, it has to be said.  But far from true of product markets – since we need to sell our products in the EU.  Also, if foreign manufacturers are forced to comply with separate British product standards before they can export here, they will either charge us extra or not bother.  If you are in any doubt about this ask a Norwegian or Swiss about how much better life is without the burden of EU regulations.  You will get a lecture about how they have to comply anyway, without any input into how they are made.  This is of particular relevance to one of the areas where Britain has a competitive edge: financial services.  Our representatives in Europe are forever batting back ideas for new rules that would disadvantage the City; I wonder what would happen if they weren’t there any more?

Fallacy no 4.  We would save money by leaving the EU, because we are a net contributor to the EU budget.  This is an illusion.  We may pay less in net contributions, but we would pay more in tariffs  And if we charge more tariffs in return?  Any economist will tell you that this is a road to nowhere.  Our net contribution is a small price to pay for access, and, besides, some of it helps to develop new markets in the Union’s less developed countries.

Fallacy no 5.  Britain would have been worse off by joining the Euro at the start.  This contention is unprovable, as is the opposite: that we would have been better off in it.  The Euro, of course was badly managed.  But so was the Pound.  While the Euro was going on, the pound shot up in value, destroying many of our exporters and creating a big trade deficit.  Borrowing ran amok, as did, to a lesser degree, government expenditure.  When it all blew up, it left the British economy in a terrible state, one that it will take many years to recover from.  Won’t the devaluation of the pound help our recovery?  Yes, but it should never have got that high in the first place.  What would have happened if we were inside the Euro?  Almost certainly no better – except that our problems would have been more transparent, so we might have started to fix them a more quickly.  My point: an ugly mess either way.  Look at our Eurozone colleagues and the British economic performance does not look stellar.  A floating currency is no free lunch.

Of course there is a lot wrong with Europe and the Eurozone.  That does not mean that this country is better off outside.  The best case for a referendum in this country is that it would force supporters of the Union to make the case more forcefully, and expose the fraud behind the anti-EU case.  But on their performance to date, who can be confident of that?

Understanding the Euro Crisis

My favourite contemporary economist is UCL’s Professor Wendy Carlin.  She was my tutor at UCL, and led my second year macroeconomics course, and a third year course on European institutions.  Her patient, dispassionate analysis is worth so much more than all that shoot-from-the-hip banging on by celebrity economists, Nobel Laureates and all.  It was her analysis, well before the current crisis broke, that demonstrated to me that the last government’s economic “miracle” was unsustainable (the combination of an appreciating real exchange rate and a trade deficit being the giveaways).  She also helped me understand the Eurozone, and pointed out the trouble ahead, again well before it happened, arising from diverging real exchange rates within the currency bloc – in other words Germany was becoming more competitive while Italy, Spain and others were becoming less so.

So I was delighted to read her summary of the Eurozone crisis – 10 questions about the Eurozone crisis and whether it can be solved.  The is a wonderfully clear summary of the whole situation, written in early September.  Her central point is that the zone’s banking system is at the heart of the crisis, and tackling the banks will the heart of any solution.  European politicians have been trying to avoid this, no doubt because it shows that Northern European countries have played an important role in creating the crisis.  However, not least thanks to the new IMF chief Christine Lagarde, this is changing.

Of course Professor Carlin cannot point to an easy escape.  She points to two alternatives paths, other than the breakup of the zone:

Scenario #1 – a more decisive approach based on current policy (bailouts)
Policy-makers need

  • the existing bailout schemes to be successful and to be seen to be working in the next year
  • to keep Italy out of the bailout regime
  • to develop a replacement for the high moral hazard regime for banks and for governments but to do this in a way that does not undermine the bailout regime in the meantime.

Scenario #2 – large-scale restructuring of bank and government debts (defaults)
Policy-makers need

  • to move decisively now to end the high moral hazard regime by accepting that default on bank and government bonds on a much larger scale than envisaged in Scenario #1 is necessary
  • to engage in restructuring sovereign debt and bank debt by, for example, forcing bond-holders to swap existing short-term bonds for long-term
European politicians are attempting the first path, but the problem is contained in Professor Carlin’s third bullet: devising a financial scheme that avoids moral hazard by banks and sovereign states – this reckless behaviour in the belief that it will be underwritten by everybody else.  The favoured answer of many is a “Eurobond” – i.e. government borrowing underwritten collectively, combined with a toothier version of the failed Stability & Growth pact.  But this decisive step towards a more federal Europe runs well beyond any democratic mandate.  The German Chancellor, Angela Merkel, is rightly suspicious.
Which leaves the second scenario, which is favoured by American commentators, based on their experiences of Latin American debt crises.  This is surely much more convincing, and I hope that the IMF will use its influence to push down this path.  Bank regulation clearly needs to change, but beyond that it doesn’t need a more federal Europe.  We can use bond spreads to act as a break on government profligacy – which is how the Eurozone should have been run from the start.
A final point worth making from Professor Carlin’s analysis is that dropping out of the Eurozone wouldn’t really help Greece or any other country that much.  They would still have to run a government surplus, and so still have to go through a very painful reform programme sucking demand out of their economies.  Of course the hope is that a rapid devaluation would kick start exports – but it does not stop the need for painful supply-side reforms if these countries are to recover anything like their former standards of living.

Time the British woke up to the crisis in Europe

It is a commonplace for Britain’s politicos to sadly shake their heads and complain that the Euro crisis demonstrates a woeful lack of political leadership.  Regardless of the fairness of this charge in respect of Angela Merkel, say, it clearly has resonance for Britain’s own leaders.  There seem to be two camps: ravingly impractical Eurosceptics, and sheer paralysis from everybody else.  The mood amongst Europhiles (as I witnessed at fringe meeting at the Lib Dem conference) is akin to deep depression.  It is time for this to change.

To be fair some key players have been showing something less than paralysis – George Osborne and Nick Clegg have both been conspicuous in raising the seriousness of the situation with their international colleagues – but their pronouncements are hardly more helpful than anybody else’s.  They aren’t bringing anything to the party and they aren’t trying bring our own public alongside.

The first point is that the Euro crisis has serious implications for Britain, much though most people seem to think it is happening to somebody else.  This is for two main reasons.  First is that this country would be caught up in any financial disaster.  Our oversized banks are deep in the mess; Euro zone countries are vital trading partners for a country very dependent on trade – especially given that international financial services are so important to us.  Our fragile attempts at recovery risk being completely blown off course.  Forget Plan B if this lot breaks.

The second reason it matters to Britain is that resolution of the crisis could take the European Union in a direction that is against our interests.  Britain leads the single market wing of the union: the chief Euro zone countries are more protectionist in their instincts.  We risk being shut out of the design of critical architecture – much as the Common Agriculture Policy was put together in our absence.

How to proceed?  We need to tackle the dark spectre head on: the best resolution of the crisis involves changes to the European treaties.  To change the treaties will require a referendum here (let’s not weasel out of it this time).  If we face up to that challenge now, it will show real courage, and help get things moving.

But, of course, we would need to see something in return.  Changes to the treaties that would further our interests.  These need to be to promote the single market, to protect London (and Edinburgh) as centres for financial infrastructure, and to reduce unsightly bureaucracy and/or operating costs of the Union (the siting of the European Parliamnet at Strasbourg needs to go on the table, at least).  Given our understanding of finance, we might well have useful things to say on the Eurozone architecture too – even though we clearly can’t be part of it.

To do this our leaders (the Prime Minister and the Deputy Prime Minister in the lead) need to build two sets of alliances.  The first is within the British body politic, so that the referendum can be won.  This needs to cover Tory pragmatists (David Cameron, George Osborne and William Hague), the Labour leadership and, preferably, the SNP.  The Lib Dems have an important role in making this hold together since, by and large, they understand the Union the best.  Mr Clegg’s experience of deal-making in the European parliament counts for a lot.  The next set of alliances is within the Union itself, to create a Single Market bloc.  The obvious candidates are the Nordic countries, Ireland and the Netherlands, together with many of the newer members in central and eastern Europe.

This will be very difficult.  That’s the point, almost.  The reward is a stabler EU, constructed more to our taste, even if we must concede some powers to an inner core of Euro area countries.  Everybody wins.  And by taking on the wilder Eurosceptic fringe, including their newspaper backers, it will cheer all right-thinking people up.  It’s time we stopped being paralysed by fear and came out fighting.

Europe’s financial crisis gets dangerous

While the British news media and politicos alike obsess with the unfolding of the News of the World hacking scandal, Europe’s financial crisis enters a dangerous stage.  In fact this crisis seems to unfolding just as quickly, and with much more important potential consequences.  Was I being too sanguine last Friday, when I blogged that it was a learning curve rather than a fundamental problem?  Well, probably.

I had hardly posted it than a flood of dire articles about the crisis came out.  One of the best is by  eminent US economist Larry Summers in this morning’s FT(£); alongside it an equally gloomy article from FT regular Wolfgang Munchau (£).  Mr Summers points to the critical issue of confidence that could be destroyed in a default, drawing a parallel with Lehman in 2008.  He then offers quite a plausible way out.  But the problem, as Mr Munchau points out, is:

I often hear that Ms Merkel in particular has moved a long way from her original position 18 months ago, when she ruled out any money for Greece. This is true. But the crisis now moves at a rate that exceeds her political speed limit.

There’s clearly a problem.  One issue is the expectation that European leaders will muddle through, as they always have.  This, unfortunately, is a self-destroying prophesy.  Because Europe’s leaders expect everything to come right in the end, they don’t have the incentive to make it actually happen.  Actually Europe’s greatest achievements have required some strong leadership, with Helmut Kohl, Germany’s Chancellor in the 1990s standing out.  Mr Kohl achieved German unification on his own terms, pushed through monetary union and the massive eastward expansion of NATO and the EU right into the former Soviet Empire.  Mrs Merkel does not fill his shoes.

Still, there are plenty of bright ideas for ways out, without the Eurozone collapsing, Mr Summers’s among them.  They will all require Mrs Merkel to shift her current stance.  Things could get worse before they get better.  At any rate it looks more soluble than the US budgetary stand-off.