1997 Onwards -
Below is the text of Sir John Major’s article on fiscal union, published by The Financial Times on Wednesday 26th October 2011.
SIR JOHN MAJOR:
The crisis in the eurozone was inevitable but has been accelerated, and worsened, by the banking collapse. It will not be solved easily or quickly. When it is, it may lead to a very different European Union.
The root of the present chaos can be traced back to bad politics taking precedence over sensible economics. At Maastricht, which I attended as prime minister, the assumption was that – before the euro was born – the economies of member states would converge: that is, operate at broadly the same levels of efficiency. Safeguards were set: it was agreed national fiscal deficits should not exceed 3 per cent of gross domestic product. Later, a Stability & Growth Pact was enacted to ensure sound fiscal policies. Yet, when the founder members launched the euro in 1999, the wise preconditions were ignored.
After the birth of the euro, some southern states over-
Hindsight is often graceless. But it is a fact that sterling did not enter the euro because we foresaw flaws in its structure. We believed monetary union without fiscal union was risky; that convergence of the powerful northern economies with southern Europe was unlikely (especially once Germany had absorbed her Eastern lender). I had a political objection as well: that entry into the euro, and the abolition of sterling, would remove key policy options from the British government. That is why, at Maastricht, I opted out of the euro.
It was not easy. The opt-
As I write, the eurozone has an immediate dilemma. Policymakers must stabilise the eurozone banks, permit Greece to default and remove market fears of other defaults. Agreement on this is essential, but insufficient. The euro’s flaws will remain. The powerful German economy is still locked within the same currency as weaker economies. She racks up huge trade surpluses within the eurozone while others have comparable deficits. Since Germany has an estimated 30 per cent currency advantage within the euro, this seems likely to continue. It is undesirable and unsettling.
In a sensible world, the southern states would devalue to become competitive – but they cannot. They are locked in a single currency. And because they cannot devalue their currency, they must devalue their living standards and promote reforms to enhance efficiency. This will take years. Meanwhile, wages must fall, unemployment will rise and social unrest will increase. The severity of this medicine may not be bearable in a liberal democracy.
Most obviously, this has an impact on Greece. Of course, it has behaved foolishly. But that does not mitigate the present pain. As salaries are cut, new taxes are imposed and other taxes rise. It is no wonder people are frightened. Some ask: why is Greece in the eurozone at all? The ease of her entry exemplifies the follies of the founders. France insisted: “You cannot say no to the country of Plato.” Maybe not, but every European is now paying the price for admitting an economically unfit nation to compete in the eurozone.
To safeguard the eurozone in the longer term requires a fundamental change of policy. It must become a fiscal union; a union of transfer payments to off-
Nor is a transfer union. Germany would hate it and transfer payments would institutionalise inefficiencies. That leaves fiscal union as the most likely destination. But it has huge political consequences. It implies a far greater level of integration, and is an escalator to a federal eurozone. This may be sensible economically, but it is profoundly undemocratic. It would drive voters and decision-
A more integrated eurozone will also provoke non-
This has consequences: non-
In the UK, and elsewhere, many are pressing for their nation to leave the EU. This is an extreme option that would throw up far more problems than it would solve. For the UK it would be a dangerous mistake but, even so, our relationship within the EU will shift. Cool heads and clear minds are needed: our future depends on it.