Catch 22 in the European Debt Negotiations

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One has to pity David Cameron’s position in Brussels last night, with cannons to the left and to the right of him.

The British Government must have known that its request for special protection for the financial industry in the City of London was doomed to fail, and so it did. The crisis context of the negotiations meant that conceding to one special request would lead to 26 others such requests and ultimately to the failure of any deal. In negotiations that are essentially about financial regulation, seeking an exemption from financial regulation was courageous (as Sir Humphrey might have said) as it was guaranteed to raise the hackles of the other participants.

But the decision to veto an EU-level treaty cannot have been easy either, even if it pleased Tory Europhobes (although the decision is also reported to have been approved by Nick Clegg). Britain is now out exactly where British ministers have said in recent weeks that they did not wish to be: looking from the outside at a new international treaty amongst 23 of its fellow EU members. If the Government holds to this position, Britain’s position is likely to becomes like that of Norway and other EEA members in relation to the EU itself: very deeply affected by

policymaking to which it can no longer contribute.  The Government retains some limited options – it can, for example, refuse to allow the new agreement between the remaining countries go ahead within the framework of the EU, although this would scarcely make the UK more popular with other European governments – but it cannot stop the 23 still in the process negotiating a free-standing international treaty amongst themselves. Just how isolated Britain will be in this new environment depends on decisions in a small number of states. Hungary, Denmark and Sweden, in particular, may take the same route as Britain, although they have not been quite so definitive.

If the Prime Minister was faced with Catch-22 last night, spare a thought for those countries Britain has left behind. Britain’s disruptive presence as a sort of curmudgeonly uncle at the European top table can be very useful to other countries that, although not so Eurosceptic, are nonetheless wary of the overweening power of France and Germany within Europe. The dominance of France and Germany in the lead up to these negotiations should be sending alarm bells ringing all over the rest of Europe even if, as the Polish foreign minister put it last week, German inactivity has been more frightening than German action during this crisis. With the retreat of the British negotiators, the deal brought to the table by Angela Merkel and Nicholas Sarkozy will become that little bit more difficult for the remaining nations to resist.

This is unfortunate, because – for the small countries and the indebted countries in particular – it is a bad deal. It is a quixotic attempt to entrench one side of a long debate about economics (that between Keynesians and Hayekians). ‘Balanced budget’ amendments must be inserted into the constitutions of the member states, with the potential for enforcement action to be taken against violators (perhaps by the European Court of Justice and the European Commission). Default on public debt will be prohibited. Austerity will continue not just as economic policy but also as constitutional law. The European Central Bank will not be empowered to directly protect struggling debtor states by buying government bonds. And the Franco-German proposals even try to set up a majority voting rule that would prevent a small country from acting as a hold-out.

This is all very worrying. With the possible exception of Ireland (where there has been a very slight growth in economic activity, although this follows an enormous contraction), austerity has not worked so far and some argue that the insistence on austerity is what has brought us to this pass (c.f. innumerable Paul Krugman columns for the NY Times over the last few years, for example). If, as a famous German once said, the definition of insanity is doing the same thing over and over and expecting a different result, what term should we use for the act of enshrining this methodology as constitutional law?

And in any case, will this constitutional law really be immutable? The 14th Amendment of the US Constitution provides that the validity of the public debt of the United States shall not be questioned. But in the US this does not apply to debt issued by cities or states, which do default on occasion (notably in 2009 when California started issuing IOUs instead of cheques to its employees) and might provide a better analogy with European member states and devolved administrations. And notwithstanding the 14th Amendment the US did effectively default on a small amount of its national debt in 1979 by late payment (although on that occasion the late payment appears, rather comically, to have been an administrative error) and in 1933 when it refused to repay some debt in gold following the collapse of the Gold Standard. The existing deficit arrangements for the Euro area were flouted by numerous states (including notably France and Germany) over the last decade.

All of these arrangements seem to be built up around three premises: (1) austerity will work; (2) the rules will not be flouted; (3) normal democratic politics can survive extreme austerity for up to a decade in the heavily indebted countries. What happens if one of these premises turns out to be wrong?

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