George
Osborne faced two major crises when he became Chancellor of the Exchequer exactly one year ago. The first of these was national. Britain was close to broke, and so he announced credible plans to tame the deficit. He deserves nothing but praise for this prompt action.
The second crisis was international, and here Osborne has been more cautious and less sure-footed. The origins of this second crisis lie in the collapse of the eurozone. A number of countries, notably Greece, Portugal and Ireland, are in effect bankrupt. Their spending commitments are far greater than their revenues, yet they are unable to raise money in the capital markets to make up the difference. As a result, their only hope of survival is the humiliation of economic bail-out.
Theoretically, none of this should matter to Britain one jot – at least not directly. Mercifully, we did not sign up to the single currency, and are therefore completely independent of the common economic government imposed upon eurozone countries by the European Central Bank from its Frankfurt HQ.
Unfortunately, in practice it matters very much indeed. This is because of the recklessly expensive error made by the outgoing chancellor Alistair Darling around this time last year. Darling’s disaster came on Monday May 10, 2010, when a meeting of European leaders took the momentous decision to launch a 750 billion euro fund, paid for by all European taxpayers, to rescue eurozone countries who met with financial difficulties.
In an action that was entirely characteristic of New Labour’s free and easy way with British taxpayers’ money when it came to the European Union, Darling committed Britain to the bail-out. It was to be his final act as Chancellor. The following day, David Cameron and Nick Clegg reached their historic agreement, and the Coalition was formed.
To be fair to Osborne, he did his best to protest by making clear his opposition to British involvement in the bail-out in a telephone call to Darling. However, critics of the Chancellor, including some in the Conservative Party, feel that he should have been tougher and made clear that when he took over at the Treasury he would have nothing to do with any deal signed by Darling.
But it is easy to understand why Osborne did not take that step. He may have felt that he did not wish to define his Chancellorship by starting off with a blazing row with Brussels. He may well have feared that taking such a drastic measure would have jeopardised the coalition deal with the notoriously europhile Liberal Democrats, then at an especially delicate stage. He may have felt powerless to act. Whatever the reason, Osborne did not attempt to overturn the Darling agreement when he became Chancellor, and we are living with the consequences today.
The first Greek bail-out had already been arranged by the time Darling wrote his blank cheque. But the consequences of his profligacy have since been felt. The Irish bail-out has so far cost Britain some £7 billion (more, in fact, as we also loaned them money on a bilateral basis) while Portugal has cost a further £4.2 billion, though the final sum has yet to be agreed. It is highly unlikely that the British taxpayer will ever again see more than a small fraction of the money we have committed to these two bankrupt countries.
To sum up, so far we have unloaded some £11 billion on the eurozone crisis. This represents a very significant percentage of the so-called cuts which Osborne imposed in last year’s Budget, and which brought hundreds of thousands of protesters on to the streets of London, some of them violent.
Indeed, it is surely surprising that more anger is not felt about the heavy cost of our eurozone commitment. One answer may lie with the BBC’s semi-monopoly of news coverage. On the one hand, its presenters have gone out of their way to emphasise the severity of the Osborne “cuts”, rarely missing an opportunity to give maximum airtime to anti-Government campaigners. On the other, the BBC has consistently minimised the extent of British exposure to the eurozone bail-outs.
But now comes a fresh crisis. It is clear that last year’s Greek bail-out has failed. As could readily have been predicted at the time, the 110 billion euros handed to Greece by the European taxpayer is now lost money. To give credit to George Papandreou, the Greek prime minister, he has struggled manfully to impose the deep cuts he promised. But state revenues have collapsed, in large part because membership of the single currency dooms poor Greece to permanent stagnation and decay. The country has gone beyond recession into depression. Gross domestic product, down 4 per cent last year, is forecast to drop a further 3 per cent in 2011. The authority of the state is in freefall, and many parts of Greece are now lawless. It would be hard to exaggerate the sheer horror of the situation, or the scale of the national suffering.
In dire circumstances such as these, the sensible decision would be to renege on its debts and set the currency free to find a level where economic activity can resume, which in the case of Greece is about one third of where it stands today. Sadly, the European Union has now acquired a demented logic of its own. It is calling for a fresh economic package to enable this unhappy, godforsaken country to remain theoretically solvent. The best estimate I have seen suggests that Greece will need a further 150 billion euros to keep it afloat over the next three or four years.
The reason why the EU is set on this frankly lunatic course is terrifying. The sad truth is that most European banks, including the ECB, are now technically bankrupt. The only way they can stay afloat is by lying about the state of their accounts. So long as Greece, Portugal and Ireland are theoretically solvent, their debt can be marked at par on the banks’ balance sheets. The moment that they acknowledge reality by rescheduling their debt (going bankrupt, in ordinary discourse), the ECB and the rest will be forced into large write‑offs and provisions.
The situation is so serious that one executive board member of the ECB, Jürgen Stark, has warned that Greek debt restructuring could cause a financial disaster that would put the devastation that followed the collapse of Lehman Brothers in 2008 “in the shade”.
This is the hideous background to the meeting of European finance ministers that takes place on Monday and Tuesday in Brussels. As with Portugal and Ireland, Britain will once again be asked to throw good money after bad in order to maintain the blatant fiction that the Greek state – and the rest of the eurozone – is financially sound.
This will give George
Osborne an opportunity to remedy Alistair Darling’s mistake of 12 months ago. I understand that he will take it. The Chancellor will argue next week that Britain played no role in the first Greek bail-out, and so the rescue mechanism to which his predecessor mistakenly subscribed does not apply. This is only sensible. Osborne’s fundamental duty is not to ingratiate himself with European leaders – it is to guard the national finances. That means refusing to commit a penny more of British taxpayers’ money to the costly and doomed fight to save the euro.
TelegraphObviously the article's fairly biased one way but is it accurate? Is it time for the UK to refuse to pay into bankrupt economies and is this the beginning of the end for the Euro experiment?
