Berlin takes a tough line on European cuts

“It was Europe that toppled her”. That’s the conventional wisdom, repeated endlessly in recent days, on the subject of how Margaret Thatcher lost her grip on power.

It’s perfectly true, of course, as the record shows, that back in November 1990, many of the then Prime Minister’s own MPs voted to oust her from No.10, embarrassed as they were by her high-handed treatment of Britain’s “European partners”. For them, Michael Heseltine’s “consensual” approach seemed wiser and less troublesome. To tolerate and indulge Brussels’ vision of “ever greater union”, as numerous Tory bien pensants insisted, was to be somehow less chauvinistic.

The record also shows, though, whatever Prime Minister Thatcher’s critics said then, and whatever the late Baroness Thatcher’s critics continue to say today, that she was right about Europe. Britain’s entry into the Exchange Rate Mechanism, against her express wishes, was an unalloyed disaster. By shackling sterling to the German mark, then desperately hiking interest rates to defend ERM membership in the face of all economic logic, the Tories committed a profound policy error.

The 1990-92 recession, as a result, was far worse that it otherwise would have been, with the home-owning dreams of countless ordinary British families cruelly upended. ERM membership saw the Conservatives’ reputation for economic competence take a hit from which, twenty years on, it has yet to fully recover.

When it comes to the single currency, also, the former Prime Minister’s deeply-felt concerns about the internal contradictions of “economic and monetary union”, the commercial damage it would cause, the political and cultural divisions it would sow, were also bang on the money. It is only recently, though, during the last few years of her life that the fatal design flaws of Emu have leapt from the history books and come sharply into focus.

Even over the last week, as the UK and much of the world has focused on the death of Britain’s most important peace-time leader, the fundamental contradictions at the heart of the single currency, the inherent unsustainability of monetary union between independent elected governments, have again burst into the open for all to see.

Last week we learnt that Cyprus is to be forced to shoulder an extra €5.5bn of the cost of its bail-out. That takes the total sum this tiny island nation must find in tax rises, spending cuts and asset sales to €13bn – which is almost one-and-a-half times’ its annual GDP. Just a few weeks ago, the EU and International Monetary Fund agreed to provide €10bn of support if Cyprus came up with €6bn. Yet as German Chancellor Angela Merkel quakes before her own increasingly outspoken electorate, with Parliamentary opposition rising and Federal elections looming in September, the screws are now being turned on Cyprus even more.

How much can this Mediterranean mini-state take? Even before this latest cash demand, the Cypriot economy was officially forecast to shrink by an eye-watering 12pc over the next two years. Those with savings above €100,000 at the dominant Bank of Cyprus – including numerous local businesses, educational institutions and charities – are already in line to lose around two-thirds of their deposits. With growth now likely to be even more negative, that horrendous asset-grab will be more draconian, with large savers at Laiki bank, the second biggest in Cyprus, likely to get nothing at all.

At the risk of repeating myself, deposits are not investments. If you buy an equity or bond, exposing yourself to risk but also the prospect of a commercial return, then you stand to lose your money. Fair enough. If you put money in a bank, though, in a modern society that deposit should be guaranteed. To willfully demonstrate otherwise is to incite deep social unrest, while undermining the very fabric of capitalism and wealth creation itself.

The current twisted geometry of German politics may require an even greater squeeze on profligate “periphery” countries. But is it really right, having already forced Cyprus to suck-up lorry-loads of hopeless Greek bonds, for the European machine now to move the goalposts again, just weeks after agreeing a deal?

“The contribution from international creditors will not change,” the German government insisted last week. Maybe it won’t. But in the end, if pushed too far, the Cypriot people will take matters into their own hands and decide – whatever the chaos, whatever the scale of the lawsuits linked to “hard default” – that life outside the euro is preferable to endless subjugation.

I don’t want that to happen, not least as a “disorderly euro exit” could spark systemic fears across global markets, with investors then worrying a bigger Eurozone economy could follow suit. But such an event could now come to pass. In the end, human beings will only take so much.

With attention on Baroness Thatcher’s passing, other Eurozone dramas have also been happening somewhat below the news radar. Portugal is embroiled in another political crisis, after its constitutional court blocked austerity measures linked to continued EU-IMF funding. Mario Soares, the respected elder statesman, who guided Portugal from dictatorship to democracy in the late-1970s, is now openly calling on fellow citizens to “bring down the government” and insist on “open-default” on debts owed to other Eurozone members.

Were this to happen, Berlin would be forced to take an extremely hard line, pushing Portugal out of the euro. How could it not? German public opinion would accept nothing less. And if Portugal got away with open defiance, other Eurozone profligates could thumb their noses at their northern creditors and do precisely what they want.

In the end, voters sick of austerity imposed from abroad will elect leaders who openly advocate Eurozone exit. That is their democratic right. There are signs of this happening not only in Cyprus and Portugal, but also Italy – the region’s third-largest economy. Eight weeks after an election, Italy has yet to form a government. Beppo Grillo, the ex-comedian whose Five Star movement took more than a quarter of votes cast, has Italy’s political future in the palm of his hand – and he wants the eighth-biggest economy on earth to quit the euro. That’s the on-the-ground reality.

These days it is generally only those in denial – their salaries paid by Brussels, or by banks now dependent on European Union largesse, or those too stubborn to admit they were wrong – who maintain the single currency has been a success, that the benefits out-weigh the drawbacks.

Meanwhile, the Eurozone economy remains extremely weak, with even solvent economies suffering from the pall over investor sentiment caused by endless systemic uncertainties. Industrial production in January and February was down across the region, even in Germany. Purchasing Manager Index survey data indicates that in March the Eurozone slipped back into recession. That will do nothing to ease the policy conflicts, and deeper political tensions, between the various members.

Prime Minister Thatcher was right to sign the Single European Act in 1986, so encouraging free trade across Western Europe. She was right, also, to push for “enlargement”, bringing Eastern Europe into the democratic fold. When she raised the dangers of Emu, though, she was ridiculed by a sniffy European elite, not least those in the UK who were contemptuous of her passionate advocacy and lower middle class origins. It may have been Europe that toppled her. But Europe could yet prove Baroness Thatcher’s most powerful insight.


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