Monday, December 12, 2011

In Support of David Cameron

David Cameron, the British Prime Minister, did the right thing for the wrong reason.

Last week the EU27 agreed to what is now known as “fiskalunion”. Governments agreed to give up their sovereign rights to determine taxation, expenditure and fiscal management to a supranational body in exchange for stabilizing Europe and settling the markets. In addition, they agreed to enhance the funds set aside to stabilize the economy – hundreds of billions – and to increase contributions to the IMF. Countries will submit proposed budgets for approval prior to their acceptance and will then be monitored by a supranational body and be disciplined if they fail to live up to commitments made. Germany, for example, breeched such existing fiscal rules some sixty times since 2000 and France some ninety times. They would both be “disciplined”.

This is being done as a response to the fiscal crisis of the Eurozone. But interestingly, it actually does not address the real economic issue. In fact, it is likely to make things worse.

The underlying economic problem is complex. But at its heart it is simple: there is a lack of growth. Some countries, especially the Southern Mediterranean countries, are lacking in growth, especially in export driven industries. Others have large trade surpluses. Some countries have significant debts (Greece for example), but others are in surplus (Italy and Ireland). No one size fits all. By imposing a solution aimed at some countries (Greece) on all, even countries who are doing well (Germany), the EU will make things worse.

It’s a very Germanic solution – discipline and control focused on austerity. Austerity will increase unemployment and further slow growth, as Britain has already seen. What is needed is a strategy for innovation, stimulus and employment. Any country pursuing this, and willing to increase debt to do so, will be punished under the new regime. It makes no sense.

Countries will find themselves unable to determine their own tax and spend regimes – the heart of a national economic agenda – and will be in constant dispute with each other and the EU. One of the leading objectors five years from now will be France, who has a habit of talking big but actually being a deviant when it comes to obeying the EU law. Conflict will be fuelled by this compact and the EU has created conditions for the subsequent fracture of the European union.

So Cameron should have said no on three grounds. First, Britain wants to make decisions about its spending, taxation and economic strategy in Britain, not Brussels. Second, fiskalunion will not solve Europe’s problem – what is needed is a more subtle, complex approach. Third, in the medium and long-term, fiskalunion is a recipe for the fracturing of Europe. While fiscal discipline for the Eurozone is a part of what is needed, the application of fiscal discipline does not deal with trade imbalances, lack of political discipline, productivity and innovation and the ingredients of a growth strategy.

Hanging his decision on protectionism – trying to protect the City of London against a tax on banks and financial transactions – was a mistake. His use of the veto wasn’t.

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