After months of wrangling, Eurozone leaders and the Greek government finally seem to have reached an agreement on a third bailout deal. EU politicians and the markets may breathe a sigh of relief at the prospect of some short-term stability being restored. But even if this new deal manages to stave off Grexit in the near future, the broader structural weaknesses in the Eurozone still need to be addressed if the bloc is to have any chance of succeeding in the long term. And if we don’t receive sufficient protections, such reforms could damage Britain’s influence within the wider EU.
Economic analysis conducted for Business for Britain’s major new research publication, Change, or go, shows how, far from promoting greater convergence between its members, the euro has acted to force Eurozone countries further apart since its creation. Therefore, for the single currency to survive over the longer term, euro countries will have to integrate further, involving greater fiscal and political co-ordination. If this doesn’t happen, the Eurozone will disintegrate.
What choice will they make? Despite the short-term costs of keeping Greece inside, Eurozone leaders have shown themselves to be unwilling to accept disintegration. So the logical conclusion is that further integration must follow. Indeed, just hours after the Greek deal was announced, leading MEP Guy Verhofstadt argued that “a currency union without a political union isn’t sustainable”. And as the recent Five Presidents’ report on Economic and Monetary Union showed, such integration will require significant reforms to the EU’s institutions. But while it may provide greater stability to the euro itself, this development could greatly impact on the interests of non-euro member states, including the UK.
As George Osborne outlined last year, for the UK to stay in a more closely integrated EU, “proper legal protections” regarding our ability to influence the rules of the Single Market will be required. Some progress on this front has already been made, with a “double majority” voting procedure agreed for the European Banking Authority in 2012 to stop euro countries forcing policies on non-euro members. However, this provision is due to expire when the number of non-Eurozone countries in the EU falls to less than four (which research from Europe Economics shows could happen as soon as 2020).
Meanwhile, the UK’s influence in EU institutions, and the ability to defend our interests, is already in decline. Last year, the UK lost three landmark cases in the European Court of Justice – on the bank bonus cap, the short selling ban and the introduction of a Financial Transaction Tax – despite the UK government arguing that these measures would damage our financial services sector. Business for Britain research has also shown that the UK has failed to block any of the 55 proposals we have disagreed with in the European Council since 1996, while the proportion of European Parliament votes accorded to UK MEPs has declined from 20 per cent to 9.5 per cent since we joined in 1973.
In short, the evolving EU status quo (notably the increasing weight of euro members) is proving damaging to the UK’s interests, with “fundamental change” (in the Prime Minister’s words) required. An extension of double majority voting, reversing harmful financial services rules, and greater powers for national parliaments to block EU proposals are all examples of reforms which would place the UK’s relationship with the EU on a more sustainable footing.
If such change is not secured and the UK is forced to consider leaving the EU, however, this is not a prospect which should be feared. In fact, as Change, or go shows, the UK would gain influence and prosper outside an unreformed EU. In addition, with a strong legal system, competitive tax and regulatory structures, and London’s status as a global financial centre, the City would be well-placed to take advantage of the economic opportunities of the twenty-first century in this scenario.
Though the latest chapter in the Greek crisis may have ended (subject to parliamentary approvals in the days ahead), the need for reform of the whole euro project is as great as ever. This process represents significant challenges to the UK’s ability to fight our corner in the EU, yet also provides opportunities to deliver the fundamental change in our relationship which business wants. And should the EU fail to reform, we would be well-placed to prosper from the outside. In short, to quote Boris Johnson, we are in a “win-win” situation.