Only the gold standard and the winter of discontent have caused similar convulsions in Britain's 20th century history
The eurozone crisis is now entering its final phase. This week European leaders – the council president, the commission president, the central bank president and the head of the eurozone finance ministers – published proposals for banking union involving the mutualisation of debt. José Manuel Barroso, the commission president, said this is "a defining moment for European integration". But Angela Merkel, the German chancellor, immediately declared that Europe cannot have banking union without political union, since "liability and control have to be in balance".
The pooling of debt requires, therefore, the pooling of sovereignty, with a European finance minister empowered to reject the budgets of member states if they do not conform to eurozone guidelines. Both supporters of the euro, such as Jacques Delors, and opponents, such as the British MP Bill Cash, predicted this at the time of the Maastricht agreement in 1991. But all this, even if it proves acceptable, will take time. The markets, however, operate rapidly and time is one commodity in short supply.
The European leaders' report spells out that "banking union" means decisions on fundamental matters of economic policy previously in the hands of member states will henceforth be in the hands of a eurozone executive.
That will not be acceptable, as Merkel has implied, unless the executive is democratically accountable. She has proposed that in future the president of the European council be directly elected. That is unlikely to happen for some time. But a genuine union would still mean that a member state could be outvoted on its budgetary policy – the centre-left in France, for example, would have to accept that it could be outvoted by the centre-right majority in the other eurozone countries. That is even more unlikely.
There is a second way in which the eurozone might be saved. Fixed currencies, and perhaps monetary unions, can work when one country is prepared to act as a hegemon, accepting responsibility for the working of the system. That was the role of Britain in the pre-1914 gold standard, and the US under the Bretton Woods arrangements until the early 1970s. Between the wars, by contrast, there was no hegemonic power prepared to take responsibility for the gold standard, Britain being too weak and the US unwilling. That was one main reason for its collapse in the 1930s.
Today, of course, Germany is the hegemonic power. But it is using that power to push Europe deeper into recession, so hampering economic growth and competitiveness in the more vulnerable eurozone members – a self-defeating policy. Instead Germany should lower its taxes and raise wages so that other member states find it easier to export to it; and sponsor a fiscal boost for the eurozone, a European Marshall plan. That is unlikely to be done on a sufficient scale while Merkel remains chancellor; and unlikely even if the rival SPD wins next year's federal elections in Germany. In any case, German taxpayers do not want to be hegemons. Survey evidence indicates that nearly 80% want Greece to leave the euro.
The position of the eurozone, therefore, is more akin to that of the inter-war gold standard than the pre-1914 or Bretton Woods systems. And the likelihood is that Greece, and possibly other states, will soon leave the eurozone. This will, initially at least, deepen the recession in the eurozone and Britain. But in Britain, with its coalition government – one part pro-Europe, the other eurosceptic – the political consequences are likely to be as profound as the economic.
Europe has, after all, been highly sensitive politically ever since Edward Heath took Britain into the European Community in 1973, since it raises fundamental issues of sovereignty and national identity. In the 70s it split Labour, leading to the formation of the breakaway SDP. In the 90s, John Major's government was almost destroyed when it sought to ratify Maastricht.
In the 2010 election, the Ukip vote of nearly a million was by far the highest ever for a minor party in Britain. In 21 constituencies the Ukip vote was higher than the Labour or Liberal Democrat majority. If all Ukip voters had supported the Conservatives, a eurosceptic party, David Cameron would have won an overall majority.
If countries leave the eurozone, this will undermine confidence in the British political establishment. It is true that the establishment was divided on the euro. But even those opposed to it subconsciously assumed that European integration was an ongoing process somehow in tune with the logic of history. That assumption is now being destroyed.
It is difficult to think of issues of comparable magnitude in Britain's 20th century history. But in 1931 the crisis of austerity caused by the gold standard led to the collapse of the second Labour government, which could not agree on whether to cut unemployment benefit. The result was the formation of a national government and a realignment of parties.
When asked what would happen if Britain left the gold standard, Philip Snowden, the Labour chancellor, threw up his hands and said "the deluge". However, the national government that succeeded Labour faced a naval mutiny at Invergordon in protest at wage cuts, and was forced off gold. "No one told us we could do that," lamented Sidney Webb, a Labour ex-minister; the pound floated, Britain in the 1930s came to enjoy economic growth of nearly 4% per annum, and by 1934 most of the cuts had been restored.
A second comparable occasion was the winter of discontent of 1978-9. Until then, the great and the good had said that government could only be effective through a social contract with the trade unions. Anyone who tried to govern without that consent would cause confrontation such as had destroyed the Heath government in 1974.
That belief was shattered by the widespread public sector strikes, which resulted in a walkout in Great Ormond Street Children's' Hospital, cancer patients being sent home from hospital in Birmingham, and the dead in Liverpool being buried at sea. The British people found themselves peering into an abyss in which civic order and decency had broken down. The winter of discontent realigned politics and signified the end of old Labour. The party was to remain in opposition for another 18 years.
No one can predict what convulsions the eurozone crisis will cause. But its political ramifications are likely to prove both massive and fundamental.
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