Because of Greece, the eurozone's future is a two-tier Europe

The agony for the Greek people continues, and will do so for a little longer. But the more it drags on – and I don’t think the outcome of the current crisis talks will be the end of the matter by any means – the more we will come to see it as a story about the euro rather than about Greece.

For there are two issues here. The first is the immediate one about whether and when Greece formally defaults on its debts and whether euro membership is compatible with that. It is complicated because while there are lots of precedents for sovereign defaults, including 11 majors ones since 2000, there is no precedent for one inside the eurozone.

open image in gallery

A country with its own currency can default on its debts and its government can continue functioning in some fashion, because its central bank can in extremis print the money to pay the wages of its staff and its other day-to-day bills. However a country without its currency can’t function at all. Or at least that would seem to be the case, but we don’t know for sure because we have not been there yet. My hunch is still that some deal will be done that preserves Greece’s use of the euro for some time yet, but that may prove wrong.

Behind this story about Greece, though, is the second issue, a much deeper one about the euro. It is hard, sitting in Britain, to appreciate fully the sense of determination in Europe to make the euro work. This is particularly evident in Germany. In 2011 Angela Merkel famously declared: “If the euro falls, Europe falls”.

To Britons that seems a bit far-fetched, for we manage to remain a member of the EU (for the time being anyway) without membership of the single currency. We also note that non-euro countries seem to be doing rather better in terms of growth than those in the eurozone. The view from Germany, however, is different. I single out Germany not only because it is Europe’s largest and most successful economy but also because it possesses a self-confidence that it knows how to run a currency. The Deutsche Mark was a huge success, the strongest currency in the world, and the Germans were only persuaded to abandon it as the price for unification.

If the past five years have taught German politicians and bankers anything, it is that the eurozone has to be reformed if it is to survive. Were Greece to leave the eurozone, that would create a precedent as there is no provision for any country’s departure. But it might be less dangerous to the euro’s survival than endless fudges. Greece, after all, accounts for only 2 per cent of eurozone GDP, and the Germans now openly acknowledge that it was a mistake to allow the country to join the euro in the first place.

To survive, two things have to happen. First, there has to be a banking union, where banks have a single supervisor and follow a single rule-book. That is now under way, with bankers trotting backwards and forwards to Frankfurt to get their orders. I have been told that while it is rather strange to have new reporting lines and new requirements, the system actually seems to be working. But that is just an anecdotal response and it is early days.

The other thing that has to happen is more contentious. It is that countries have to follow common fiscal rules. Such rules were incorporated into the Maastricht Treaty, which, for example, limited fiscal deficits to 3 per cent of a country’s GDP. But this particular provision was promptly broken, ironically, by Germany, among other countries. Now Europe is having another shot, with its fiscal stability treaty.

open image in gallery

This is a massively, mind-numbingly, complex area, and according to a survey of financial economists in the Financial Times earlier this year the majority believe the present arrangements are not fit for purpose anyway. But some sort of fiscal controls are necessary and the one of the current issues is how they might be policed. There are two ways of doing this. Either the Commission in Brussels gets more power or there have to be legally-binding requirements on governments. Unsurprisingly, Germany favours the latter approach.

The British are non-playing members of this particular club, so our reaction to all this is one of polite disdain. If Europe wants to condemn itself to stagnation so be it. But most of us on these shores have not grasped quite how determined Germany is to have these rules that limit national budget deficits. If you don’t have rules and make them stick you will get another Greece – and another, and another.

So what is emerging is a de facto two-tier Europe: those who are inside a rapidly-integrating eurozone and those who are outside. The formal position of the UK is that it has an indefinite opt-out, but other EU countries outside the eurozone are supposed to join at some stage.

Until the last few months there was always a vague assumption that the larger non-euro members such as Poland would do so. The eurozone is still expanding – Lithuania joined the other Baltic states in adopting the euro on 1 January this year. But one effect of the Greek crisis has been to harden the mood, particularly in Poland, against membership. The new 43-year-old Polish president, Andrzej Duda, is anti-euro, and this seems to have been a factor in his surprise win last month.

We in the UK will, of course, now spend the next 18 months or so pondering our own relationship with the European Union. What we don’t yet fully grasp is the extent to which Europe is changing, and has already changed.

Triggered by the Greek experience, the eurozone is being obliged to integrate. The UK is already a semi-detached member of the EU, and will become more detached in the years ahead whether we like it or not. But a semi-detached EU member, you might conclude, is not too bad a place to be at the moment.