A disastrous failure at the summit

by Martin Wolf

Financial Times
December 13, 2011

Whom the gods wish to destroy they first make mad. That was my reaction to the outcome of last week’s meeting of the European Union’s Council. Many focused their attention, understandably, on the decision by David Cameron, UK prime minister, to veto a new treaty. But the UK’s behaviour took attention away from the failure of the eurozone’s leaders to devise a credible remedy for the ills of the currency union. They propose, instead, to tighten the screws on fiscal deviants. It may feel good. But it will not work.

Mr Cameron presented his colleagues with a list of demands designed to protect both the City and the ability of the UK government to regulate it, largely unhindered by European regulators. Mr Cameron could have stated, instead, that he would accept a treaty applicable only to members and candidate members of the eurozone. He could have intimated that he would put a treaty that did any more than this to a UK referendum (which would have been surely lost). Instead, he ended up with no additional safeguards for the City and a semi-detached status inside the European Union, of which, he has insisted, he wants the UK to remain a member. That is not a success. He has achieved nothing positive, but will undermine the credibility of UK membership of the EU. That brings substantial costs.

Yet far more important than this piece of British political theatre is what might now happen inside the eurozone On this I am pessimistic. Germany and France have agreed that there is to be no fiscal, financial or political union. The failure to transcend the defects of the original construction is predictable, but dire.

The core decision was to strengthen fiscal discipline, so building what Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, the French president, last week called a “stability and growth union” – or, as I think of it, an “instability and stagnation union”. Even under an intergovernmental treaty, this reinforced discipline could probably still occur via EU institutions, as Olli Rehn, European commissioner for economic and monetary affairs, now argues.

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