Up to 100 Conservative MPs are meeting today under the banner of reversing integration in the European Union. Share prices may have plunged across Europe, including on the FTSE 100, but for eurosceptics this pales into insignificance compared to the prize of repatriating powers to Westminster. And that is the price they want the UK Government to demand for further eurozone integration. What they fail to see is that it is in Britain's interest for the eurozone to integrate further because Britain needs it to be strong. A collapse could send Britain and Europe's economies back to the 1970s.
Firstly, as David Cameron said to the House of Commons' liaison committee last week, 40 per cent of our trade is with the eurozone. While markets in China and India will become increasingly important we should not forget that they currently account for just over 4 and 1 per cent of our trade respectively – which puts the eurozone's importance to us in perspective.
Secondly, the eurozone has ended up subsidising British banks currently being propped up by the UK taxpayer. Given their considerable exposure to Greek debt, the second eurozone bailout, agreed to in July, means that banks such as RBS have had to write down portions of their Greek debt. However, due to the eurozone- (and not UK-) funded bailout, RBS will be able to write hundreds of millions of euros back into its full-year results, which will be announced early next year.
A Greek default is likely, but the worst case scenario of a eurozone breakup would be catastrophic. The exposure of UK banks to Irish debt alone is about £200bn. Irish default would risk creating high streets full of Northern Rocks. The newly separated countries that made up the eurozone would put up trade barriers and protectionist regulations favouring domestic producers; trade and travel could plummet; and the fragile recovery would turn to recession.
Those arguing that this would allow countries to devalue their way to prosperity have got it completely and dangerously wrong. Three to four years after a 25 per cent devaluation of sterling, we should be in the middle of an export boom. We are not. Going back even further, the pound was worth 16 deutschmarks in 1949, and 2.5 marks in 1999, but the UK is not eight times better off than Germany.
Eurobonds and greater fiscal co-operation in the eurozone, along with reforms geared towards getting Europe competitive and productive, have got to be part of the solution. Some sort of joint and several liability of eurozone sovereign debt may be the price Germany has to pay to keep the euro. Moral hazard could be mitigated by guaranteeing only the first 60 per cent of a member's debt using "blue bonds" and letting the market dictate the price of every country's debt above that level as a junior "red bond".
This would promote much needed fiscal discipline, and reduce the cost of everyone's borrowing by creating a market (about €5,600bn) almost as large as the US Treasury debt market (about $8,300bn), thereby going even further in cementing the euro as the world's second reserve currency.
If this is necessary, will it happen? Chancellor Merkel has said "no" to eurobonds. But she also said a second (or first) Greek bailout would not happen. The way the crisis has unfolded has taken us to a point where one or a combination of massive fiscal transfers, an extension of the bailout fund, or eurobonds, is the end point. The alternative is breakup. Germany needs to see that eurobonds are the only remaining option to prevent breakup, and that is where we are now, or soon will be.
It is also important to understand what will not happen, and what will not work. First, Greece will not leave the euro. Quite apart from there being no way of Greece leaving, it will stay because its departure could lead to a domino effect ending in breakup. It is quite possible for Greece to default in an orderly fashion whilst remaining in the euro – indeed the July summit and bailout already includes a bond swap that is equivalent to a default of about 20 per cent for private bondholders.
The other solution that has been mooted is a Financial Transaction Tax. An FTT is unrealistic unless it is done globally, and would only serve to push trading out of Europe into the Eastern markets of Hong Kong and Singapore.
The final question is where Britain should stand. The calls to use this as an opportunity to repatriate powers from the EU ignore the dire consequences to the UK of playing politics with eurozone stability. Also, the last thing Britain needs to do is try to negotiate its way out of the EU under the pretext of a spurious defence of British sovereignty. No one is forcing EU membership on the UK, and if we were foolish enough to wish it, we could leave at any time.
The UK's efforts should be focused on strengthening the hand of liberals in the EU. Ultimately, this is a crisis of competitiveness and the EU will only get out of it through growth.
The UK is perhaps the strongest liberal voice in Europe, along with the Netherlands and a few others. When it comes to influencing economic policy, however, our problem is that we are not members of the single currency. The euro, however, is not the only important forum for economic decision-making.
There is also the 23-member "euro-plus pact", which includes the 17 eurozone members as well as Denmark, Poland, Latvia, Lithuania, Romania and Bulgaria. It uses the relatively new – and voluntary – "open method of co-ordination" to improve competitiveness, create jobs and help stabilise members' public finances.
It could be shaped into a forum for euro and non-euro countries to discuss issues of broader economic policy together. Mikolaj Dowgielewicz, the Polish Europe Minister, said, "There will be no division into two categories, namely full members and observers."
Today's meeting of Conservative MPs will be interesting because they clearly speak for a significant part of today's Tory party. The UK Government, however, has to speak for the country – we're in Europe, we've got to make it work for us.
Roland Rudd is chairman of Business for New Europe
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