John Lichfield: Europe knows it cannot go back, but can't bring itself to go forward

Until now, it has been unwise to underestimate the survival instinct of the European Union and all its works
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The Independent Online

The battered, noble and ambitious European single currency should perhaps, like some of us once suggested, have been called after its father, or at least its godfather.

The "Delors" should have taken on the "Dollar". The Great Man himself – and he is a great man, a wise and almost British kind of pragmatist – spoke out for the first time on the great euro crisis this week. Jacques Delors, 85 next month and as bright as ever, said something so blindingly obvious that almost no one else has dared to say it.

"The debts of all countries have increased in a spectacular way because they came to the rescue of the banks and the financial system. And now this same financial system is wagging a finger at the excessive public debt. At the same time, the same financial system complains that cutting the debt will damage growth and jobs. Governments are damned whatever they do." Mr Delors also complained of a new "nationalism" and "populism" – especially in Germany, but not just in Germany – which had made EU "firefighters" culpably slow to react when the markets began, gleefully, to pour oil on to a smouldering Greek debt crisis in March.

All the same, Mr Delors conceded, the euro had been built on quicksand. His own proposals, 15 years ago, when he was European Commission president, to co-ordinate the economic policies of countries had been rejected, he said. By whom? He did not say so but largely by Germany.

Another wise man spoke out on the euro crisis this week – in far more apocalyptic terms. The billionaire investor George Soros said that the EU was now stuck in a dangerous no-man's-land, unwilling to go backwards and unable to go forwards. A deepening euro crisis could, he said, "have the potential of destroying the European Union" and "give rise to the social unrest" which spawned the fascist movements of the 1930s.

The main culprit? Germany was insisting on maintaining a high trade surplus and high domestic savings and – despite being one of the few EU countries with no real debt problem – making large cuts in its own state spending. "But you can't be a creditor country, a surplus country, without somebody being in deficit," Mr Soros said. Both men were talking before Thursday's EU summit in Brussels. Nothing much happened there to change their minds. The French and Germans, despite a show of unity, remain dangerously divided on the future machinery and the future policies for preventing another, and deeper, euro crisis. The new council president, Herman van Rompuy, is supposed to present unified proposals in October.

From the beginning, the great euro crisis of 2010 has been a confrontation between two versions of reality, neither of which is especially real. The first version is the EU version of reality, based on compromise, or if you insist, fudge. We will do as little as we can (because the German won't do more) and we hope the problem will go away. The second version is the market version of reality, based on taking a real problem, like Greek debt, and making it worse in order to make money. The markets, whatever other faults they have, can smell out a contradiction, or unworkable compromise, like a truffle dog in November. Despite the assurances given at the summit, Spain could face a market hurricane in the next few weeks, which could make the Greek crisis look like a passing squall.

On the other hand, there have been some signs that the markets have grown bored with bullying the euro. The US federal deficit is higher than Spain's; 35 out of the 50 US states have technically illegal budget deficits. The markets may now decide to hound sterling or the dollar. Either way, the combined wisdom of Delors (the enlightened bureaucrat) and Soros (the enlightened speculator) remains valid. The EU has come to a dangerous crossroads.

In some respects, this is a place that the EU knows well. Most of its achievements have been born out of crisis. There are two reasons to fear that this is not just a crossroads but a minefield. There is, as Mr Delors says, a new nationalism in Europe, which partly explains the new selfishness – or narrow and self-defeating definition of national interests – which has arisen in Germany. Something of the same trend could be seen in the past week in the election results in Belgium and the Netherlands. Bart de Wever, the "moderate" Flemish nationalist, and Geert Wilders, the plausible Dutch populist, represent a kind of educated, middle-class, white-collar selfishness and intolerance – Ukip rather than BNP. This may be more threatening in the long run than old-fashioned, blue-collar, xenophobic nationalism.

There is another reason why the present euro crisis is disturbing (and should be disturbing even to moderate eurosceptics). As both Mr Delors and Mr Soros suggest, the EU has reached a point where it cannot easily go forward and is unable, safely, to go back.

To move forward would be to enter the forbidden land of true federalism. If the euro was rooted in a single economic and budgetary policy from Germany to Greece, it would be easier to run and keep stable, in theory. Such a Europe-wide economic policy is politically impossible, and probably undesirable in practice.

The euro is the perfect symbol of the EU tendency to shuffle forwards three steps towards quasi-federalism and then shuffle two steps back. Mr Delors and others were right that a single currency without any form of political government was likely to prove unstable in the long run. (It took the markets rather a long time to see that they could make money from this contradiction but they got there in the end.)

The Germans, now even more nationalist in their thinking, remain viscerally opposed to the idea of a "euro government" of 16 countries. David Cameron refuses, rightly, to accept Angela Merkel's unworkable idea of a vague economic "governance" of all 27 EU states. Result: deadlock and calamity. Or perhaps not.

Until now, it has been unwise to underestimate the survival instinct of the EU and all its works. Until now, EU governments have always dreaded the kind of nuclear confrontation which would tear the whole project apart. EU governments, especially the Germans, have, until now, felt a gut terror of the EU failing and turning the European clock back – as Mr Soros warns – to 1930.

The great known unknown (as Donald Rumsfeld would say) is a newly confident, newly intolerant Germany: not exactly Ukip-ised but no longer willing to accept that European interests are nearly always Germany's interests. How far can a politically weakened Ms Merkel go towards a more balanced, less selfish, beggar-my-neighbour approach to Europe-wide economic recovery? Can Mr van Rompuy come up with a plan which, short of a euro "government", narrows the divergences which are tearing the euro – and the EU – apart?

Eurosceptics in Britain may delight in the problems of the EU. This year's 70th anniversaries should remind them that it is sometimes dangerous to be given what you most desire.