The Greek crisis – amid rumblings of discontent in capitals across the European Union – has cast a shadow over the EU’s economic course. And as Britain pushes for structural reform, the uncertainty in Europe may be here to stay, argues Allie Renison
Europe is on the British news and political agenda like never before – for reasons that won’t necessarily thrill the European Union. Three key issues relevant to UK businesses dominate the discussion, both in practical and macroeconomic terms: the crisis in Greece and its implications for the eurozone, the changing policy orientation and output of the new European Commission, and the future of Britain’s relationship with the EU. There are degrees of overlap between each of these, and the potential for significant knock-on effects.
Our polling reveals that IoD members are clear: the prospect of a UK withdrawal from the EU, or ‘Brexit’, is of more direct relevance to their business than Greece leaving the eurozone (‘Grexit’), with 68 per cent of IoD members reporting that Brexit would be of more concern to them1. The main worry seems to be Grexit-inspired currency fluctuations. This, along with the ECB’s quantitative easing programme, has weakened the euro significantly against sterling. While the euro’s decline is boosting northern European exports, it is putting pressure on UK businesses.
But 48 per cent of directors also think that a Grexit – which three-quarters think is likely to happen within the next 12 months – would hurt the UK economy, while 62 per cent consider a messy withdrawal which negatively affects financial markets to be a likely outcome. They are right to have such concerns, even though many firms and institutions in the UK have taken significant steps to reduce their exposure to Greece.
The immediate threat of Grexit has been averted, with a third rescue deal reached on paper, and the country’s short-term financing needs being met through a revived bailout fund. But the rancour of Syriza rebels against the troika’s return, a Greek government averse to taking ownership of reforms it feels forced into, and a German finance minister openly saying that temporary Grexit is preferable, means that it is still an omnipresent possibility. The situation has been further complicated by Greek prime minister Alexis Tsipras’ decision to quit, triggering a snap election likely to be held on 20 September.
The temptation is to reach for deceptively ‘simple’ solutions while overly dwelling on past mistakes, which is understandable for a eurozone trying to learn how to prevent future crises – particularly when it comes to the rules of its institutional architecture. The consensus now, from academics, economists and politicians, is that Greece fudged the numbers when joining the euro.
True Greek inflation and deficit levels towards the end of the millennium meant that Greece was nowhere near compliant with the economic convergence criteria needed to enter the eurozone. But revised and creative accounting on the part of the then Greek government allowed them – on paper – to qualify for euro membership.
The result is that Greece, in the run-up to euro entry and in line with most other eurozone countries, squandered the once-in-a-generation opportunity of lower interest payments to consolidate debt painlessly. Instead they used lower debt interest payments to substantially increase their public sector expenditure. This was aided not least because of the weak enforcement of the bloc’s deficit and debt-to-GDP threshold rules.
Persistently weak ownership of the structural reform measures attached as conditions to Greece’s bailouts leads some to argue that cutting off Greece would be best for both sets of parties. They argue that the re-establishment of a massively devalued drachma would help it recover in the longer term. But the country’s chronically underperforming exports means it is unlikely that even this would help boost its competitiveness enough to stave off the external shocks that a messy default and exit would bring. Moreover, any post-Grexit government would have to undertake a programme of radical deregulation, along with tax and spending reform of a degree never seen before in Greece.
The more likely outcome of a reintroduction of the drachma is a relaxation of austerity and a rapid erosion of the competitive advantages of any initial devaluation to the point where further devaluations became inevitable. And with the German government being rounded on from all corners for its uncompromising stance, cracks within the eurozone that have emerged in recent weeks would have exploded were Greece to have been forced out. Just as politics brought the currency union together, it could threaten to break it apart.
The hope is that the eurozone uses this crisis as an opportunity to improve and integrate structural economic convergence in the euro area. On the one hand, it could provide the impetus for moving more quickly towards this objective. On the other, the political ramifications of the standoff could expose deeper rifts about the way forward. Germany and France both want to give it those teeth, but approach such a system with markedly different views about the economic orientation it should adopt.
A Greek government weary and wary of surrendering [further] sovereignty to a “neoliberal” structure would have to agree, although it is debatable how much longer Syriza will be in power. Any dispassionate analysis of progress would have to conclude the pace of structural reforms has been protracted, and the rules-based euro governance system lacks real teeth. A quantum leap to a fiscal union for now remains a dream in that many governments are averse to the treaty change needed to drive this through.
To this end, the European Commission is trying to mobilise debate with proposals about what that integration for the eurozone should look like. The Five Presidents Report laid out a 10-year roadmap across three stages for bringing this integration forward. This lays down a blueprint for completing the nascent banking union to redress the so-called “doom loop” between banks and sovereign debt, more integrated fiscal risk-sharing and a fiscal stabilisation function, and more co-ordinated economic policymaking. Whether banking union will inspire sufficient consumer confidence in southern European banks for them to again attract deposits – and repair those credit markets – remains
a significant question.
In the UK, salience of, and interest in, the deeper eurozone debate has often been coloured and therefore limited by not wanting to join the euro. While staying out of the currency union naturally restricts our ability to influence eurozone matters, this should not mean a total abandonment of engagement. Our interests are still at stake and have to be defended.
The ongoing structural reform drive in the eurozone, spearheaded by the commission, is something the low-regulation British should welcome. This long overdue shift could well boost the euro area’s competitiveness and is a sign that the EU is moving towards a model more aligned with Britain’s economic approach.
Increases to flexibility in labour markets, privatisation even where it comes through foreign direct investment, and getting serious about deficit and debt levels, all are hallmarks of economic overhaul that Brussels is helping to drive. Emerging from the crisis of the past few years with more competitive and growing economies will help generate domestic demand and consumption across Europe.
Integration to strengthen euro area policy co-ordination and stabilise its banking sector is in our economic interest. But further political union does raise some key questions to consider, particularly around the balance between eurozone and non-eurozone members of the EU.
By necessity, the eurozone has had to focus largely on addressing the structural shortcomings of the euro’s institutional architecture to stave off one crisis after another. The ongoing Greek saga will ensure that this is still a major priority. This increasingly lends itself to the view shared by some countries that the EU’s central focus is the euro, and that wider pan-European interests are secondary to shoring up the currency union.
If the prime task of the EU is to bolster the eurozone, there is a risk that for the UK – where there is no chance of ever joining the euro and at least a possibility of leaving the EU – desire to heed British concerns may well be limited. The faultline in Europe has increasingly become not one between euro-ins and euro-outs, but rather those both in and on their way to joining the euro and those who remain committed to staying out. That leaves the UK in a shrinking minority, and with limited influence against potential ‘eurozone caucusing’.
Eurozone members tend not to act as a unilateral bloc – even France and Germany are rarely on the same side when it comes to ideas of economic competitiveness. But on several key matters they are still in step. These include: the financial transaction tax (FTT), a common consolidated corporate tax base, and gender quotas on boards. While voting in the EU on tax issues remains subject to unanimity and thereby national vetoes, a more integrated eurozone on fiscal policy could lead to the euro area pushing ahead with decisions such as the FTT, which still have significant second-order effects on the UK’s financial sector.
A formalisation of the EU’s two-speed structure would allow the eurozone to press ahead with the integration it needs to make monetary union work, while giving the UK the more detached status that many here crave. It would be a signal that Brussels understands that one-size-fits-all simply is not the right fit for some countries. But a multi-speed Europe could also perpetuate divisions that will lessen UK impact on areas that matter, such as the single market. Accepting this diminished influence is the price of less interference needs to be more appreciated and accepted.
Fortunately, the European Commission shows every sign of pushing ahead with the UK’s key interest: the single market. The UK government has ambitious plans for the energy union, capital markets union and digital single market agenda, but perhaps more crucially for Britain it seems to be getting serious about enforcement of the existing rules in all member states.
The UK has a tendency to implement EU rules to the letter – and too often beyond. The same can hardly be said about many other big players, frustrating British exporters and domestic operators alike at the lack of a level playing field and perceived lack of fairness in implementing regulation. Nothing is going to reduce enthusiasm for activist lawmaking in Brussels more than the rigorous enforcement of what has been agreed.
In fact, the commission could be argued to be more in line with UK interests than it ever previously has been. Jean-Claude Juncker’s right-hand man, first vice-president Frans Timmermans, is serious about putting into action better regulation. Already he has made good on his intention to withdraw the controversial revised maternity leave directive, which sought to impose significant new obligations on employers that would have invariably helped keep many women out of the labour market.
Timmermans has also announced the creation of a new stakeholder mechanism to bring together experts from across Europe on how to reduce the burden of red tape and mandated that the commission must formally react to its proposals. The IoD wants Timmermans to go further, embedding an innovation principle as part of all legislative proposals’ impact assessment criteria and adding a sunset clause to mandate the review of all legislation after three-to-five years for its burden on business.
Having taken several IoD members on delegation visits to Brussels (there will be another chance for directors to join one next month) we can say that there has been a notable shift in the commission’s receptiveness to the concerns and priorities of enterprise.
This is doubly important in the run-up to the UK referendum on EU membership. The IoD sees its most important priority on Europe as testing that the EU is both capable of and moving towards reform. Our most recent Policy Voice survey showed that most members wanted to stay in the EU – on the basis of seeing a measure of that reform. It revealed that the top priority areas for directors are reducing EU red tape, amending the principle of ever closer union, making the single market work better and pushing forward structural reforms to boost eurozone competitiveness.
In addition, IoD members want to secure more flexibility on EU social and employment policy and better enable national parliaments to collectively challenge EU proposals. Given that just 11 per cent of directors consider the EU’s [traditional] socio-economic model to be a viable one for the future and perhaps increased awareness of the challenges treaty change poses in the short term, this shift is understandable.
It will also be a welcome move from our 27 European partners, who remain integral to any deal David Cameron seeks to reach. The IoD is aware that just having a list of priorities will not do the trick, and so we’ve embarked on a series of conversations across Europe, taking our business reform manifesto directly to both governments and other business groups.
The reception has been positive and our discussions productive. In particular, many European SMEs are not only desperate to keep the UK in the EU to ensure a more open and market-focused economic orientation, but also see this exercise as a way to strengthen the competitiveness agenda in Brussels. At the same time, the IoD’s presence as well as brand in Europe is receiving a significant boost as we build a network of like-minded business leaders across the national capitals and beyond.
The crisis in Greece has manifold implications for the UK’s relationship with the EU. The confrontational strategy favoured by the Tsipras government may well serve to positively differentiate from Cameron’s own negotiating strategy. The UK is not seeking to overhaul EU structures within a short period of time, and occupies the position of supplicant rather than demandeur.
While EU governments may on the one hand feel the Greek crisis is more pressing than dealing with Britain’s concerns, they will be grateful for the more conciliatory stance being adopted by London, particularly if the focus is on changes designed to benefit the EU as a whole. Conversely, events in Greece and the potential spectre of Grexit may cast a long shadow over the EU as a whole in the eyes of the British public.
The shambolic nature of negotiations and the perception of European institutions “imposing” change on a small country may combine to trigger levels of scepticism which had been steadily decreasing over the past 18 months. Despite an EU increasingly receptive to UK interests and concerns, Grexit – or even the prospect thereof – may serve to increase the likelihood of Brexit.
Voters will be going to the polls in Portugal, Spain and Poland among others this year, with some facing Syriza-style parties seeking to force the EU to abandon the economic course it has sought to forge during the eurozone crisis. Whatever the outcome, it is clear that political risk and uncertainty are here to stay for businesses.
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1 IoD Policy Voice Survey, June 2015
• It is hoped that the eurozone uses the Greek crisis as an opportunity to improve structural economic convergence in the euro area.
• Many firms and institutions in the UK have taken significant steps to reduce their exposure to Greece.
• Before the third bailout deal, many observers floated the idea that it would be better for both Greece and the eurozone for Greece to leave the currency union, or at least its formal structures, while continuing to use the euro.
• Events in Greece may cast a long shadow over the EU as a whole in the eyes of the British public.
• While staying out of the currency union naturally restricts the UK’s ability to influence eurozone matters, this should not mean a total abandonment of engagement. Our interests are still at stake and have to be defended.
• While the euro’s decline is proving a boost to northern European exports, it is putting pressure on UK businesses.
• Integration to strengthen euro area policy co-ordination and to stabilise its banking sector is in our economic interest.
• The new European Commission shows every sign of pushing ahead with the UK’s key interest: the single market.