The euro crisis reveals the bitter division within the Conservative party

(c) XiXiDu

Tom Bailey

Potential eurozone integration may not have the fiery pictures of riots to accompany, but it is of enormous long-term importance. While we have become used to regular stories of the divides between the coalition partners, the more interesting split on this issue is that within the Conservative party, a divide becoming increasingly evident as the euro crisis deepens. This crisis emerged from problems which eurosceptics predicted would result from having a half-baked euro, one with monetary union but not fiscal union. These issues have come to fruition in recent years and show no signs of ceasing.

Indeed, Nick Cohen wrote that ‘not since the collapse of communism has an argument been settled so decisively’. Recently, mocking euro enthusiasts has become something of a sport for the right-wing commentariat. However, triumphant though eurosceptics are on the failures of the past, there are no easy solutions to the euro’s future. Indeed, the response of Osborne to the crisis has disappointed the right. Eurosceptic George Eustice MP recently hoped that the government might use the euro’s plight as a ‘beneficial crisis’; Osborne’s approval of a potential shift towards fiscal union within the eurozone is the polar opposite of the solution advocated by eurosceptic backbenchers.

There are no obvious solutions to the eurozone crisis and Osborne’s now preferred policy response of an increase to eurozone integration certainly has many problems of its own. One enormous problem is the effect that such a policy will have on democratic accountability. Robert Peston doubts whether ‘eurozone fiscal integration designed to close a financial deficit can be achieved without enlarging Europe’s democratic deficit.’ He raised this concern as fiscal union will weaken the control that elected national officials have both to raise their own taxation and allocate spending in full accordance with their own wishes.

For instance, a left wing government aiming to increase long term capital spending in schools and hospitals could be overridden by eurozone technocrats. The integration strategy also does not remove one major problem faced by economies on the periphery of the eurozone. David Blanchflower, former MPC member, summarized recently the problem as being that these countries ‘are in trouble because they are stuck in a monetary union and cannot depreciate their currency’. These are only two of the problems attached to the greater integration strategy.

Obviously, Osborne is not willfully attempting to push Europe towards political and financial ruin. Given our economic interdependence with Europe and the enormous exposure of our partly state-owned too-big-to-fail banks to eurozone periphery debt, only a fool would advocate a policy that they thought certain to fail. Osborne supports the fiscal integration believing that either of the other two alternatives (to continue with the status quo or break up the euro) would be worse.

There is much to be said for this analysis. With respect to the first alternative, Nick Cohen summarised that the outcomes ‘if the EU tries to keep muddling on and a major European country defaults range from the alarming to the catastrophic. Liquidity would freeze, British banks’ capital would be wiped out, Britain would go back into recession, orders for exports would vanish, tax receipts would collapse and the deficit balloon beyond control.’ To continue current policy in the face of the same problems with the hope for a different outcome is illogical.

In relation to the second option, George Soros speculated that ‘if the euro were to break up, it would cause a banking crisis that would be totally outside the control of the financial authorities. So it would push not only Germany, not only Europe, but also the whole world into conditions very reminiscent of the Great Depression in the 1930s, which was also caused by a banking crisis that was out of control.’ Even amongst eurosceptic commentators, there are no articles suggesting that dismantling the eurozone would be easy. John Redwood MP described a hypothetical euro break up as the ‘least bad option’ rather than an easy move. Osborne might be advocating a problematic path but he lacks an obviously preferable alternative.

One aspect to the calculation might be that the fiscal union path has the potential to provide at least short-term economic stability whereas dismantling the euro would inevitably cause short-term chaos during a prolonged weak economic recovery, both globally and in the UK. The economic problems are such that Nouriel Roubini, the economist nicknamed ‘Dr Doom’, tweeted on the 18th August that ‘when banks & deposits arent safe & govs are bankrupt time to buy canned food, spam, guns, ammo, gold bars & rush to your mountain log cabin’. While you do not get the nickname Dr Doom by seeing the glass as half-full, the downward trend is certainly borne out by falling markets globally over recent weeks.

Despite the evident complexity and uncertainty of the dilemma facing Osborne in relation to the euro’s future, the right-wing response has been that of outspoken criticism. James Forsyth argued that the results of such a move towards fiscal union ‘- in the medium to long-term – will be disastrous’. Douglas Carswell MP warned that ‘fiscal union in Euroland dooms many of our nearest neighbours to economic sclerosis for a generation or more’whileAllister Heath of City Am argued that a ‘giant pan-European welfare state would merely reward failure and fuel nationalism and bitter resentment.’ Evidently, given the strength of feeling within the party and core support, making the choice to support fiscal union within the eurozone could not have been an easy political decision for Cameron and Osborne. Why then is Europe such a poisonous issue for the Tories?

Europe has been a divisive subject for over two decades for the Conservatives. The split between pro-European one-nation Tories, such as Ken Clarke, and euro-sceptics, such as John Redwood MP, left them looking hopelessly divided over the Maastricht treaty in the 1990s. Both UKIP and the short lived Referendum party both emerged because of the perceived failure of the Conservative party to take a sufficiently strong stance against further European integration. Of course, Labour has divides on the issue but never with such toxicity.

Certainly there are divides on their concept of an ideal Europe or on preferred economic policy as there are in all parties. However, one reason for the venomous nature of the divides in the Conservative party is that Margaret Thatcher made opposition to European integration a key component of her legacy. In her 1988 Bruges Speech, one of her most famous lines was that the Conservatives had ‘not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising a new dominance from Brussels’. Support for EU federalism or the euro thereby became a betrayal of all that Thatcher had supposedly worked for.

Overall, anything short of full blown euroscepticism remains unpopular with many Tories. Indeed, the largest mistake of Cameron’s leadership to one poll of party members was abandoning his commitment to hold a referendum on EU membership. In a similar vein, Osborne’s pragmatic stance on fiscal union will have provoked serious anger amongst the right and reopened old divides. The 2010 intake of 150 new Conservative MPs is a rebellious group with an avowedly eurosceptic approach. As recently as late June, several of these new backbenchers declared themselves to be supportive of the efforts of what George Eustice MP described as a ‘eurosceptic government’ but that they were not averse to giving that government ‘a nudge and a push quietly’.

It seems likely that this private discontent will surface in public given Osborne’s evidently unexpected support for fiscal union in the eurozone. While the Tory leadership has opted for to support this move towards greater European federalism, Thatcher’s views continue to underpin the bitter ideological hostility in large sections of the Conservative ranks towards both Europe and the euro. For all Cameron’s efforts to detoxify his party and to move out from Thatcher’s shadow, the current euro crisis is a reminder that it remains divided over Europe.

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