Eurozone Crisis (Impact on Scotland)
We move on swiftly to our report on the eurozone crisis and its impact on Scotland. I welcome to the meeting Dr Fabian Zuleeg, who is the chief economist at the European Policy Centre. He has kindly come along to give us his thoughts on the eurozone crisis and the committee’s report. I invite him to make a brief opening statement.
Dr Fabian Zuleeg (European Policy Centre)
Thank you for inviting me to give evidence. It is always interesting to talk about the eurozone crisis—it always means checking the news in the morning, to see whether anything else has happened. This morning, I think that we are safe.
I will briefly describe where we are in the crisis. It is important to emphasise that it is not simply a public finance crisis. It is a public finance crisis—some eurozone countries had a lot of problems with excessive debt—but we are talking about a much more comprehensive crisis. This is a financial crisis—it all started in the banking sector, which is still in a fragile state across Europe. It is an economic crisis and a crisis of growth and competitiveness in the crisis countries and in the European Union as a whole.
In a number of countries, it is clear that the crisis is now social. Unemployment is at completely unacceptable levels—a 25 per cent unemployment rate and a 50 per cent youth unemployment rate are certainly crisis levels. It is a political crisis that has already led to many political changes, and a number of national Governments have fallen. In Greece and Italy, Prime Ministers were replaced because of the crisis, with a lot of pressure from the European level.
Underlying all that is the fact that the situation is a European political crisis. To put it simply, we had monetary union but we did not have the economic and political union that was needed to underpin that. We did not have the governance that we needed to make economic and monetary union work.
We are now trying to deal with both the immediate crisis and the longer-term crisis. Obviously, the focus of the immediate crisis in a number of countries has been the public finances, with debt levels in countries such as Greece rapidly approaching 200 per cent of gross domestic product. However, although debt levels are still creating very significant problems, we are in a slightly better position than we were a few months ago, at least as far as the immediate crisis is concerned. Probably the most significant intervention has been the European Central Bank’s statement that, in essence, it will do whatever it takes to sustain the euro. That is what the markets needed to create the certainty that the euro would exist in future and, since that statement was made, the immediate crisis has eased significantly. There is much less speculation about any agreed exits from the eurozone, although some people still think that that might be the best option.
There have also been political changes. For example, the elections in the Netherlands unexpectedly produced a pro-European coalition, which disproved the point that if you carry out reforms or support eurozone Governments you will lose your next election. The fact that that did not happen in the Netherlands was positive.
Moreover, Germany has changed its attitude. As far as the crisis is concerned, it is by far the most important country economically and politically; not only is it the economic heavyweight of the eurozone, but it is very clear that, politically, no solution to the eurozone crisis can be reached without it. It has committed to a long-term solution to the euro crisis which, put simply, is all about having significantly more economic and political integration. For Germany, it is very important to have political as well as economic union, because given the legal limitations on the country it cannot go much further than it has already gone without political union.
At the European level, we have put crisis mechanisms in place. For example, the European stability mechanism is now up and running and providing funds to countries and banks that are getting into trouble. Of course, the countries that access those funds have to submit to a programme of reform—or what is often called an austerity programme. There is also a tacit acceptance that the European Central Bank can now do things that it did not do before the crisis, mainly buying the debt of eurozone countries on secondary markets, which is by now quite a large-scale operation.
We also have put in a huge array of economic governance measures such as the so-called six-pack, the two-pack and the fiscal compact. I will not go into detail on all of those measures but will say that their main focus is discipline in public finances, ways of enforcing that discipline and closer surveillance of and checks on what is happening in member states. That is a clear indication that the European Union is changing. In the past, what happened in a member state was pretty much the member state’s business. That is no longer the case, and we now have a very clear process by which member states must account for their economic policies at a European level, with sanctions if they do not follow the rules that have been put in place.
A banking union is starting to be put in place, with common supervision of European banks through the European Central Bank. That is the first step. Further steps are envisaged, such as common deposit insurance guarantee schemes. However, this will be a more lengthy process, not least because some countries in the EU are not particularly keen on European action in the banking field.
There are also wider considerations about what might have to happen in the financial sector. The Liikanen report looked at how the financial sector needs to be reformed to ensure that the kind of crisis that we have seen does not happen again, which basically involves functional separation of the core banking business and the more speculative investment banking side. That has not yet been endorsed but I expect that we will see more action in that area.
We have a growth pact in place. The recognition has arrived at the European level that this crisis will not be solved without growth. That received further impetus from the election of President Hollande who, in the election campaign, strongly advocated growth. The growth pact that we have at the moment is useful but does not go far enough. It has some limited measures on how we can spend unspent structural funds and measures in respect of the European Investment Bank, but it is a relatively small growth impulse, and we are already lagging behind in implementation—it is not happening fast enough.
I will finish on the issue of the long-term trajectory. My belief is that the union has already changed significantly but not enough. We will have to go much further in the integration process, certainly in respect of fiscal union and how we collateralise debt at the European level. We are already collateralising debt: if the European Central Bank buys up debt from the crisis countries, that is a form of collateralisation because we then all carry the risk. However, there are possibly much better, more structured ways of doing it, which also have political legitimacy associated with them.
We will continue to have to deal with crises. It is clear that banking systems are still fragile. We will still have problems in a number of countries—Cyprus is a recent case. The problems will continue. We will have to have more growth-enhancing measures, otherwise the current reforms will not be politically feasible in the long run. The countries that have to implement the reforms will not vote for them for ever if they have 25 per cent unemployment.
The big thing that is still on the table is political union and what we need to change to legitimise all of the measures that we have put in place and the additional measures that will come. That is still a big open question. We will have a report from the presidency in December, which will start to discuss some of those issues, but at the moment it is not clear what direction it will go in. Some people are trying to limit that a lot—they want very limited or no treaty change; others are talking about a much broader discussion about where the European Union will go.
It is clear that we have already had more integration and that there will be more integration. That creates some challenges for particular countries. In my view, it is not feasible to have a multispeed Europe, in which countries pick and choose which parts of the European Union they can participate in. To take one example, the banking union is clearly an important part of the economic governance package, but it will affect the single market. There is no way that the free movement of capital cannot be affected by those kinds of rules. In my view, separating out the single market from economic and monetary union is an impossible exercise.
For countries, there will be a choice that will have to be made. To put it very starkly, that choice is whether they want to be in this new European Union, which will look very different from how it looks at the moment, or do not want to be in it.
09:15
Thank you very much. At this point, I welcome Chic Brodie, who has a particular interest in our discussion. If he wants to ask a question, he can give me a nod.
I will open the questioning. The impetus for our committee inquiry was David Cameron’s use of the veto last December over the fiscal compact and everything that it contained. One of the impacts of that on Scotland was a hardening of attitudes in Brussels towards the United Kingdom and the growth of a very Eurosceptic attitude in the UK towards Brussels. That has an impact on Scotland because, obviously, Europe is a huge market for Scotland in many ways—not just in trade but in culture too. Can you give any insight into how that whole exercise played out and into the impact that it had on Scotland?
What we are seeing at the moment is a change in the UK’s relationship with the EU. That change is not a sudden change but has been going on for a long time. Certainly, the UK has for a long time been the most Eurosceptic country. From opinion polls and the background information that is available, it is clear that the UK has some particular issues with the way that the integration process is going.
We are now seeing a hardening of some of those attitudes, as you said. For the first time, we have seen discussion in Brussels of the possible exit of the UK, which has always been taboo. The agreement has always been that the UK should be part of the European Union, and it has never been mentioned that the UK might not be part of the European Union. Now we are talking about that and there is a realistic chance of that.
The key issue is the way in which the European Union works. With 27 countries—soon to be 28—there have to be compromises, no matter how strong a country might be or how determined it might be to defend its national interests. The European Union cannot function without compromises. Germany has already had to accept a lot of things in the euro crisis, despite the fact that Germany is clearly the most important country for the resolution of that crisis. For example, a lot of things that the European Central Bank is doing now cause deep levels of unease in Germany. Germany is very unhappy about some of the things that are happening, but it still has to compromise and come to the table.
If we are getting to a situation in which a country is choosing no longer to be constructive and to use the veto a priori—without even having the discussions—we have a problem. There is great concern that in negotiations on the budget and the multi-annual financial framework, we will see another veto from the UK, and that the same will happen in relation to the banking union. If that is becoming the main UK tool for European policy, the relationship will have to change over time.
That is a worrying development. Scotland’s attitude has always been much more that of a Europhile than a Eurosceptic. If a veto is used on the multi-annual financial framework, what will the impact be on the relative and fragile stability that has developed in the past few months? Will the situation be tipped back into crisis?
There is a question of timing. It might well be that at next week’s summit in Brussels there will be no formal veto but negotiations will not be concluded. That raises a lot of questions for the European Union, because the general consensus is that we need the decision this year if we are to be able to start programmes from 2014. If the decision goes into next year, delays in the start of the new programmes will become a virtual certainty.
There is a problem, because it is unlikely that we can go from the November summit to the December one and get a resolution in the meantime. There is a very short time between the November and December summits. More important, what would materially change? What would be on the table that would be acceptable, if the UK carried out its threat to accept only very significant cuts to the proposed budget?
There is also the question of the extent to which the issue will become entangled with the discussions about economic governance. That is the last thing that other countries want; they want the December summit to focus on and get resolution on the economic governance question. However, if that happens, we will not be able to discuss the multi-annual financial framework until some time in the new year, most probably February, and the question is what new proposals would be on the table at that point.
We are in a situation that is different from the situation in relation to previous multi-annual financial frameworks. The Lisbon treaty changed the game, because there are now provisions for what happens if there is no budget agreement. However, the situation is still very open and there are a lot of uncertainties, because the provisions have never been used. There is a big question about what they actually mean in practice.
Could the UK’s actions during the next few months determine whether there is further uncertainty—or stability, should it compromise?
Yes, absolutely. I work in a think tank and I always have a bit of a problem when we talk about the multi-annual financial framework, because it is not what we should be spending our money on at European level. However, for a variety of reasons, it is very difficult to change things. Currently, the most important thing at European level is to get an agreement. We cannot have a situation in which we continue the negotiations indefinitely; we have enough problems and do not need to add another. The best thing for stability and certainty would be an agreement, but that looks unlikely.
Thank you. I could go on asking questions for a while, but I am hogging the floor, so I will bring in other members.
What part is national debt playing in the current crisis in Europe? It is surely no surprise that countries have had significant national debt over many years. The UK’s national debt is about a trillion pounds—that is not a direct criticism of the current UK Government, because predecessor UK Governments left office with huge amounts of national debt. Is national debt becoming more significant because of the banking crisis? We have had national debt and recessions for a long time. What is different this time round that has caused the crisis that we are in?
A number of things have changed. The banking crisis certainly had a big influence. To put it simply, we had very cheap and easy money in the period running up to the crisis. When the crisis hit, banks had to be far more selective about how they were lending their money. That meant that they re-evaluated the portfolios that they held, which included national sovereign debt.
However, there are other issues. One concerns the question of long-term growth prospects. A country can have a significant national debt if the markets believe that, in the long run, its economy will grow very healthily. That has often been the case for developing countries, in particular. In essence, if the country’s growth rate is relatively healthy, it is difficult to get into trouble. When the economic crisis hit, there was an effect on growth, which aggravated the situation.
There is also the question of how the national debt is structured and who holds it. In a number of the crisis countries, a lot of the debt was held outside the country. Generally speaking, if the debt is held by citizens, and as long as those citizens are still willing to lend to their Government, a country can have very high debt levels and sustain them for a long time. Japan is a classic example of that. It has a very high debt level, but because the debt is held predominantly by Japanese citizens, the country does not really have any problems financing it.
It was not just the level of debt that changed, but the cost of having that debt. With very low interest rates beforehand and no spreads, which are in essence what markets price risk at, it was very cheap to hold even large levels of debt. Greece, for example, paid the same interest rate as Germany for the whole period of the economic and monetary union that created the euro.
For 10 years, debt was very cheap for a country such as Greece. When the markets realised that there was a risk, and when that risk was then aggravated because there were discussions about Greece possibly dropping out of the eurozone, those spreads went through the roof. We are still in a situation in which a country such as Greece finds it impossible to finance itself on the open market because the costs are so high that it would pay a punitive interest rate that it could not possibly pay. We have to keep supplying Greece with new tranches of money because it cannot finance itself on the open market.
The long-term question for Greece, which is a special case, is whether it will ever be able to repay that level of debt. When we look at its growth rate and the structure of its economy, nobody believes any more that it will. Greece will have to have some form of debt forgiveness at some point in time. We can do that in an organised, structured way, or in a chaotic way if Greece defaults, but it is clear that Greece will never pay back that amount of debt.
I was going to ask about Greece, but you have introduced it. Greece is by no means the biggest economy in Europe; it is a fairly small economy. Why is it having such a major impact on the European situation? Is it because of the reason that you have given—that it just cannot afford to service its own debt? Why is it such a significant problem when it is such a small economy in comparison with Europe as a whole?
That is a very interesting question, because it demonstrates clearly how interdependent the European economies have become, that a small economy with 3 per cent of the eurozone GDP can threaten the whole economic and monetary union.
09:30
We simply did not have systems to deal with what happened in Greece. When the crisis started we were faced with the situation that Greece was, in essence, threatening to go bankrupt. If Greece had gone bankrupt then, I firmly believe that the situation would have been a lot worse than it is now. The problem with Greece was that, for example, all the major large banks—especially those in continental Europe—held large amounts of Greek debt. For a long time, that was seen as a very safe way to lend; Greece could borrow whatever it wanted on the open market. You have to remember that we already had a banking crisis at the time, so if we had added a Greek default to that there would have been a meltdown of the financial system. Even countries outside the eurozone that had never been that concerned with a country such as Greece were concerned. We had warnings from the US, for example, which said that we could not risk that kind of meltdown at that point.
With that kind of contagion, the problems in a country such as Greece very quickly multiply through the eurozone and beyond. It is a clear demonstration of interdependence. We are at the point where we have to find mechanisms through which we can have the right governance for all the countries in the monetary union, otherwise it will not work in the long run.
Thank you for your presentation. You alluded to a number of issues, primarily about the UK’s current attitude to Europe. It is an interesting theory, because the UK itself is going through a difficult time concerning its geographic boundaries and what may or may not happen in 2014 regarding Scottish independence, which would also add complications. This issue will be fluttering around for a period of time. If the UK decided to pull out of the European Union I think that there would be a meltdown of the EU, because the UK’s industry is far bigger than Greece’s industry and it has a bigger share of involvement in Europe. There would be very serious implications and it is unlikely that Britain would be allowed to pull out of Europe unilaterally. There would be a lot at stake.
There is another complication. We have a theory that anyone who lives in Europe has the right to join the EU and Turkey is knocking at the door to join the EU as a European nation. Although its first attempt to join was unsuccessful, its second attempt may well be successful. Turkey would bring a huge economic benefit to Europe because it has developed far more rapidly than most of our European counterparts and it would probably be an asset.
What are your thoughts on the UK’s EU membership and how that could affect Scotland, and what are your thoughts on Turkey’s continuing application to join the EU?
I hope that I did not create the wrong impression about the impact of the UK leaving. I think that it would be a negative thing for both the UK and the rest of Europe. The UK should be in the EU and the UK has a lot to offer. The other side of the coin is that the UK is highly dependent economically and politically on the EU. I believe that the UK should be in the EU, but that is in question because of how constructive the UK is being and how willing it is to take part in what is happening.
The legal situation is that, since the Lisbon treaty, a country can leave the European Union. Beforehand, we did not have that provision, but there is now an exit clause. Therefore, if there were a move in the UK to leave the EU, it could simply announce that it was leaving and nothing could be done. That makes the UK different from Greece, for example. There is no exit clause from the economic and monetary union—membership of the euro. It is not possible to leave the euro, but it is possible to leave the EU. There are big differences.
If the UK left the EU, it would have a negative effect on the EU but it would have an even bigger negative effect on the UK. When economies are struggling across the board, the last thing that we need is economic disintegration—it makes no sense whatsoever. However, the political reality is that, if it happened, the EU would have to accept it.
The question about Turkey is difficult. Turkey has been a candidate for a long time now. Not much progress is being made because there is still strong opposition in some countries to Turkey joining the European Union on cultural, political and economic grounds. The attitude in Turkey is also changing: it is becoming much more of a regional power, much more confident in itself and much clearer about its important strategic role in its region.
It is a real pity that we are not making progress. Turkey would be a useful addition to the European Union with conditions attached—certain rules need to be followed—but the willingness must exist. We should set a realistic target date for Turkey’s accession and set out clearly what it needs to do to achieve that. However, at the moment, we are, in essence, postponing the accession process indefinitely because of the opposition of individual member states. That is not a good message. It also means that the European Union as a whole loses influence in the region.
Good morning and thank you for coming.
We hear much about austerity throughout Europe. We are familiar with that word under David Cameron’s prime ministership in the UK. It has led to the huge strikes that took place in Europe yesterday. We even watched officials of the EU walk out on strike, too. There has been a belief that the austerity measures and the cutbacks in public expenditure would allow a return to a degree of acceptable performance, but that was predicated on a belief that the private sector would help growth in the countries that took that approach. Certainly in the UK, the private sector is simply not delivering. We are not getting the level of growth that we need and I think that that is true throughout the rest of Europe, as well. Our eyes are also on what will happen in the USA with President Obama’s re-election and the tax cuts that might take place if he cannot get the right measures agreed to by January.
A perfect storm is brewing. It is not only about what is happening in Europe, but what is happening in China and the USA. Do you really believe that austerity measures are the answer? The private sector is simply not delivering, and each depends on the other.
That is difficult to answer, because a lot of measures are grouped under the term “austerity measures”. There certainly was and is a need for public finance consolidation in a number of countries, if not all countries, given the long-term trajectory. Public finance consolidation is not necessarily the same as austerity measures. For example, there has been a lot of emphasis on cutting spending and much less emphasis on increasing taxes, so there is a big question about how exactly the public finances are consolidated.
There are also a number of structural reform measures, which have been called austerity measures, although many of them are not austerity measures. Many of them are about changing the labour market, for example, by trying to tackle protected professions, which are still a big issue in a number of countries, and by trying to open up markets in some areas.
There are many different measures, but if we are talking about the crude cutting of public expenditure, that has not worked. It has not worked for the crisis countries, because they have gone in a downward spiral. In essence, the current situation means lower growth; lower growth means lower revenues; and lower revenues mean bigger deficits. Therefore, the deficits in a number of the crisis countries have actually been increasing, not decreasing, because those countries cannot get out of that spiral by themselves.
The question is how we best address that. As I emphasised in my opening statement, we do not have growth measures. We need to provide positive measures and impulses to those economies, particularly as the international environment is even more worrying and it is unlikely that a lot of positive growth impulses will come from the international economy. Therefore, we need to do more to help those countries.
From the start, we have advocated that we need to maintain some form of medium and long-term positive perspective. It is clear that there will be a lot of economic suffering in those countries. Quite often, the media in northern Europe gloss over the fact that life is incredibly hard for people in Greece, Portugal and Spain who do not have jobs and can no longer pay their rent. There are social indicators, such as the number of young people who are moving back into their parents’ houses because they can simply no longer afford an apartment. That kind of thing is happening all over the place. We need to give those countries some hope for the future. Maybe there needs to be pain in the short term, but if we start to cut all the things that are important for long-term growth, such as investment in education, infrastructure and innovation, we will have a long-term problem as well.
I suppose that there are implications for democracy. In some of those countries, technocrats rather than democrats are in position. Will you comment on that issue?
Arising from the treaties, we are seeing that new member states must join the euro. Latvia and Romania must join the euro by 2014. Are those countries on track and will that go ahead, given what is happening in other parts of Europe? I believe that Bulgaria must join, too, but it does not as yet have a date set.
09:45
The issue of euro membership is a little bit confusing. Any EU member that does not have an opt-out is committed to joining the euro at some point and at the moment only Denmark and the UK have a formal opt-out. However, in order to join the euro, you have to fulfil a number of conditions—if you do not do so, you cannot join—and countries are assessed on whether they are ready. Of course, if you do not want to join, you can fail the assessment. Indeed, it is very easy to fail, because the criteria include being a member of the exchange rate mechanism, which is entirely voluntary—no country can be forced to join—and having a stable currency in the mechanism for at least two years. Sweden, for example, is not part of the exchange rate mechanism and therefore cannot be forced to introduce the euro. No country in the European Union can be forced to introduce the euro.
Despite its problems, however, the euro is still quite an attractive proposition to a number of countries, and they still want to introduce it. The question for them is whether they will be able to fulfil the various conditions by the date that has been set. Frankly, I think that it will be very difficult for any country to fulfil what are quite strict conditions, so I do not expect to see any enlargement of the eurozone in the near future. Of course, we shall see. There is still time for some of the criteria to be met, but at the moment it is a very big ask. The only country that has been able to get in recently has been Estonia, which is in a very special economic position; however, in some areas it, too, was quite close in terms of the levels that were set by the criteria. As a result, I think it unlikely that other countries will fulfil the criteria—certainly not Romania and Bulgaria for the foreseeable future.
How does that sit with the requirements of the treaty, which makes it clear that any new EU countries must join the euro? It seems that we have one rule pointing in one direction and other rules pointing in other directions.
The treaty says that countries must commit to joining the euro when they fulfil the conditions. If they do not fulfil the conditions, they cannot join the euro.
If I have time at the end, I will let Helen Eadie back in, but three other members want to ask questions and we are running out of time.
I have two very quick questions. During the summer, I attended the Scotland Europa conference at which you were a panel member, and we talked at length about the UK’s relationship with the EU after the use of the veto. What impact will the recent vote at Westminster not to increase the European budget have on the MAFF negotiations and the setting of the budget? How is the UK being viewed as a result of that decision at Westminster?
Secondly, when you talked about the collateralisation of the debt, you said that we are all exposed to the risk. How does the UK sit within your definition of “we”?
The House of Commons vote on MAFF has made the situation even more complicated. Although the vote itself is non-binding, it clearly sets the tone for what the UK Government is asking for in Brussels.
An undoubted political consideration for a number of countries is that it is quite good for the UK to ask for the cuts, because they, too, want them and it is much easier for them to say, “It’s the UK that wants the cuts, not us. We are simply going along with it.” Of course, it is all part of the normal negotiation process. However, if the vote means that the UK is no longer willing to compromise, we will have a problem. Indeed, that is what we are facing at the moment. The worrying sign is that it is no longer clear whether the UK Government is able to get a compromise through the House of Commons. If that is the case, we will be back to the veto stage.
I am sorry—what was your other question?
It was about the risk to the UK from the collateralisation of debt.
Although there is certainly a direct risk to the countries that are part of the economic and monetary union through the European Central Bank, the fact is that our financial system is fragile and any major problems in the banking system will quickly spread from that union to the rest of Europe and, indeed, will trigger a global crisis. Those risks are still very real.
There are also risks from taking on these responsibilities. The biggest concern of countries such as Germany is that collateralising debt without any political or economic integration will create moral hazard, and there is a fear that countries will continue to borrow unsustainably in the knowledge that someone at a European level will step in. That is why debt cannot be collateralised without having political and economic integration at the same time.
Good morning. Could you put more flesh on your comment that it is not feasible to have a multispeed Europe and, in particular, on your point about banking union affecting the single market? Does that not pose particular difficulties for the UK Government, given its current views? Will the UK ever embrace a one-speed Europe?
I should make it clear that I am not saying that a multispeed Europe is an impossibility; indeed, in a number of areas, we already have different arrangements and things moving at different speeds. For example, some countries are part of the Schengen agreement and others are not. I do not think that we would have a problem in such areas.
When we come to economic integration, however, and look at what full economic union means, we find that it is clearly linked to the single market, which covers taxation, public spending, banking regulation and supervision, mobility of capital, mobility of people and so on. All of those things will be affected by the integration process. We have maintained what I would call a fiction at the European level in that, whenever we put these things in place, we always say in the first paragraph that they should not affect the single market. In the long run, that position cannot be maintained. Of course the single market will be affected if the banks that are in the eurozone have a different supervisor from banks that are outside the eurozone. That must affect the single market.
What that means for the UK is the big long-term question. Is the UK willing to be part of that? I do not know. However, I certainly do not think that we can pick and choose. The fact is being emphasised that the UK would retain a veto on all financial sector regulation but, in the long run, that cannot be maintained. We must be able to make rules effectively at the European level to govern banks. That cannot happen if we give one country a veto on everything.
What is your best guess about where Europe and the crisis will be in 12 months’ time?
We will be pretty much where we are now. The immediate crisis will not go away, but we will not get as close to the wire as we have in the past couple of years. We will do what one of my colleagues has called muddling through—we will continue to muddle through. The big question is whether we are on the right trajectory for the longer-term resolution.
What political integration steps will come next is another big question. We do not know exactly where we will go, but something ambitious must be on the table. We must see at least what the goal is. It will take quite some time to put all that in place and not everything will happen at the same time.
Significant additional integration steps will take years to implement. There is no question but that the European system has moved quickly in the crisis, but fundamental issues such as political union need treaty change and a convention at the European level and they take a number of years. The situation will not be resolved quickly, but we should at least be able to see the trajectory.
From the point of view of Scotland, which has a referendum coming up in 2014, there will be a little more clarity, but not much more.
Probably—yes.
I call Chic Brodie.
Convener, thank you for allowing me to participate.
Dr Zuleeg talked about the conditions and the need to enforce public finance discipline. The conditions for the ERM put limits on budget deficits and said that debt should be no greater than 60 per cent of GDP. Many holes have been shot in that—for example, Greece’s level is at 200 per cent, and some countries, such as Italy, were allowed to join the ERM without achieving the targets.
You might have answered part of my question in your previous answer. In effect, Germany—and not just Germany—is buying back its own debt in Greece. Whether it likes it or not, the UK is strapped, because the French banks have a large share in Greek debt, and the Royal Bank of Scotland is a 40 per cent creditor to the French banks. Whether we like it or not, the UK faces that situation.
Creditor nations such as China are unhappy about writing off debts. Germany and other European countries need the market, although it is small, to be sustained for their goods. How will the political union that will be required to effect the fiscal union be achieved?
10:00
A lot has already changed. It is true that, in the past, we had the stability and growth pact, which was supposed to guarantee public finance discipline, but that has obviously not been the case. One reason why the stability and growth pact did not work was simply that Germany and France ignored it when it did not suit them and changed the political game afterwards. To ask countries such as Greece to respect something that Germany and France clearly do not respect was politically impossible.
However, there have been a lot of changes and I would not underestimate the impact that they are having. I always say to reporters that there may be a problem with moral hazard, but who would want to be the Greek Government at the moment? Who would want to be at the point at which they can no longer make independent decisions, they struggle to get a coalition together to just go from week to week and they are fundamentally unpopular with their own electorate? Who would want to be Greece? Who would want to be the Government in other countries, either?
Things have changed and countries no longer get away with things. Countries are under far greater scrutiny than they ever were at European level. A country that does not fulfil its public finance obligations will be publicly discussed and will have to justify itself in front of its peers. That is a big change; we are interfering quite a lot at European level in what happens with national public finances.
We are not just talking about Greece, are we? We are talking about Spain, Portugal and Italy. Presumably, at the end of the day, the question comes down to who will drive the political union.
If I may, I will ask one other question. Scotland is using capital investment to try to secure economic growth—rightly, according to senior international economists. Would it not be better to have something like the Marshall plan that was invoked by the Americans to support the European economy after the second world war? Would it not be better to have something like that to generate capital investment and to come up with some agreement with the individual countries that a programme of investing in capital and infrastructure would be better than simply putting money into countries through debt?
I emphasised Greece because it is a particular case, but we can look at changes in other countries. Berlusconi lost his job because, in essence, he could no longer credibly interact with the European Parliament. The Italian system did not kick him out; it was the European system. Politically, a lot has changed already.
Should we have a Marshall plan? We called it a new deal, but it is the same idea. We need something whereby we invest particularly in the crisis countries to help them to grow—be that in infrastructure, education, or the creation of the cross-border networks that we need for the single market to work properly. There are some moves in that direction, but what there is at the moment is far too small. There is a lot of discussion about the idea of a fiscal capacity, which would in essence be a eurozone budget. We do not know, but perhaps part of the idea behind that is to go in that direction.
If we do not do something decisive now to help those countries to grow, we will very quickly get to the point at which the whole process will become politically unfeasible.
We are right on time. I thank Dr Zuleeg for his evidence to the committee, which we found to be extremely helpful and informative. I hope that we will welcome you back to the committee at a future meeting.
Thank you very much.
10:05
Meeting suspended.
10:10
On resuming—