15 July 2015

Trust is a scarce commodity that will be difficult to rebuild

In 2010 and 2011, EU leaders agreed a deal that established that the EU-wide EFSM bailout fund, to which the UK is party, would no longer be used for Eurozone bailouts. David Cameron had sold this as a diplomatic victory but now, because it is the most convenient avenue to resolve an immediate Eurozone problem, that deal is being reneged on. Commissioner for the Euro Valdis Dombrovskis today made an unconvincing argument that the small print of this agreement always allowed the use of the EFSM to address the problems of a single member state but simply prevented it being used for the problems of the ‘Euro area as a whole’.

As my colleague has noted, such ‘reinterpretation’ of high-level EU agreements poses fundamental questions about ‘trust’. As the Eurozone negotiations over Greece have shown, once this is lost everything becomes much more difficult. Today’s developments are therefore a boon to those who would like to see the UK leave the EU, and for good reason. This type of political agreement, so readily jettisoned in a moment of Eurozone panic, is precisely the type of agreement Cameron may, at least in part, be relying on to secure his negotiations and sell them to the British public.

This episode will only increase the domestic pressure for the UK to secure treaty changes to underpin EU reforms – anything less will allow the No campaign to simply quote the European Commission back at the UK Government: ‘political agreements are not the same as legal agreements’. It also reinforces the general sense that everything else in the EU is at risk of being sacrificed on the altar of the Eurozone. That is not a very appealing prospect for a country that is not going to join the Euro. (If one wants to take a positive from this, it provides a practical example of and drives home the need to establish proper, legal safeguards for non-Euro member states.)

This is about more than money

Another thing to note is that the EFSM bridging loan is not simply about money – a compromise deal could end up seeing the UK and other non-Euro states completely protected against any losses, which were extremely unlikely in any case – but also sees the UK and other non-Eurozone countries being dragged into the politics over the terms of Greece’s bailout agreement. This is because the EFSM bridging loan will come with similar ‘conditionality’ to that of the full €86bn bailout, still under negotiation.

Not only are the non-Eurozone countries not involved in these discussions, the outline of the Greek bailout deal is one that few rational observers think makes economic sense. As Bank of England Governor Mark Carney told Parliament yesterday,

The statement by the Eurogroup leaders on Monday morning is an attempt to craft a programme that will allow … a return to sustainable growth. I would observe that what’s embedded in that statement requires Herculean efforts of all sides.

It is one thing for the Eurozone to ask the rest of the EU to suspend political and economic disbelief over the Greek deal, it is quite another to ask the UK and others to not only endorse it but help pay for it.