Whiskey & Gunpowder

In Britain there is now a strong feeling that the decision not to join the euro has been justified by the banking crisis. If Britain had been part of the Eurozone, it would not have been possible for the pound to fall so far relative to the dollar and the euro itself. Yet it is the fall in the trade weighted value of the pound which has saved the U.K. from a really desperate situation. For the present, there is hardly anyone who is an immediate advocate of joining the euro, though there are plenty of europhiles who would expect Britain to join the euro at some future date.

At the same time, the euro has become more attractive to the weaker European currencies which are outside the Eurozone. The Polish Government has reasserted its intention to joining in 2010. Small countries which already belong to the Eurozone, such as Ireland, feel that it helps them to survive the recession, and that it would be very dangerous if they still depended on the Irish Punt; it would not be safe to depend on a small currency for a small country in such a big crisis.

Superficially, these contradictory attitudes have taken all the heat out of the debate on euro membership, but it has left open the problems which arise out of euro borrowing. Increasingly, the widening spread on the yield of eurobonds, with Greek eurobonds yielding almost double German, has led to discussion of common European borrowing, which is one way in which Germany could raise the solvency of the weaker European nations. In theory, this could become a virtually cost free way in which the strong could help the weak. If, for instance, Germany were to sell eurobonds and pass them on to Greece, then so long as Greece remained in the Eurozone, Germany would receive the appropriate income in euros and would suffer no loss. In effect Germany would offer a free guarantee that Greece would not actually leave the euro. As this would reduce the pressure on the euro system, it would actually be in Germany’s interest, unless or until the guarantee came to be called. It would strengthen the euro system by removing the weak link of the eurobond spread. Of course, there would have to be negotiated terms to protect the strong countries from potential fiscal extravagances of the weak.

On the other hand, the challenge to the Lisbon Treaty in the German Constitutional Court has been more successful than was expected. As reported in Open Europe:
“On 10 and 11 February, the German Constitutional Court in Karlsruhe held hearings on whether the Lisbon Treaty breaches the German Constitution. That two full days were taken to stage the hearings shows that the Court has some major concerns about the Treaty.

The ‘reporting judge’, Udo di Fabio, pointed out that the Treaty involved a clear extension of the EU’s competencies. He said, “One has to ask soberly: What competences are left with the Bundestag (the German parliament) in the end?” He also bluntly asked “whether it would not be more honest to just proclaim a European federal state”.

Furthermore, he questioned whether the transfer of powers to the EU really means more freedom for EU citizens, asking “Is the idea of going ever more in this direction not a threat to freedom?” (FAZ, 11 February; Euractiv, 12 February).

Five of the eight judges must approve the ratification bill for Lisbon in order for it to come into force. Incidentally, five of the judges pursued a line of critical questioning, suggesting that they are not convinced by the German government’s assurances that the Treaty does not impact on the German Constitution (BBC, 10 February).

The Court may ask for a referendum if it finds that the Treaty detrimentally affects the country’s Constitution. Article 146 of Germany’s Constitution provides that a referendum may be called if the German constitutional order is changed and Gesine Schwan, who was the Social Democrats’ nomination for the German Presidency, said she would support a referendum on the Lisbon Treaty. (Sueddeutsche Zeitung, 11 February; Wienerzeitung, 12 February)

The Court’s decision is expected in May or June but the judges’ comments should be treated with caution. Although not impossible, it would be sensational if the Court ruled in favour of a referendum. Either way, the judges’ comments highlight the serious reservations existing within Germany about the Lisbon Treaty.”

No doubt in the end Germany will find a way to ratify the Lisbon Treaty, whatever the German Constitutional Court may decide. There is a strong tendency for apparent setbacks – such as the “No” vote in the Irish referendum – to lead to ever closer integration in Europe. But that will take time. The Eurocrats want Lisbon safely ratified by all countries before May of 2010, when there will be a British General Election. If the Conservatives win that election, they will withdraw the British ratification when Labour forced through Parliament without the promised referendum.

William Rees-Mogg
for Markets and Money

William Rees-Mogg
Leading political editor William Rees-Mogg is former editor-in-chief for The Times and a member of the House of Lords. He has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His political commentary appears in The Times every Monday. His financial insights can only be found in the Fleet Street Letter, the UK's longest-running investment newsletter.

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4 Comments on "Whiskey & Gunpowder"

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Brian Barker

Interesting mention of the global language Esperanto!

It’s unfortunate that most people still do not know that this comparatively new language has also become a living language.

Confirmation can be seen at http://video.google.com/videoplay?docid=-8837438938991452670

Otherwise http://www.lernu.net ?

It was fashionable to mention Esperanto in the 70’s until tossers in a circle went out of fashion during the stagflation. Rees-Mogg has a bigger point, the Euro blanket is an emasculator for the weaker states. It was easy to get most to sign on with promises but now comes the reckoning and internal conflict generated by escalating subsidy or bust. Getting European cultures to converge in productivity and the method of achieving it is the impossible dream. The banking regulatory divergence in the Eurozone was criminal and I still can’t believe the Germans were so negligent in acceding to… Read more »
Paul Cadier
As predicted in the Theory of Currency Areas by Professor Mundell, the euro is under internal strain. This is because euroland is neither a “land” nor an “optimum currency area”. It is a divergent group of individual economies. Upon the arrival of “an assymetric shock” that impacts each economy differently, the union will start to unravell. The largest recession in 100 years is such an assymetric shock. The future of Euroland is bleek, with internal devaluation now impossible,the massive restructuring of their economies will be forced through in the middle of a worldwide slump. Not an auspicious time for such… Read more »


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