EU summit conclusions: Sharon Bowles

The UK must work to reclaim its place at the heart of the EU decision-making process or suffer the consequences, writes Sharon Bowles.

Last week’s summit was conducted against a background of national individualism: Merkel feeling obliged to say no to a transfer union and holding out against European Central Bank (ECB) quantitative easing; Sarkozy showing he is not relinquishing control to Brussels or Berlin by pursuing intergovernmentalism; and the UK opening up past arguments and current legislative issues in a forum which was inappropriate, packaging it as defence of the City of London. This is ironic considering the UK is busier than the rest of the EU tightening regulation to protect themselves and taxpayers from the worst effects of the City. This misguided attitude led to a needless veto.

Nevertheless, the summit delivered a result that was as good as it could have been, given the restricted input. Eurobonds were not ruled out and the confusion caused by the voluntary bondholder haircuts was cleared up. The ECB becoming the agent for the European financial stability facility – the temporary fund set up to provide bailouts for struggling eurozone member states – and bringing forward the start date for its permanent successor, the European stability mechanism (ESM), are both good measures; the ECB brings respectability to a mechanism that was somewhat jaded, and the ESM operates on capital rather than guarantees and is therefore on firmer footing for its rating.

Meanwhile we should not underestimate the ‘lender of last resort to banks’ role of the ECB with three year liquidity, and note the usefulness of the relaxed collateral rules which enables small and medium sized banks, vital for lending to the SME sector, to have access to ECB liquidity.

But there is no worse time for the UK to have walked away from the European negotiating table when the key item was saving the euro. The UK’s “veto” has made the summit result harder to deliver, more intergovernmental, and less integrated with the European institutions and the community method. Together, the commission, council and parliament will mitigate this effect as we work out the legislative paths. It is also a wake up call for the UK: only those who want to leave the EU have reason to celebrate.

Amid the fallout, we should reflect on the point that we care enough to be angry – this is not how Europe is supposed to work; this is not where the UK should be in relation to its largest trading partners. We must use that anger and alarm, coming from many sides, for getting the UK properly back in the ‘club’ or we will all be worse off. Let us look beyond silly rhetoric of ‘defending the city’ to the common cause of tighter, intelligent financial regulation, and optimising opportunity for growth by strengthening the single market, of which financial services is an integral part.

Returning to what the summit was about and saving the euro, there are essentially two branches to the solutions we seek. One is making sure there are stronger mechanisms to prevent a repeat of poor budgetary control. So far the success story here is the negotiation of the “six pack” of economic governance proposals. These tightened the stability and growth pact; introduced surveillance for macroeconomic imbalances; implemented new fining procedures, budgetary coordination and monitoring with a requirement for independent oversight offices and professional independence of statisticians, along with a whole range of other steps. This success of the community method gave markets a signal that we can create the necessary framework to make sure governments put themselves on the path to balanced budgets in future. This is in contrast to the intergovernmental path which has demonstrated, summit after summit, that a just-in-time negotiating stance by leaders actually leaves them well behind the game. Even now many of the upgrades to economic governance proposed in the December summit are the same as those pushed by parliament in the six-pack but resisted by council.

Then there is dealing with debt and providing alternative routes for financing when sovereign bond markets are at unsustainable interest rates. These have been successful for the peripheral countries, but the involvement of sovereign haircuts has spread contagion, potentially costing more than the haircuts. In one way such haircuts seem morally appropriate, rather like letting Lehman Brothers go bust, but just like that experiment, the backlash has been disproportionately large. This is why those who suggest we should ‘let the euro go’ should be careful what they wish for. Not only are the collective metrics of the euro and eurozone strong, but the consequences of not harnessing those collective metrics are likely to be even worse than we can imagine.

So how do we harness those metrics? One route is via the ECB, and their level of intervention has increased, even if not as far as in the primary bond market. The other untried method is a genuine common bond issuance. Right now it is too soon to embark on an unlimited mechanism because fiscal integration and certainty over good future behaviour is not sufficiently guaranteed. However, ring-fenced bond mechanisms deserve attention. Time-limited rather than guarantee-limited bonds could have a place. The German economic council of wise men proposed one long-term mechanism. Or what about one year bills? These attract lower interest rates, get repaid quickly and good behaviour is the entry ticket to a subsequent issue. Interest can be levied differentially so that the assistance from the higher rated countries has been bought. Progress had been made, but forward momentum is still needed especially on debt sustainability and growth.

Sharon Bowles is chair of parliament's economic and monetary affairs committee