In his speech to a joint session of Parliament in Ottawa last week, British Prime Minister David Cameron lavished praise on our economic system. After commending Canada for getting “every major decision right” in the past few years of global market turmoil, he lauded the strength of both the Canadian banking system and our economic leaders, who, he said, “got to grips with its deficit” and were “running surpluses and paying down debt before the recession, fixing the roof while the sun was shining.”
Cameron’s admiration for Canada’s relatively peachy fiscal position stands in stark contrast to his dim view of his eurozone neighbours.
The British PM used his northern stopover to trumpet the message both he and his finance minister, George Osborne, have taken up even more loudly than usual as of late: Europe, and the U.S., must get their fiscal houses in order, or face disastrous consequences. “This is not a traditional, cyclical recession, it’s a debt crisis,” Cameron said of the world’s faltering economies. “When the fundamental problem is the level of debt and the fear of those levels, then the usual economic prescriptions cannot be applied.” It’s a statement that begs the obvious question: what now?
As eurozone leaders scramble desperately to come up with a viable plan to stave off a sovereign debt debacle, hardline Euroskeptics—those who oppose British integration within the European Union—in Cameron’s party have never seemed so smug. Their cries of “I told you so” are not entirely unwarranted. (While Britain is a member of the EU, it did not join the eurozone nor the European Central Bank and retains its own currency and central bank.) After expensive bailouts led by the ECB and the International Monetary Fund (IMF), a Greek debt default seems inevitable. The question now is when, and will leaders be able to avoid the much-dreaded contagion effect. For if struggling larger economies like Spain and Italy follow suit (as some economists believe they will), the effect could be disastrous. A second recession for Europe would be inevitable, with the grand integrated currency experiment revealed as an unsustainable dream.
The only solution now, it seems, is for eurozone leaders to build a so-called “financial firewall” to protect their vulnerable banking system from collapse. The European Financial Stability Facility (EFSF)—the zone’s war chest of mad money—has just 440 billion euros in the kitty, of which at least 142 billion euros are already committed. The firewall could need trillions of euros. As one senior European official told Reuters, “We need to find a mechanism where we can turn one euro in the EFSF into five, but there is no decision on how we could do that yet.”
The IMF insists the ECB must help. “It is very important that we see a combination of the ECB and the EFSF. Anyone who thinks that the EFSF will be a miraculous solution to the problem is making a very big mistake,” Antonio Borges, head of the IMF’s European division, told the press over the weekend. “The ECB is the only agent that can really scare the markets.” But Germany, which would be the biggest ATM should the ECB provide the cash infusion, may lack the political will to do so.
Across the Channel in Britain, all this amounts to a whole lot of internal government schadenfreude for those who opposed joining the currency experiment in the first place. A few weeks ago, Liberal Democrat Leader Nick Clegg admitted that his previous position in favour of adopting the euro “would have been a huge, huge error”—a position that stands in stark contrast to his party’s election manifesto statement that “it is in Britain’s long-term interest to be part of the euro.”
Naturally, such thinking will not get you far in Britain today. The Tory Euroskeptics who only a few years ago were dismissed by the mainstream as hardline crackpots are now starting to gain power and influence in Parliament. In mid-September, more than 100 Conservative MPs attended a meeting in the Thatcher Room at Westminster to discuss seizing what some have called a “golden opportunity” to renegotiate Britain’s relationship with the EU. Some are demanding a referendum on the subject of whether to stay in. Another camp would prefer looser economic ties, along the lines of those Norway and Iceland have with the EU.
But Cameron, for all his economic tough talk, is understood to be wary of reopening old wounds when it comes to Britain’s relations with Europe. Britain has its own host of economic problems (high unemployment and a sluggish economy), but watching the unfolding Continental disaster, it’s lucky enough to be on the outside looking in. As Cameron said in his speech last week, he doesn’t support joining the euro and never will, but the problems there “are now so big they have begun to threaten the stability of the world economy.” In other words, just because you’re on the sidelines in a losing game, doesn’t mean it’s appropriate to cheer.