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Two-speed Europe could be disastrous for Wales

10/12/2021

Plaid Economic Adviser Dr Eurfyl ap Gwilym gives his thoughts on the latest Eurozone developments


The agreement reached by the Heads of State of the EU is the culmination of many weeks of haggling which have revealed deep divisions within the EU. These divisions are unlikely fully to be resolved by the decision of the seventeen member states of the Eurozone to agree a new treaty among themselves. At the same time the decision by the UK Prime Minister to use his veto to block an agreement between all twenty seven members of the EU raises the spectre of a two-speed Europe with an inner core moving towards an ever closer union including a fiscal union. It is possible that a number of the ‘outer ring’ of states will, in the future, join the inner circle which will further isolate the UK. An additional complication is whether or not the institutions of the EU can be used to build and support the proposed fiscal union.

There were two reasons why David Cameron was obliged to exercise his veto. The reason he gave was that he wished to safeguard the interests of the City of London. This is not surprising. Figures published by the Treasury as part of the Autumn Statement illustrated how much in hock to the banking industry the UK has become. In 2010 bank assets as a percentage of GDP are an eye-watering 550 per cent in the UK. Compare this with the US, the home of the ‘bulge bracket banks’, where the percentage is a much more modest and manageable 100 per cent of GDP. Between 1999 and 2007, the year before the banking implosion, the proportion of wealth generated in London by financial services grew from 11 per cent to 18 per cent. Successive UK governments have become hooked on financial services at the expense of other sectors such as manufacturing and construction. This addiction has resulted in the other countries and regions of the UK seeing wealth and talent being sucked into London. The Prime Minister has pledged to rebalance the UK economy. It is good that he recognises the problem: the key question is what will he do in practice to redress the balance?

The second, unstated reason, the Prime Minster exercised his veto was to prevent a rebellion by many of his own backbenchers. Successive UK governments have been ambivalent in there attitude to constitutional developments in the EU and in particular to moves to a federal Europe. If the agreement sketched out overnight progresses to a fiscal union then the core of EU states will have taken major step along this path. A serious question is whether in practice the Eurozone will supplant the EU itself or can the two co-exist?

Dr Eurfyl ap Gwilym says a two-speed Europe could be disastrous for Wales 

 

However it is unlikely that restoring stability to the Eurozone will be the end of this story. In the case of Germany the Chancellor, Angela Merkel, was obliged to insist on fiscal union in order to placate her domestic critics and to enable Germany to use its financial resources to stabilise the Eurozone. It remains an open question as to how serious Germany is in terms of pressing for a full, fiscal union. Germany is likely to be the greatest beneficiary of fiscal union. If the Deutschmark still existed German competiveness would be much diminished. It is paradoxical that the very weakness of some of the ‘peripheral economies’ help German competitiveness. If Germany is serious countries such as Greece and Spain will continue to pay a heavy price in terms of high unemployment and low growth due to their lack of competitiveness and inability to devalue. This could well lead to further civil unrest.

Where does this leave Wales?

Some of us have long advocated an evolution of the EU to a Europe of the Regions but this has been resisted by the member states. The danger now is that the Eurozone crisis will accelerate the development of a federal Europe based on existing member states with or without the UK’s participation. This would leave Wales as a peripheral region of an isolated state. This could be disastrous for Wales. Much of our industry is reliant on exports to the EU and many overseas firms that have located to Wales did so to secure entry to the single market. Unless Wales is seen as an integral part of the European core our competitive position will be eroded. This will not happen overnight but there will be a gradual divergence between the European core and the periphery of which Wales will be an unwilling part.

The breathing space gained in Brussels needs to be used to formulate a longer term, sustainable plan which is best agreed when more measured decisions can be made away from the immediate crisis. Part of the longer term plan should seek to halt the draining away of talent and wealth creation from the more peripheral regions of the EU, a phenomenon Wales has long experienced as part of the ‘Sterling Zone’. Action at the EU level needs to be matched by the UK Government in rebalancing the UK economy. This will not be easy and will take a long time. This is all the more reason for getting started now. It is to be hoped that the Welsh Government will do all in its power to ensure that the interests of Wales are taken into account both by the EU and the UK Government.

Labour won the May election claiming that it would stand up for Wales. Now is the time to do so.