14th May 2021


Eurozone approaching moment of truth

  • "An integrated single market, including in financial services, is strongly in Britain’s national interest" (Photo: Paul Vallejo)

We are approaching a moment of truth for the eurozone. After more than two years of uncertainty, instability and slow growth, decisions taken over the next few months could determine the economic future of the whole European continent for the next decade and beyond.

I have argued for a year now that the eurozone need to follow the “remorseless logic” of monetary union towards much greater fiscal integration. In countries like the UK and the US we are familiar with the features of a stable single currency area. The solution in the eurozone doesn’t have to be a full-blown United States of the eurozone, but if it is to be successful it is likely to include some form of most of the mechanisms that make other currencies work: more support from stronger economies to help weaker economies adjust; more pooling of resources, whether through common Eurobonds or some other mechanism; a shared backstop for the banking system through a banking union; and as a consequence, much closer collective oversight of fiscal and financial policy.

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While we are not members of the eurozone, as full and committed members of the European Union, Britain has a huge interest in the outcome of this process. The British Government is clear that it is strongly in Britain’s interests for our biggest export market to succeed; the risks for us of a disorderly outcome are huge. We will not stand in the way of further political integration amongst the eurozone countries that any successful solution will require.

One proposal that has been put forward in recent weeks is for a banking union. This could have a number of features: a collective guarantee for insured bank deposits; a facility to inject capital directly into banks; and common supervision of banks.

In my view, such a banking union for the euro area is likely to prove necessary. If countries in the eurozone default, they hugely destabilise and threaten the euro. The need to stand behind banks in a crisis is one of the greatest risks to its public finances a country could face. If governments in the eurozone cannot meet their liabilities, such as to protect depositors or ensure their banks have sufficient capital, then to avoid a threat to the currency as a whole it may become necessary for the other eurozone countries to stand behind them. In return, it is understandable that those countries would want a say in how banks across the eurozone are supervised and dealt with in a crisis.

That is why a banking union is a natural extension of a single currency. But it is not essential for a single market. In no other sector of the single market is such a high degree of integration deemed necessary. Countries outside the euro have their own currency and their own independent central banks, and therefore the means to stand behind their own banking systems in times of crisis. And those outside the euro do not have a vote on the fiscal and macroeoconomic policies of those inside. For these reasons we are clear that Britain will not take part.

Of course, operating a banking union, which involves some but not all members of the EU, does pose challenges for the single market. The countries of the euro area will have an automatic qualified majority, and will therefore, in principle, be able to set rules for the EU as a whole.

There may be decisions the euro area has to take to protect its financial stability, which could be detrimental to the rest of the EU if imposed on them. For a country such as the UK with a large financial sector, there may be decisions we have to take to protect our taxpayers and our financial stability that may not be possible if we are constrained by rules set only for the single currency area.

So it is entirely reasonable for countries in the EU but not in the banking union to seek safeguards that protect their taxpayers and preserve the single market for all EU members.

Far from seeking opt-outs as some claim, we want to deepen and enhance the single market. An integrated single market, including in financial services, is strongly in Britain’s national interest, and indeed in Europe’s too. But the rules that govern it must continue to be determined by all 27 members of the EU.

I accept my responsibility for keeping Britain's financial system secure. Our new bank levy is greater than that in France and Germany combined, and in addition we already tax share transactions. The last thing Europe needs now is the kind of instability we are seeing in some countries in the euro area in Britain. That is why I have taken tough action to our deficit back under control; and why I am taking tough action to reform our financial sector by ringfencing our high street banks from their investment banking arms and ensuring our banks have sufficient capital to withstand future shocks. In the debate on banking regulation in Europe, it has been Britain that has been among the most vocal in arguing for tougher standards.

Britain is playing its part in contributing to economic and financial stability in Europe. By playing a constructive role in shaping necessary reforms in the euro area, we can help others do so too.

The writer is British Chancellor of the Exchequer


The views expressed in this opinion piece are the author's, not those of EUobserver.

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