Wolf began by setting out his position over the years, confirming his initial view that monetary union "was an immensely risky and probably unwise idea". Despite warning in 1997 that Britain was in danger of becoming a semi-detached member of the EU if it did not join the euro, he became by the turn of the millennium a strong supporter of the then Chancellor Gordon Brown, "in his intellectual and political war with Tony Blair over whether or not to enter the euro".

Analyzing the fates of the five countries currently in most trouble -€“ Greece, Italy, Spain, Ireland and Portugal -€“ Wolf argued that the eurozone crisis has demonstrated beyond doubt that the monetary union, as designed, hasn't worked. He predicted that it will either break up entirely, or, more likely, fundamentally change, with serious repercussions for the UK: "What will emerge is a very different European Union, which will present Britain with some uncomfortable choices that we won't like". Furthermore, he said, these profound changes within the EU and in Britain's relationship with it "could lead, even quite quickly, to partial or complete exit".

How can the eurozone solve the crisis?

Wolf characterized the two scenarios for how the eurozone crisis could be resolved as, "€œthe catastrophic and the very painful" -€“ the catastrophic being partial or complete break-up, "a traumatic economic and political event for Europe"€; the painful being "€œan extended and painful period of adjustment via depression and structural reform".

If currency union is to survive, Wolf said that there would need to be (1) large debt write-offs; (2) ongoing external financing of countries that cannot manage adjustments quickly enough to prevent economic meltdowns; and (3) structural reforms and higher inflation in core countries. The whole process will take ten years or more to play out.

Banking union, he argued, was key to a long-term solution to the crisis, with eurobonds and a supportive central bank. Considerable obstacles to long-term stability remained, however, owing to the huge scale of the economic problems, the huge ideological stresses involved, and political differences between nations, simply expressed as, "€œthe countries and peoples don'€™t like or trust one another very much"€. The necessary structural reforms raise huge questions about political legitimacy, leaving us in a position which Wolf summarized as "a very bad marriage or a horrible divorce"€.

Whilst acknowledging the unpredictability of the fact that, the "future of the EU will depend on the decisions of a very few individuals under stress", Wolf asserted that the commitment to find a solution is extremely strong, not least because of fears of what dissolution might bring, including the rise of political extremism and a split between northern and southern Europe.

 

 

Turning to the question of the implications of the eurozone crisis for Britain, Wolf said that, assuming the eurozone were to survive, it would have to become a genuine fiscal union with much more fiscal and financial discipline, which would constitute a significant step towards federation. This would in turn have huge political implications, completely transforming Britain's position, since the issues it is most concerned about -€“ the financial system, the banking system, and the single market -€“ will be decided within the eurozone. "On the most important areas of policy affecting Britain, we would have no voice at all".

Wolf concluded by reiterating the unpredictability of developments in Europe, but speculated on one of the more interesting possible scenarios - that the pressures the eurozone is facing could precipitate the fragmentation of the UK as a whole - with the possible devolution of Scotland, were it to choose to enter the euro.

Martin Wolf'€™s comments follow a Panel Discussion in April this year, in which the Honorary Director General of the European Commission characterized Britain'€™s EU policy as "uncomfortably situated between a rock and a hard place", and warned that David Cameron's veto over proposed EU treaty changes in December would lead to serious economic and political problems for Britain. The text of this speech is available as an Opinion Piece.

The lecture was the first of a series of lectures, workshops and panel discussions held by the Foundation for Law, Justice and Society this term, which include on 18th October a lecture by Judge András Sajó of the European Court of Human Rights. To find out more and register for any events, which are free and open to the public, visit the News and Events page.

Audio and video podcasts are available from the right-hand links.