Speaking last night at an investment dinner organised by Lazard – for whom he is a senior adviser – Mandelson called for drastic changes to the way the eurozone is run, including the need for any country deficits in excess of 3% of GDP to require unanimous approval by European governments. He also called for a new body to supervise each country’s fiscal arrangements.
“Fiscal slippages would have to be corrected on the lines of the German debt break with fines and ultimately receivership for fiscally delinquent members of the eurozone,” he said.
“And [there should be] a politically independent European budget office to invigilate each country’s fiscal plans – to pull them up, review them, approve them and say when they are not adequate enough. This is drastic compared to what we have already in the eurozone at the moment, but it is necessary and it is important in my view for eurozone members to find the political will to introduce and drive through these sorts of changes.”
Market reaction
Whilst acknowledging that any drastic changes are unlikely to take place this year, Mandelson stressed how markets will only react positively if they see a considered plan of action.
He added: “If the direction of travel is agreed over the next three to four months, and if that is partnered with concerted action to strengthen and recapitalise the continent’s banks, this should greatly reassure the markets that the eurozone at least knows what it is doing, where it is going and is at least asserting some sort of control of its own destiny.
“In the meantime to staunch the sovereign debt crisis the eurozone has to demonstrate absolutely convincingly that it has the capacity to protect the insolvent Italians and Spaniards should the eye of the storm move to those countries.”
The plight of the eurozone, said Mandelson, stems from not one but four distinct crises. One concerns insolvency. Secondly, a wider banking crisis lingers from 2008 and has been exacerbated by banks’ exposure to sovereign debt. Thirdly, a structural and productivity gap exists between different members in the north and south. Lastly, a fourth crisis overarches the problems of sovereign debt and of banking and of competitiveness and productivity – a crisis of political legitimacy in Europe.
UK scepticism
“Our brand of scepticism [in the UK] is now mirrored in many countries across the European Union with integration fatigue which is frustrating all the initiatives that the governments need to take to deal with the other three crises,” he opined.
However, Mandelson said he does draw some encouragement from the fact that politicians and governments across the world are realising that austerity alone is not actually going to trigger the recovery that we need.
Bringing his arguments closer to home, he remarked: “In our own country we have to maintain the essence and creditability of our deficit reduction programme – we would pay an international price if that credibility were to erode and the consequence would be an evaporation of confidence in the direction of the UK economy. I also believe the Government can, should and now is developing other measures to support economic recovery in the UK.”
