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News

Delusions of the Euro Zone

The Lies that Europe's Politicians Tell Themselves

A Commentary by Armin Mahler; Der Speigel online, 30 December 2011

Since its inception, the euro zone has been built on lies, the most grievous of which is the idea that the common currency could work without political union. But Europe's politicians are currently suffering under a different but equally fatal delusion -- that they have all the time in the world to fix the crisis.

How much does time cost? That depends what you need it for. The time that Europe's leaders want to buy to tackle the euro crisis is a precious commodity. And its price keeps going up and up.

Initially, it was supposed to cost €110 billion ($130 billion). That's how expensive the first EU bailout package for Greece was. Soon, it was expanded via a comprehensive rescue fund that helped out Portugal and Ireland. Then came a second bailout package for Greece, followed by an even more comprehensive rescue fund for the rest.

In late September 2011, representatives in Germany's parliament, the Bundestag, had not yet voted on this expanded package -- which would put Germany alone on the hook for €211 billion -- but it was already clear to them that even that wouldn't be enough. But nobody could say that out loud, and especially not Finance Minister Wolfgang Schäuble, because they obviously didn't want to endanger the government's majority in parliament -- and, thereby, its own ability to govern.

On top of that, the European Central Bank (ECB) is buying up sovereign bonds of debt-ridden euro-zone countries. At first, it was Greece, Portugal and Ireland. Then, beginning in the summer of 2011, it bought bonds from Italy and Spain. It now has a grand total of over €195 billion of bonds on its books. If things should go south, Germany will also ultimately be responsible for 27 percent of that figure, corresponding to Germany's share of the ECB's capital.

Winning Time

The argument is always that it's all about winning time. Time that would allow the financial markets to settle down. Time that would let the debt-ridden PIIGS states (Portugal, Ireland, Italy, Greece and Spain) implement stringent cost-cutting measures. Time that would make it possible for the euro zone to reform its institutions and rules -- and perhaps even let Greece default without having the entire euro immediately implode.

But is all that money really well invested? And will the time it has bought also be put to sensible use?

Anyone who believes that the European currency union doesn't have a future anyway will think that every euro devoted to the rescue effort is a euro too many. On the other hand, anyone who thinks that the European Union is no longer imaginable without the euro -- as Chancellor Merkel does -- will believe that no price is too high.

But whoever wants to save the euro must first be clear about the ultimate goal he or she wants to achieve. Do they want a currency union like the one constructed in the 1990s, with states that are solely responsible for their own finances, or a so-called transfer union with shared liabilities? Do they want a currency union in its current configuration or a smaller but stable euro zone of the core countries? And, whatever the answer, they also have to ask themselves which of these possibilities can realistically be implemented politically.

The Mistakes of the Past

In answering these questions, the very first thing one has to do is conduct an honest analysis of what went wrong with the ambitious project of giving the old continent a unified currency, and why it is stuck in such a deep crisis today. Indeed, if one is going to be able to draw the correct conclusions for the future, one can only do so by first identifying the mistakes and errors of the past.

But, already at this point, one runs into problems. Almost all of the major political figures in Europe -- whether it's Helmut Schmidt, Germany's chancellor from 1974 to 1982, who sees himself as the grandfather of the common currency, current Chancellor Merkel, Jean-Claude Juncker, the head of the Euro Group, or Jean-Claude Trichet, the president of the ECB until Oct. 31 -- have been unanimous in stressing that there isn't any euro crisis at all. Rather, in their eyes, what we have is simply a debt crisis in some euro-zone countries.

If it were only that simple. Unfortunately, it isn't. Simply put, without a common currency, Greece's problems wouldn't have spilled over into Spain and Italy. And, without this risk of contagion, politicians and central bankers wouldn't be staggering from one crisis summit to the next, ever driven by the fear that the currency union might break apart.

Without the euro, Greece could recover more easily. It could devalue its currency and thereby make its national economy competitive once again.

Indeed, without the euro, Greece wouldn't have ever gotten into this calamitous situation in the first place. The fact that it was a member of the currency union was the only thing that allowed the country to borrow money at such favorable rates and get itself up to the neck in debt.

The Principle of Hope

Nevertheless, not one of the currency union's founding fathers will admit that it was poorly designed. The currency union brought together countries that weren't compatible economically simply because it was opportune politically. It replaced the currency exchange rate, the standard mechanism for balancing out differences between national economies, with the principle of hope. Now, the common currency was supposed to make the economies align themselves with each other, practically automatically.

In reality, however, the differences between the economies of the euro-zone countries became larger rather than smaller. The so-called "Club Med" countries benefited from the low common interest rate. They lived beyond their means and they consumed more than they could afford -- to the detriment of their already weak ability to compete.

A country with a flagging economy normally devalues its currency. Doing so makes its goods cheaper on the global market, allowing it to increase exports and cut back on its deficit. But, in a currency union, there isn't an exchange rate that can serve as a compensatory mechanism. If a country doesn't have a sound economy, the tensions only increase.

For these reasons, it has always been clear that the currency union cannot function without shared economic and financial policies. Indeed, that's exactly how politicians imagined things in the beginning. For example, in November 1991, then-German Chancellor Helmut Kohl told the Bundestag that a currency union without a political union would be absurd.

Political Delusions

At the time, Europe's governments couldn't agree on steps toward greater political integration -- but they still kept pursuing the currency-union project anyway. The vague expectation was that the political union would follow the economic one of its own accord.

This hope was never fulfilled, and so the euro rushed headlong into crisis. Things started off slowly. But, once the criteria of the Stability and Growth Pact were no longer adhered to, they started picking up speed -- until even the key promise that pro-euro politicians had made was broken. According to the so-called "no-bailout clause" of the Maastricht Treaty, no country was supposed to be liable for the debts of another.

As the former SPD Finance Minister Peer Steinbrück told SPIEGEL in an interview published in September, that was an "error that became evident during the crisis." As he sees it, this "political delusion should have already been acknowledged and explained a year and a half ago."

Instead, Germans were repeatedly told that saving the euro might not even cost them anything, that no money had changed hands yet, that only guarantees had been given. But nobody can believe that anymore.

Part 2: A Bailout Based on an Illusion

Just as the euro's introduction was based on a mistake, the effort to rescue the euro began with another instance of "political delusion," to use Steinbrück's phrase.

With debts amounting to 150 percent of GNP, Greece is de facto bankrupt. Over the course of 2011, even the leading representatives of the euro zone finally accepted this fact -- after having claimed its opposite a year previously.

This explains why the first bailout package for Greece was, to put it mildly, based on an illusion. Possibly against their better judgment, countries putting money into the package assumed that Greece would be able to solve its debt problems by implementing a stringent belt-tightening regime.

The so-called troika, made up of representatives of the International Monetary Fund (IMF), the ECB and the European Commission, was tasked with evaluating the success of these measures.

But they were not successful. Instead of getting better, things only got worse for the country. The austerity measures caused the economy to stall, hoped-for increases in state revenues never materialized, and the country started sinking deeper into debt rather than climbing out of it. But the financial assistance kept coming nevertheless.

Learning a Bitter Lesson

This year, the would-be euro saviors have had to learn a bitter lesson: If they assume that the collapse of a single euro-zone country would bring with it incalculable risks, comparable to the 2008 collapse of the American investment bank Lehman Brothers, then they have no credible power to exert pressure on deficit offenders. Instead, they just have to keep paying. And then the euro zone will have to subsidize countries like Greece for the long term -- just like the rest of Germany has been supporting the chronically cash-strapped northern city-state of Bremen for decades under the country's federal financial equalization system.

The only question is whether ordinary people will play along -- both in the donor countries, who are meant to keep paying, as well as those in the recipient countries, who will have to suffer mightily under stringent austerity measures.

In September, the Bundestag voted to approve the expansion of the euro bailout fund, the European Financial Stability Facility (EFSF). But there is growing resistance to additional maneuvers of this sort -- and not only in Germany.

The currency union has already started subtly transforming itself into a debt union. If the ECB -- and soon the EFSF too -- purchase sovereign bonds that might never be paid back, or at least not in full, the stronger countries will be liable for the weaker ones.

Of course, politicians don't like to use phrases like liability union or transfer union. But what these phrases describe became reality long ago -- which also numbers among the truths they prefer not to mention.

Bottomless Pit

Yet another inconvenient truth is that not all countries will be able to reduce their debt levels by themselves and boost their competitiveness. The currency union can only survive as a transfer union, and if it doesn't want to become a bottomless pit, it also needs to become a fiscal union -- one with strict rules and independent institutions capable of enforcing them.

For these reasons, the euro states have to cede a major part of their sovereignty to Brussels. Whether or not one wants to call the result the United States of Europe is a matter of taste.

Proponents of this kind of union fantasize that the crisis will give rise to an opportunity. They believe that now, in the hour of need, the pressure to act is big enough to push through the integration of Europe that has previously always failed because of national self-interest.

But they might be deceiving themselves once again. The parliaments of the EU member states would have to approve any far-reaching amendments to the union's treaties. What's more, in many cases, this would also involve changing national constitutions and holding referendums. Such a process is protracted, and its outcome is anyone's guess.

The alternative would be returning to how things were originally, meaning at the birth of the currency union. As happened then, euro-zone members would pledge to maintain stability (which admittedly already failed once before, because the rules were overridden when push came to shove). In this case, there would be no permanent transfers and also no collectivization of debts.

Inevitable Shrinkage

In the end, the currency union will shrink. Greece and possibly even other countries will have to abandon the euro in order to be able to get back on their feet with the help of their own, significantly devalued, currency.

The euro saviors and their citizens must finally face the uncomfortable truth. Under current conditions, the euro will fail economically because the differences between euro-zone countries are too great.

But new conditions that would give the euro a firm economic foundation are almost impossible to implement due to political factors. In any case, they can definitely not be put in place quickly enough to combat the current crisis.

Indeed, the would-be euro saviors are suffering from yet another delusion: that they are able to buy all the time they need, without any limits.

Translated from the German by Josh War

William Hague has the 'frites fraternity’ on the run across Whitehall

By Benedict Brogan, Politics, Telegraph, December 20th, 2011

The Foreign Secretary’s harder line on the EU has been a shock to his Europhile mandarins

It is said in Downing Street that shortly before David Cameron set off for his showdown in Brussels, he was offered a spot of strategic advice by William Hague. “If it’s a choice between keeping the euro together or keeping the Conservative Party together,” the Foreign Secretary told him, “it’s in the national interest to keep the Conservative Party together.” Shortly afterwards, the Prime Minister refused to join the Franco-German single currency rescue deal, and Tories everywhere rejoiced.

In the days since Mr Cameron’s unlikely triumph, attention has centred on the outrage of the French, the frustrations of metropolitan Europhiles, and in particular the confusion of Nick Clegg. Westminster has delighted in the Deputy Prime Minister’s vacillation. His weakness accentuates Mr Cameron’s strength. That “No!” to the EU may have been an unintended victory, but it has shifted the advantage the PM’s way. As they go home for Christmas, Tories are cheered and united. They have rediscovered a degree of admiration for their leader.

Central to this change in fortunes has been the Foreign Secretary, who is presiding over a cultural transformation of British diplomacy that has profound implications for how we do business across the Channel. Those of us who a year ago feared Mr Hague had lost the ideological edge that made him such a convincing critic of the European project in Opposition should be heartened to learn that he still has it, and is bringing it to bear. He has turned the dial setting of British EU policy from “emollient” to “sceptical”. Mr Cameron’s “No!” is a precursor of things to come.

You can tell something is up by the reaction of some of our diplomats, who have put on a display of petulant, ill‑disguised horror at this overturning of all their assumptions about how Britain should deal with the EU. The whispered briefings of an enraged ambassador class have appeared in the newspapers. The main target has been Sir Jon Cunliffe, the Treasury’s seasoned chief international negotiator who serves as the Prime Minister’s foreign affairs adviser. He is about to take up the post of the UK representative in the EU, an appointment that has enraged his new colleagues in the Foreign Office, who resent seeing such a plush post go to a bean-counter with no idea how to serve a Ferrero Rocher.

They accuse him of deploying the bully-boy tactics he learned under Gordon Brown when he prepared the negotiations that culminated in Mr Cameron’s veto of the rescue deal. They say he failed to tell his fellow diplomats what the British strategy was, and bounced the French and the Germans into a corner. In reply, some might point out that the more accommodating approach favoured by his critics got us nowhere in the past. Sending him to run the British mission in Brussels – UKREP, to give it its unattractive nickname – was a deliberate attempt by Mr Cameron to shake up the cosy Whitehall euro-consensus.

This spat might look like little more than a cat-fight between jealous rivals, but investigate more closely and it quickly becomes apparent that there is an underlying significance. The complaints from the Foreign Office are a manifestation of a wider sense of rage felt by the EU’s friends in Whitehall, who have just realised that their world has been turned upside down.

Central to this change is the Foreign Secretary himself. When diplomats point the finger at Sir Jon, they are using him as a proxy for Mr Hague, who, along with George Osborne, played a central role in shaping the Prime Minister’s approach to the Brussels negotiations. His point about the unity of the Tory party being in the national interest may have been in jest, but it reminds us that his voice is one of the most influential in Government.

One senior Whitehall figure described it to me like this: “William Hague has done a remarkable job driving European policy, in a way that these Foreign Office morons find so difficult. Blaming Jon Cunliffe disguises the fact that they have lost the argument. Our own Eurocrats have suffered a setback.” A Cabinet colleague says: “William has defied the caricatures. He is determined to reset some of the default assumptions about relations with the EU that the Foreign Office has nurtured for years.” A Downing Street insider rages: “It is lamentable how timid and incompetent our European diplomacy has been.” The complaint from some in No 10 is that all the effort has been invested in the Council of Ministers, the body where final decisions are taken, neglecting the European Commission and Parliament, the other two institutions that under the Lisbon Treaty have huge influence over how EU law is shaped.

Actually, no one has yet come up with a collective term for those mandarins steeped in the ways of the European Union. Arabists are referred to – often derisively – as the “camel corps”, a term that conjures images of gentlemen in pith helmets and puttees, more at ease in the alleys of the souk than the corridors of Whitehall. Their colleagues who have steeped themselves with similar enthusiasm in the labyrinthine complexities of EU politics are equally influential. This “frites fraternity” or “Brussels brotherhood” or whatever we might call it is well entrenched across government. The FCO is its main base, but it is also strong in Vince Cable’s Business department, where an excessive enthusiasm for all things EU is partly blamed by No 10 for the lack of progress in reducing Britain’s regulatory burden. Mr Cameron has let his frustration show in recent months when he has exhorted ministerial colleagues to stand up to officials and lawyers who worry about being taken to the European Court.

This time last year, Mr Hague appeared a weakened figure at Westminster. Colleagues wondered whether he had lost his appetite for the cut and thrust of politics after a particularly bruising episode that exposed his private life to the media glare. Some doubted he would see out the parliament in the role. Others muttered that he had lost his political keenness and become a bit too cosy with the foreign policy establishment, in particular on Europe. His colleagues on the Right were disappointed by what they perceived as his failure to deliver a robustly Eurosceptic programme, conveniently overlooking his role in taking Tory MEPs out of the German-run federalist EPP group in the European Parliament.

All that has changed. His standing has been buoyed by his success in Libya and by the discreet way he has built useful relations with counterparts such as Hillary Clinton in Washington. His landmark speech earlier this autumn, reasserting the Foreign Office’s role as one of our great institutions, undid much of the damage wreaked by Labour on the credibility of our foreign policy. His robust approach to the EU, which prizes bilateral relations over multilateral ones, has forced Labour to adopt a more Euro-questioning pose.

The Brussels “No!” was a startling manifestation of a change that has been quietly under way for some time now. It was a signal to the machine that the old way of doing things, of cosy consensus by Eurostar, is no longer acceptable. It has been done quietly but with great purpose. A principle has been established to which Whitehall’s Euro-elite must adapt.

The DM says: Cunliffe was close to Gordon Brown and is said to have been influential in keeping Britain out of the Euro. Could be interesting.

If the euro is saved then Britain should quit the EU and say good riddance

The season of good cheer may be upon us but in this, my last column of the year, I want to discuss the attractions of good riddance. My subject is Britain’s relations with the EU.

By Roger Bootle, managing director of Capital Economics, Telegraph Business, 18 Dec 2011

Why did we join the EU in the first place? We didn’t; we joined the Common Market, which evolved into the EU. But this disguises a more fundamental truth. In the first couple of decades after the Second World War, the UK was in sharp relative decline. Meanwhile, from a state of devastation, the countries of continental Europe advanced rapidly. By contrast, the non–European world, in which we had played out so much of our history, seemed like a backwater. Add in a dose of Britain’s imagined cultural inferiority and a smidgeon of Vorsprung Durch Technik and you have the explanation.

Whatever was true then, the economic reality now is very different. Many of those backwater countries, including several members of the Commonwealth, are booming. Meanwhile, the countries of the EU have been growing relatively slowly – which looks set to continue.

Yet the UK policy establishment is still in the grip of three serious economic delusions which appear to dictate continued membership of the EU: top table syndrome, sizism, and proximity fetishism. The first I have discussed before but the other two need attention.

On size, it is striking that so many of the world’s richest countries are small. The reason, I suspect, is that in a large country the state can be incompetent and yet the country can get by – and still large resources can be available for governments to spend. By contrast, the government of a small country must ensure that the economy remains competitive or its own resources will soon be curtailed.

Singapore is an interesting example. At independence, the view of the British Government was that she should throw in her lot with the much larger Malaysian federation – which she did. Accordingly, when she was expelled in 1965 it must have seemed that her future was bleak. Now look at her. Never mind Malaysia, she has a higher income per head than the UK. Why? The essential answer is good government – by Singapore for Singapore.

On proximity, admittedly the EU gives us tariff-free access to its market, which may help to boost foreign direct investment into the UK. But the cost is high. It starts with our budget contribution, which amounts to about £7bn net per annum. In addition, there is the cost of the Common Agricultural Policy, which may be only about £3bn net, but is probably much more. Then there is the cost of complying with EU regulations, which some estimates suggest could be about £30bn.

Other costs are virtually impossible to quantify – the costs of having our democracy undermined and key national decisions effectively made by the kleptocracy in Brussels.

Admittedly, trade with the EU is very important – about 50pc of our exports go there – but that means that more than 80pc of our GDP does not consist of exports to the EU. Yet this overwhelming part is still governed by the EU’s panoply of ridiculous regulations.

In any case, being outside the EU would not imply being unable to export into it. The tariffs that non-EU goods pay to enter the European market are minor, being governed by world trade agreements. Moreover, there is every prospect of being able to negotiate favoured access, not least because we are their largest export market.

More fundamentally, over centuries this country has made her living (and endured much of her dying) around the world. It is extraordinary that in the age of the internet she should believe that she must do the economic and political equivalent of marrying her next door neighbour. If ever there was a time when matters of language, culture, shared history, law and fellow feeling should trump geography surely this is it.

The European crisis will play out in one of two ways. One is that the euro collapses and the integrationist tendency suffers a huge loss of prestige. In that event, the UK should be ready to advance her vision of a new Europe. (The DM says: If the Euro collapses, the EU project will have done us and all the people of Europe immense damage by it arrogance and folly. Why should we want to stay part of it?)

The second is that some sort of fiscal and political union is cobbled together to save the currency union, leaving us marginalised. This union would tax, harmonise and regulate until the (much subsided) cows come home. In that case, we should be prepared to withdraw from the EU. Far from being an economic catastrophe, this could be the making of us. And, most importantly, there would still be us for it to be the making of.

Roger Bootle is managing director of Capital Economics. roger.bootle@capitaleconomics.com

Why the euro turkey is well and truly stuffed

The coming break-up of the single currency makes Britain’s veto seem a mere sideshow, writes Jeff Randall.

By Jeff Randall, Telegraph, 19 Dec 2011

As George Osborne prepares his response to the Vickers report on banking reform (the Chancellor is expected to make a Commons statement this afternoon), there’s a growing sense in the City that while Britain upgrades its sprinkler system, a fireball has already engulfed our neighbours. Much-needed changes to UK financial legislation, recommended by Vickers, will be enacted by the end of the current parliament, with the overhaul completed by 2019. Nothing wrong with long-term planning, except that with the eurozone in disarray and sovereign defaults looking all but certain, even getting to next Christmas without a fresh banking crisis may prove a wish too far for Santa.

Those who had bet on a seasonal gift of salvation from this month’s Brussels summit have already lost their wager. With a gun to the head of monetary union, European ministers, in effect, invited bond markets to pull the trigger. Without a new mechanism for very large and permanent fiscal transfers – from the prudent to the profligate – the euro turkey is stuffed.

The sideshow of David Cameron’s veto will soon be upstaged by the single currency's combustion and the immolation of its weaker members’ economies.

Confounded by the triumph of remorseless debt over political will, EU leaders have succumbed to collective delirium, promising that future government budgets will be “balanced or in surplus” and that annual structural deficits will “not exceed 0.5 per cent of nominal gross domestic product”.

There is not one chance in a million that this can be achieved by more than a handful of EU states. When fantasy masquerades as action, the end is nigh.

One can only marvel at the Micawberism of some in the European press who continue to perform as cheerleaders for a dysfunctional and discredited system. Germany’s Der Spiegel concluded: “The result of [the summit] is a success. A success for the majority of Europeans and for efforts to find a solution to the euro crisis.” Keep taking the tablets, guys.

Nouriel Roubini, professor of economics at New York University, sees it differently: “Papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings; addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.”

The French, in particular, are finding this hard to swallow. In a new book, The End of the Euro, Johan Van Overtveldt, editor-in chief of Trends, Belgium’s leading business weekly, delivers a harsh verdict: “France’s inability to accept gracefully its political and economic decline has produced additional tension. Le grandeur de la France, once an undeniable reality, is now a thing of the past.” Burdened by an inferiority complex over France’s subordinate relationship with Germany, frustrated by the markets’ sceptical view of the French state’s finances, the elite in Paris lashes out at an imaginary conspiracy among Anglo-Saxon bond investors and their perceived henchmen, the ratings agencies.

With Fitch, one of the big three, deciding that “a comprehensive solution to the eurozone crisis is technically and politically beyond reach” and Standard & Poor’s, a rival agency, reported to be preparing a downgrade of France’s triple-A status, a sense of persecution is building inside the Elysée Palace. Quel dommage!

In May 2010, when I wrote a column for this newspaper under the headline “Whatever Germany does, the euro as we know it is dead”, there was a predictable response from the usual suspects, accusing me of economic illiteracy and xenophobia. Today, it seems, I’m in good company. The Economist, not known as a flag-waver for Little Englanders, opines: “As investors and voters lose faith, the task of saving the single currency grows harder. Sooner or later, the euro will be beyond saving.”

It’s a view shared by many whose livelihoods depend on forecasting global events and adjusting their finances accordingly. Few believe that the euro will disappear altogether, but a growing number expect it to be reconstructed, shorn of members who can neither accept the rules nor afford the fees.

Last week, I pre-recorded a Christmas special for Sky News at which Sir Philip Hampton, Royal Bank of Scotland’s chairman, was a guest. Asked if the euro would hold together in 2012, he said: “I think it’s likely that one country, a small country, will drop out. It could be any of them because these things will be driven by political events as much as by economic circumstances.”

Would such an outcome trigger a banking Armageddon? On this, Sir Philip was only slightly more guarded: “Some banks will be under particular strain, but I don’t think the banking system as a whole. The banking system as a whole can deal with Greece.” (The DM says: if you can keep your head while all about are losing theirs, you probably have no idea what is going on. Why should the problem be confined to Greece?)

Social cohesion, however, is a different matter. As if to bat back France’s recent aspersions on Britain’s creditworthiness, Sir Philip predicted a wave of unrest across the Channel: “France has got an unmatched history of getting on to the streets and making a big noise. I’m amazed the French have been so subdued. I don’t think it will continue: they will be on the streets in 2012.” Cher Sarko, you have been warned.

Workers of Europe unite, you've only euro chains to lose

By Ambrose Evans-Pritchard, Telegraph Business, 18 Dec 2011

Europe's Left has suffered a calamitous six months. Socialist governments have met historic defeats in Portugal and Spain. Greece’s Pasok party was toppled by an EU technocrat Putsch. Ireland’s soft-Left Fianna Foil lost every seat in Dublin. The question for today’s Left is whether it is in their interests to keep apologising for an EU monetary regime that has pushed the jobless rate for youth upwards.

Almost 97pc of the European Union’s population is now governed by conservative or Right-leaning coalitions, or EU-imposed mandarins. All that is left to social democrats is Austria (8.4m), Denmark (5.5m), and Slovenia (2.1m).

The whole machinery of the European Union (EU) system is under the control of the Right, with variants of Rhenish corporatism in the Council, and pre-modern Hayekians at the European Central Bank (ECB). Whether you regard this Hegelian ascendancy as good or bad, it certainly has profound consequences.

For just as former Prime Minister Margaret Thatcher protested at Bruges that “we have not successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level”, the Left might equally protest that they have not fought the long, hard struggle for worker rights in their own democracies to see social welfare rolled back by Brussels and Frankfurt.

In Italy, EU viceroy Mario Monti has more or less been ordered to reform the labour code, to break union power by shifting to “firm-level” wage deals and rewrite Article 18 that protects workers against sacking for economic reasons – the issue that led to the assassination of two labour reformers by the Red Brigades since 1998.

No doubt Italy should confront its trade unions if it hopes to compete in the world, but my point is a different one. Who decides such matters? Why would the Italian Left think it desirable to concentrate further power in EU hands when it will without question be used against them? They might win control of Italy. They have no chance of taking control of policy levers in Europe in the foreseeable future, if ever.

David Begg, head of the Irish Congress of Trade Unions, said his encounter with the (EU-ECB-IMF) Troika now restructuring Ireland was a sobering experience.

“The man from the IMF was very helpful, but the officials from the EU were neo-liberal ideologues. We had a very fraught meeting, almost a shouting match,” he said. “It would have been better if we had never have joined the euro.”

The consequences of this Rhenish Right ascendancy in EU institutions – not the same as Anglo-Saxon or Burkean “small platoon” conservatism, by the way – was in evidence at the Merkozy summit in Brussels. As the BBC’s Paul Mason put it, the deal has “outlawed expansionary fiscal policy” by enshrining near-zero structural deficits in international law, with constitutional debt brakes, mandatory sanctions and budget commissars for delinquent nations.

The 26 states that went along with this Merkel plan have given up the right to pursue counter-cyclical Keynesian stimulus, and have agreed to do so in perpetuity since it is almost impossible to repeal EU “Acquis”.

Personally, I am not a Keynesian – nor are many Daily Telegraph readers – but this strikes me as a mad commitment to make. For the Left it is surely an unmitigated disaster. They cannot pursue their economic agenda ever again. Fabians feared long ago that such an outcome was built into EMU. They called the euro a “bankers’ ramp”, but somehow their warnings were drowned out in the mass hysteria of monetary union.

Owen Jones at the New Statesman said it is baffling that socialists have been so slow to recognise the threat. “The proposed EU treaty is perhaps the biggest catastrophe to befall the European Left since the Second World War. After this stitch-up, the Left really needs to have a long, hard think about its attitude to the EU as it is currently constructed. There’s still a sense that any criticism of the EU puts you in the same box as swivel-eyed Ukip-ers. It is a travesty that highlighting the EU’s palpable lack of democracy has become a Right wing issue.”

Well, yes, we’re all swivel-eyed now. It should indeed have nothing to do with Right wing or Left wing affiliation. Besides, if you listen closely, angry talk is simmering across Europe, in the ranks of the French socialist party, in Germany‘s Linke, in Italy’s Rifondazione, and Spain’s newly-liberated Socialist Workers Party (PSOE).

Note the outburst last week by Pedro Nuno Santos, socialist vice-president in Portugal’s Assembleia. “We have an atomic bomb that we can use in the face of the Germans and the French: this atomic bomb is simply that we won’t pay. Debt is our only weapon and we must use it to impose better conditions. We should make the legs of the German bankers tremble,” he said.

The sacrosanct 40-hour week is being stretched to 42 hours in Portugal. Manuel Carvalho da Silva, head of the General Confederation of Portuguese Workers, said pay-cuts for public workers under successive austerity packages will amount to 27pc.

This is an “internal devaluation” of epic proportions.

Much has been written in recent weeks of Europe’s swing to the far Right, of the rise of Geert Wilders in Holland, or Marie Le Pen’s Front National in France, or – quite different – the black-shirt Garda Magyar of Hungary’s Jobbik party. The echoes of the 1930s are loud, and will become louder as combined monetary and fiscal contraction entrench depression.

Yet there is another parallel of equal resonance: the election of the Front Populaire in France with Communist support in May 1936, the cathartic rejection of deflation policy. Whether or not Leon Blum privately wanted to leave the Gold Standard – that inter-war replica of Europe’s unemployment union – the logic of his policies forced the outcome. Orthodoxy was overthrown.

The question for today’s Left is whether it is in their interests to keep apologising for an EU monetary regime that has pushed the jobless rate for youth to 49pc in Spain, 45pc in Greece, 30pc in Portugal and Ireland, 29pc in Italy and 24pc in France – yet 8.9pc in undervalued Germany – and that offers no credible way out of the slump for the Southern half.

Comrades across Europe, come over to the eurosceptic side. You have only your euro chains to lose.

The BBC makes a meal of the EU dream

Charles Moore reviews Beyond Borders (Radio 4).

By Charles Moore, Telegraph, 19 Dec 2011

As the eurozone totters, the British Broadcasting Corporation has become ever more mindful of its historic duty to defend the European project at all costs. Since David Cameron said “No” in Brussels, the airwaves have been full of frightening words like “isolated”, “on the fringes”, and “lost in the mid-Atlantic”. The studios have been full of septuagenarians, such as Michael Heseltine and Leon Brittan, who represent the last generation of true believers.

These propaganda efforts have not been confined to news programmes. The BBC is making a determined effort to take us back to the early, most sacred years in which the euro-religion developed its creed. Beyond Borders was a gallant and, sad to say, comical attempt to dramatise the Schuman Plan, the invention of the Coal and Steel Community in 1950, from which all else has flowed. The playwright, Mike Walker, attempted to recreate the moment when Jean Monnet’s big idea won through. Monnet, the charming cognac salesman and networker, has as good a claim as any to be the father of the European Union. Timothy West played him.

You could tell very quickly which side you were supposed to be on, because the Monnets, devoted to what Jean calls “the power of ideas as well as the anvil and the forge”, go for a long walk in the Alps and see an eagle (a representation, we are perhaps meant to guess, of Germany). “People shoot eagles,” laments Mme Monnet: “How could they shoot anything so beautiful?” Later, the couple hear shots. “Hunters killing!” exclaims Jean: “It spoils the peace. With peace, everything will be achieved.” Field sports, it seems, are a major obstacle to European unity. Jean and Sylvia love nature and animals and birds and peace. “Perhaps it is time for a new world,” they dream.

They also love food. As the Europhile historian Hugo Young has written: “The story of Britain and Europe is, among other things, a story of many meals.” In the 45 minutes of Beyond Borders, the cast spent a good proportion of their time talking with their mouths full. Mme Monnet produces an uncommonly good soup for the co-conspirators of the Coal and Steel Pact, and this enables them to draft their visionary words. The American Secretary of State, Dean Acheson, gets such a fine meal off Monnet in Paris that, despite his doubts (“That’s a coal and steel cartel, Monnet, and that’s pure poison to any US administration”), he allows Monnet to persuade him by scribbling answers on a napkin.

Acheson is en route to London to discuss these matters. Monnet tells him not to wait for the British — “We waited for them once before, when Hitler entered the Rhineland in 1936.” Acheson points out, no doubt justly, that the food Monnet is giving him is much better than any he will get off Ernie Bevin, the British Foreign Secretary. So he agrees to Monnet’s plan.

In wishing to pool the production of French and German coal and steel, Monnet was not breaking completely new ground. Towards the end of the war, Hitler’s overlord of the wartime economy, Albert Speer, held secret discussions with his counterpart in the collaborationist Vichy government, Jean Bichelonne. Both men wanted a “European Economic Union”, and the best way to get this going was to coordinate production between the French and Germans in Alsace-Lorraine and the Ruhr, with the Germans producing the armaments and the French doing the rest. Needless to say, these talks did not form part of Beyond Borders. Monnet developed comparable ideas in the post-war context. The key to his view of the situation was that national sovereignty should be overridden by what he called “a high authority”, which “must be supranational”. Only then would anything happen.

In the play, Monnet recognises that the British dislike the whole principle of the high authority, but that is just too bad. They want to see the detail before they agree to anything but, in Monnet’s view, it should be exactly the other way round: they should accept the whole, huge principle, and only then settle down to decide the practice. Nor (young Mr Cameron be warned!) are opt-outs allowed. “There can be no special conditions for one nation,” says Monnet, “whatever their history. Equals are equals.”

As a drama, Beyond Borders was creaky. It was full of the fact-introducing dialogue which never happens in real life (“I became a Russian citizen in order to marry you”) and devices like a ticking clock and drumming fingers to indicate that Monnet and chums are waiting for an important telephone call about whether Schuman, the French minister, has accepted their idea.

Its solemn ending, in which Monnet quotes Rimbaud’s poem: “I have stretched ropes from belfry to belfry… golden chains from star to star [the stars, you see, should be taken to represent the flag of the European Union]. And I am dancing…” made me laugh out loud.

In a way, though, this short play did encapsulate accurately the attitudes that lie behind “ever-closer union”. It identified a key point which British pro-European politicians have generally sought to evade, which is that the entire idea, in its essence and its genesis, does want to create a new pan-European nation, by means that are at best only semi-democratic. It also brought out the fact that, from the beginning, this was about French and Germans agreeing and the rest following. The British were wanted on board if possible, but it was considered unwise to tell them much about the nature of the voyage and its proposed destination. More than 60 years have since passed, and now these birth defects threaten the life of the whole thing.

With one little word, Prime Minister David Cameron breaks the European taboo

The PM has shown great political courage. Now he must make sure that No doesn’t become Yes.

By Charles Moore, Telegraph online,9 Dec 2011

'Come on out – the water’s lovely!” is what I feel like saying. Of course the travails of the euro remain as bad as ever. Of course Britain has not actually won anything positive from this crise de trois heures in Brussels. And of course the existing EU treaties – which work, in the relevant areas, by majority voting rather than unanimity – will be used by angry Continentals to impose on Britain the financial regulations which they failed to get past David Cameron early yesterday morning.

All the same, this is a great moment for Britain’s relationship with Europe. A generation too late, it demonstrates the power of No. By using that undiplomatic word, and acting on it, Mr Cameron has broken the taboo which has hamstrung all previous British diplomacy.

Until now, throughout the history of Britain’s membership of the European Union, the other member states have known that “Britain huffs and puffs, but always agrees in the end”. This has given them the whip hand. In October 1990, Margaret Thatcher shouted “No! No! No!” against the schemes of Jacques Delors. She was out of office within a month. This country was only ever allowed to say “Yes” or, rather feebly, “Yes, but…”. Not any more.

In order for me to illustrate the great change, please forgive a touch of autobiography. At almost exactly this moment 20 years ago, the leaders of the European Community (as it was then called) were about to meet at Maastricht to negotiate a treaty. Its purpose was to set in train “the irreversible character” of Mr Delors’s three-stage plan for economic and monetary union. Stage three was the introduction of what is now the euro.

I was writing the political column for this paper. A few days before Maastricht, I filed a piece arguing that the then prime minister, John Major, should veto the proposed treaty, since a single currency, even if we could secure some exemption, would be a bad thing for Britain and the Community. Later that night, a motorcycle arrived at our house bearing a letter (no emails then) from my otherwise brilliant editor, Max Hastings. Max informed me that he had “spiked” my column. I was not permitted to argue for a veto in the pages of The Daily Telegraph.

Since a columnist is not much use if he cannot express his views, this looked like a resignation issue. My wife and I had a little conference, and she sportingly agreed that if I thought I should resign, I should, even though we had two babies and no other visible means of support. The next day, Max and I had some tense discussions. Luckily for me, talks then took place between proprietor and editor. I was assured that, in future, I would be free to say what I thought. So I did not become a Maastricht martyr.

I tell this story to show how powerful, even in newspapers, let alone in government, was this idea that one must not say “No”. “No” was the word of the nostalgic, the “Little Englander”, the “headbanger”. The future was bright, the future was European. “Ever-closer union” was “inevitable”.

So Mr Major went to Maastricht the following week, and made the best of this bad job. He won Britain opt-outs from the single currency and the “social chapter”. His spin-doctors, dutifully echoed in the press, declared it “Game, set and match”.

It is true that the currency opt-out was hugely beneficial. It set the precedent that member states did not have to move at the same pace, and made it hard for later British governments to drag us in. Without it, we might well, today, be as abject as Italy, or as angry as Germany.

But the trouble with the opt-out device was that it was not a No. It made Britain part of the process of creating the single currency, and it made that creation part of European law. It gave permission for the great disaster which is now destroying the prosperity of Europe.

Twenty years on, things are different. The argument – assertion, rather – that Europe is the future has never looked weaker. Mr Cameron’s first palpable hit as Tory leader against Tony Blair was when he said, “You were the future once”. Now he is saying the same to “Merkozy”, and he is right. The fear of being “isolated”, so beloved of our Foreign Office, is hardly a fear at all: we are isolating ourselves from a political project that cannot work, designed to save a currency that may already be beyond redemption. I know exactly how much everything has changed, because today even the pro-European Sir Max (as he now is) has gamely admitted to his readers that Europe is “a disaster blighting our lives”.

To work out what should happen next, one needs to understand why Mr Cameron did what he did. Although the Prime Minister is mildly Eurosceptical, his decision in the early hours of yesterday morning was not what he had intended a week earlier. He was let down by our Sir Humphreys in Brussels who mistakenly assured him that he would win enough concessions on financial regulation to permit him to sign up for a new treaty. It is hard to exaggerate how great a blow his “No” is for them: now there will be a top table and they won’t have a seat at it. They are jockeys without horses.

Several factors gradually bore in upon Mr Cameron as the day approached. He learnt from his mishandling of the Commons vote on an EU referendum last month. Literally never have so many Eurosceptic Tories filled the lobbies against their party line. This was followed up by serious, though discreet, ministerial protest, most notably from Iain Duncan Smith and the Northern Ireland Secretary, Owen Paterson. The Prime Minister realised it would be impossible to return to Parliament promising his party a new treaty that they distrusted while refusing them the referendum that they demand.

Then he worked out that the Liberal Democrats, however fervent their europhilia, were not going to kill the Coalition for a treaty which was expressly being advanced by President Sarkozy (in re-election mode) as a means of making London pay for the euro.

Dreadfully late in the day – as is so often the case with Mr Cameron and his “government by essay crisis” – everything became clear to his cool mind. He could stave off a referendum, hold together his Coalition, win over his party and prevent further encroachments on British commercial freedom by the use of that one little, previously unsayable word, “No”.

The danger is that he will think he has done enough: the gesture has been made, and now it is fine to let what Brussels calls “the institutions, mechanisms and procedures” of the EU be employed to make the new treaty. Then the Sir Humphreys can remount, the treaty can eventually become European law – as has happened with the Schengen Treaty on borders – and the United States of Europe will at last have been created. The Cameron “No” would turn out to have been a cheat, a delayed “Yes”.

This is not impossible. But against that stands the fact that Mr Cameron has been brave – braver, in a sense, than any previous prime minister. Politics offers rewards for such courage. The next step, surely, is not to rest, but to press forward. Why doesn’t he sketch out the European future that should emerge from the ashes of the Maastricht legacy? Why doesn’t he make his own Bruges speech?

David Cameron had no choice but to say non

By Benedict Brogan, Telegraph Politics: December 9th, 2011

William Hague on the Today Programme, discussing David Cameron's decision to veto the EU deal (details below): "We have created world market confidence. We do that by controlling our own affairs". He stressed that Britain is "not changing" the terms of treaties and refused to say that Britain would be "isolated.

He said that Nick Clegg had "absolutely" agreed the decision to use the veto, but ruled out a referendum. "There are many different overlapping groups of cooperation, this is one of them… The important thing at the moment is for the eurozone to be stabilised, for the european economies to start growing again, and for Britain to defend its national interest".

Mr Hague also refused to answer whether Britain could be involved in an IMF bailout. "We are always involved in increasing the resources of the IMF" he said, but he said that the IMF is about the world economy, not the EU. "We won't agree an uplift [to our IMF contribution] to help the eurozone" he added.

VETO WIELDED

The veto has been wielded and David Cameron has presumably snuck off to bed – we've got a few hours before the EU summit meetings kick off, and the Prime Minister looked exhausted at his press conference at 5.30am (UK time). Now it's time for the rest of us to digest the deal he's (not) reached.

The main point is that Britain has vetoed the deal proposed by Germany and France and so will stay outside of any treaty changes. Instead, France and Germany will lead the 17 eurozone countries and six stringers in a new treaty. Britain is left outside with Hungary, and with Sweden and Czech Republic, who are consulting their parliaments.

Speaking earlier, Mr Cameron said that: "What is on offer isn't in Britain's interest so I didn't agree". He added: "I had to pursue very doggedly what was in Britain's interests, which is very difficult in a room where people are pressing you to sign up to things because they say it is in all our interests". He ruled out "surrenders of sovereignty" and "new rounds of integration".

In his own press conference, an hour before Dave's, Nicolas Sarkozy said that Britain had made "unacceptable" demands. The big fight was between Sarkozy and Cameron over exemptions from financial regulations (it's not clear which yet), hence the narrower deal.

The French are very angry – one French diplomat says that Britain is acting "like a man who wants to go to a wife-swapping party without taking his own wife". So too are the Europeans. The FT quotes an EU official who says "this is going to cost the UK dearly – they have antagonised everyone".

But the big question now is what will the 23 be able to do? Dave insists that he will stop them using EU institutions, a position backed by Jose Manuel Barroso, the European Commission President. But if the result is new institutions for the 23 (or the 25), then this looks less like a two-speed Europe and more like British withdrawal.

Certainly, it's no surprise that Mark Reckless, the incredibly eurosceptic MP, was on Today earlier heaping praise on the PM. Now we can be more like Switzerland, he said. Was that the plan?

WHAT THIS MEANS

This morning's news will be a shock to those used to hearing British prime ministers threaten a veto but never use it. As William Hague said earlier, the Prime Minister has done exactly what he said he would do: block a proposal that threatens Britain. But where does it leave us?

For starters, Edward Leigh owes Mr Cameron an apology, and a grovelling one at that (yesterday, the Tory MP compared Dave to Chamberlain). Beyond that, all is uncertainty. His decision puts the Coalition under immediate strain. For Britain to step out of the European consensus, to set itself apart, is a blow to core Lib Dem beliefs. How will Nick Clegg react?

Certainly, it looks like it will be difficult to reconcile the Cabinet. As Patrick Wintour details here , Vince Cable was calling for the Prime Minister to agree to a deal of the 27 even if meant sacrificing the interests of the City. Meanwhile, five Tory ministers, led by Iain Duncan Smith and Owen Paterson, want the PM to explain how he will renegotiate Britain's position in the medium term.

Mr Cameron was right to reject a deal designed by the French, for the French. At the heart of this dispute is France's desire to see Britain out of the EU, and the City marginalised. That was why they loaded the package with elements Britain could not accept. Downing Street officials are clear about what the French are up to, and why the Prime Minister had no choice but to say non.

BACKBENCHERS

Then there is the reaction of Tory backbenchers. Mr Leigh and his friends are unlikely to waste time clapping Dave on the back. They will demand more, no doubt a comprehensive renegotiation of British relations with the EU.

How will Mr Cameron manage those forces? He is meeting a group of his backbenchers at Chequers tonight, but he won't be able to ward off the demands for a referendum before his statement to Parliament on Monday.

I blogged yesterday that if it was an E17 deal, Downing Street was ready to press for EU institutions – Commission, ECJ – to be respected, and therefore Britain's voice to be respected. What about the wider point? How do the US and China view us this morning? We stand alone – and now what? This is a pivotal moment that is about far more than an internal Tory ding-dong.

ECONOMIC CATASTROPHE

Then there is the question that matters most: where does Britain stand in the EU and globally? What happens to the euro? Is the E17 a remotely credible proposition? Moody's has downgraded three French banks this morning – hardly a good sign. This morning, Italian 10 year bond yields are back over 7 per cent, as traders presumably wonder whether this deal will lead to any action from the ECB.

As Fraser Nelson notes in his column today (and in a blog post this morning), this deal isn't anything to do with saving Europe. "The European Union is being redesigned, and the French and Germans are quietly ticking off their wishlist. They have long wanted to bind the eurozone closer together, with similar rules on tax and spending."

Yesterday, Philip Hollobone won an award for the silliest comment of the day, when he said that "we need to have a disorderly breakup" of the euro to "boost growth". George Osborne disagrees. The Times has splashed on the Chancellor's comments to the Lords Economics Affairs Committee yesterday; George reckons that a eurozone breakup could cause a 7 per cent contraction of GDP, or the worst since the 1920s.

David Cameron faces cabinet split over Europe

Prime minister must steer course between Eurosceptic ministers and Vince Cable's opposition

Patrick Wintour and Larry Elliott, guardian.co.uk, 8 December 2011

David Cameron is facing a three-way split in his cabinet over Europe, with senior Conservatives demanding a looser relationship with Brussels and the business secretary, Vince Cable, leading Liberal Democrat opposition to the prime minister's strongly pro-City line.

Cameron is facing demands from at least five senior Tory ministers, including two in the cabinet, to set out how he will negotiate a far looser medium-term relationship with Europe, possibly in a white paper. The ministers appear to have accepted that Cameron regards the potential collapse of the euro as too important to demand a massive renegotiation at this weekend's summit, beyond securing safeguards for the City .

The ministers are Iain Duncan Smith, the work and pensions secretary, Owen Paterson, the Northern Ireland secretary, the work minister Chris Grayling, the transport minister Theresa Villiers, and the defence minister Gerald Howarth.

But some of the ministers now believe there will have to be a referendum at some point in the next few years on Britain's future relationship with Europe. They are also certain Europe has to abandon the idea of it being a single journey taking the EU in one direction.

One source said: "Our neighbour is in deep trouble, and what happens to our neighbour affects us. The prime minister argues the patient is deeply sick, you need to stabilise him so he does not get any worse and then you can figure out where to go from there."

This sceptic group do not hold out a blueprint for what a new two-tier Europe will look like or even whether the new architecture will be acceptable to their EU partners. But they are determined that Cameron starts a renegotiation soon.

Cable has been irked by Cameron's insistence that Britain will block change unless the interests of Britain's financial services sector are ringfenced, believing it will jeopardise the government's attempts to rebalance the economy towards manufacturing, life sciences and the creative industries.

Sources close to Cable said he was concerned the strategy was being deflected by the "special interests of the City of London" and admitted it was causing tension among the members of the coalition.

The business secretary has been actively promoting policies to boost Britain's industrial base and believes that some of the reforms to the City proposed by Brussels are sensible.

Agreeing a white paper with Nick Clegg's Liberal Democrats would be very painful process for Cameron.

Clegg has been working closely with Cameron ahead of the summit, speaking to 10 European leaders in the past week to work out a common negotiating positon on protection of the single market.

Eurosceptics are looking at a range of options on Monday before Cameron's afternoon statement to the Commons on the outcome of the summit.

Figures such as David Davis, the former shadow home secretary, may put himself at the helm of a critical early day motion if Cameron fails to come back with clear safeguards on Monday, as well as a future strategy for a different relationship with Europe, including a referendum.

There have even been suggestions that letters challenging Camerons' leadership would be sent round.

But in a signs of the divisions inside the Tory party, Eurosceptics are divided in their attitude if the 17 euro-group members agreed at the summit to go ahead on their own. Some think it would exclude UK from any influence. Others see it as the welcome start of a two tier Europe, leading to its break up.

Hard line Eurosceptics in a debate at Westminster Hall insisted that Cameron had to seize the golden opportunity of the euro-crisis to create deadlock at the summit and demand big changes. "Far from not being the time to renegotiate to bring powers back, this is the moment at which we will have most leverage," Bernard Jenkin said

Let’s take back Britain's powers from the European Union, and let’s do it now

David Cameron must negotiate a permanent opt-out that allows us to escape the damaging effects of costly and unnecessary EU laws.

By David Davis, Telegraph, 17 Nov 2011

Today, David Cameron arrives in Berlin for talks with Angela Merkel about the eurozone crisis. All the indications are that if he tries to raise the issue of repatriating powers, Mrs Merkel’s reaction is likely to be irritation rather than understanding. Yet however much it irritates our neighbours, the question must be addressed. As the Prime Minister said in his Mansion House speech this week: “Now is the time to ask: what kind of Europe do we actually want?”

What we want, in effect, is a renegotiation of our position. Support for that is not confined to the Conservative back benches: 70 per cent of voters want to reclaim powers from Brussels. Yet even though Foreign Office officials have agreed to draw up plans to repatriate powers, nobody can tell us which ones. The voters, however, know what we need – and it’s not just control of business and employment regulation, important as that is to growth. We need to have control of our borders. To see less money wasted in Brussels. To have human rights cases decided in London, not Luxembourg. It is the duty of Parliament and government to devise a strategy for our relationship with Europe that reverses the decades-long erosion of control, and sidesteps future power grabs. To this end, any renegotiation should start by focusing on three key areas.

First, we need to reclaim control of justice and home affairs. Of course there are advantages to EU-wide co-operation on some matters, such as counter-terrorism. However, this should mean co-ordination, not subordination. British citizens can now be extradited anywhere in the EU without evidence. Meanwhile, free movement of labour has opened our borders to millions – and the European Commission has threatened to sue us if we do not make it easier for migrants to claim unemployment benefits.

Second, it is time to reassess Britain’s contribution to the EU budget. Last year, we paid almost £20 billion – more than £800 for every household. We get some back, but in the form of grants and subsidies that must be used for specific purposes. It is ridiculous for taxpayers to hand over billions, only for the EU to keep most of it and tell us what to do with the rest. To make matters worse, the Commission wants to increase the EU’s budget. At a time when the Government is having to show financial restraint, this is unacceptable.

Third, we need to take control over key economic issues ranging from business regulation to striking trade agreements. Yes, our trade with the EU nations is vital. However, the prosperity this should bring is undermined by the sheer volume of regulations flowing from Brussels, costing business billions of pounds a year. What’s more, the EU has failed to conclude trade agreements with the largest and most dynamic markets: it trades freely with Chile, but not China.

Our relationship with the EU’s undemocratic institutions has to change, too. The European Parliament might be the EU’s only directly elected body, but real power lies with the 27 unelected commissioners. It is they who propose laws, control the budget and enforce decisions. This is fundamentally undemocratic. The solution is to secure for Britain a permanent, universal opt-out that allows us to escape the damaging effects of costly and unnecessary EU laws. If we do not like a new law, Parliament should be able to reject it. Norway and Switzerland – with their more flexible trading relationships – do not subordinate their democracies to the EU. Neither should we.

In opposing this, the critics of renegotiation have two main complaints. The first is that it would create a two-tier Europe. Yet this is inevitable whether or not we renegotiate. The EU is already split into eurozone and non-eurozone countries. With the single currency’s leaders intent on further integration, and the rest unlikely to join it any time soon, this divide will widen.

Contrary to what some say, a two-tier Europe is not an anti-European idea. That impeccable pro-European Douglas Hurd advocated “variable geometry” within the EU, with different states integrating to differing degrees. The disadvantages of eurozone membership are not a price worth paying for a seat at the table. Being in the outside lane is, after all, where you do the overtaking.

The second complaint is that EU integration is a side issue at a time of crisis. This is totally wrong. The eurozone crisis is a consequence of the flawed attempt to impose a one-size-fits-all economic union on 17 countries. There could be no clearer example of the folly of closer integration – yet, this week, the Commission president actually called for Britain to join in.

That is why now is exactly the right time to talk about rebalancing our relationship with Europe and reversing the steady creep of EU power. What is more, renegotiation may well happen whether Britain likes it or not. Mrs Merkel has spoken of the need for a new EU treaty; at the very least, we will need an overhaul of EU institutions. This would make renegotiation of Britain’s relationship inevitable.

On current terms, the EU is simply not working for Britain. Political union is undermining our democracy. The single currency is in crisis. Bureaucracy is stifling British business. Intrusive regulation is subordinating our justice system. And the free movement rules weaken our border controls. Now is the time to get round the table and take back those powers that should never have left these shores.

David Davis is MP for Haltemprice and Howden and a former Minister for Europe

Germany plots to derail U.K. poll

By Bruno Waterfield, The Daily Telegraph November 17, 2011

Germany has drawn up secret plans to prevent a British referendum on the overhaul of the European Union amid concerns it could derail the eurozone rescue package, leaked documents obtained by The Daily Telegraph disclose. Pictured, German Chancellor Angela Merkel speaks during a joint press conference with Danish Prime Minister at the Chancellery in Berlin, November 17, 2011. Helle Thorning-Schmidt was in Berlin to meet with Merkel.

Germany has drawn up secret plans to prevent a British referendum on the overhaul of the European Union amid concerns it could derail the eurozone rescue package, leaked documents obtained by The Daily Telegraph disclose.

Angela Merkel, the German chancellor, is expected to tell David Cameron on Friday that Britain does not need a referendum on EU treaty changes, despite demands from senior Conservatives for more powers to be repatriated to Britain.

The leaked memo, written by the German foreign office, discloses radical plans for an intrusive new European body which will be able to take over the economies of beleaguered eurozone countries.

It discloses that the EU's largest economy is also preparing for other European countries, which are too large to be bailed out, to default on their debts - effectively going bankrupt. It will prompt fears that German plans to deal with the eurozone crisis involve an erosion of national sovereignty which could pave the way for a European "super state" with its own tax and spending plans set in Brussels.

Britain would be relegated to a new outer group of EU members who are not in the single currency. Mr Cameron will travel to Brussels and Berlin for tense negotiations with Mrs Merkel amid growing disagreement between the leaders over how to deal with the eurozone.

The Prime Minister is increasingly exasperated that Germany refuses to provide more financial help for Italy and other struggling countries amid concerns that the crisis is having a "chilling effect" on the British economy. Mrs Merkel said of Thursday that she expects Mr Cameron to "examine a stronger involvement with other countries" once the eurozone crisis has been resolved.

She said: "We've seen a sovereign debt crisis evolve in some states and particularly those in the eurozone find themselves in the international focus.

"It was right of David Cameron to concern himself with the U.K.'s debt issues when he became Prime Minister - that's my firm conviction, and once the negative focus has moved away from Europe, he will examine a stronger involvement with other countries."

The eurozone contagion is threatening to spread to Spain and France. On Thursday, the price of Spanish government borrowing reached the "brink" of crisis point.

The Spanish government sold 10-year bonds at 6.975 per cent - just below the seven per cent level which indicates a country needs international assistance.

Amid protests in Milan and Turin, Mario Monti, Italy's un-elected "technocrat" prime minister unveiled sweeping austerity reforms. Mr Monti warned that a break up of the single currency would take eurozone economies "back to the 1950s" in terms of wealth.

The six-page German foreign ministry paper sets out plans for the creation of a European Monetary Fund with a transfer of sovereignty away from member states.

The fund will have the power to take ailing countries into receivership and run their economies.

Even more controversially, the document, entitled The future of the EU: required integration policy improvements for the creation of a Stability Union, declares that the treaty changes are a first stage "in which the EU will develop into a political union". "The debate on the way towards a political union must begin as soon as the course toward stability union is charted," it concludes.

The negotiating document also explicitly examines ways to limit treaty changes to speed up the reforms. It indicates that Mrs Merkel will tell Mr Cameron to rule out a popular EU vote in Britain.

"Limiting the effect of the treaty changes to the eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the U.K.)," read the paper.

Senior government officials confirmed that they had dropped a previous demand that EU powers should be "repatriated" to Britain in return for the treaty changes requested by Germany, a move that will anger Conservative MPs.

"I don't think that anyone is seriously proposing going down that route," a senior government source said.

Open Europe, a think tank, called for Mr Cameron to demand something in return from Mrs Merkel for her "far-reaching plan", which requires the unanimous consent of all 27 EU countries, by giving Britain a veto.

"It would be the first step towards a vision of 'political union' that would have major consequences for the future of the entire EU, and therefore the U.K.'s place within it," said Stephen Booth, the think tank's research director. "Merkel is daring Cameron to call her bluff, but if the U.K. is serious about taking a leadership role in shaping the EU, Cameron will have to take a stand sooner rather than later."

Bill Cash, chairman of the House of Commons European scrutiny committee, accused the Coalition of standing by in "no-man's land" while Germany shaped the EU to suit its own interests.

"We are going to get nothing significant in return for agreeing to this," he said.

Mr Cameron is also expected to pressure Mrs Merkel into lifting German opposition to the use of the European Central Bank to rescue the euro.

However, Mrs Merkel said on Thursday night: "If politicians think the ECB can resolve the problem of the euro's weaknesses, then I think they are persuading themselves of something that won't happen.

The euro is dead and must be buried

Anthony Hilton, Evening Standard, 10 Nov 2011

It was the Labour chancellor Denis Healey way back in the Seventies who first pointed out that if you are in a hole the best thing to do is to stop digging. Though they will not welcome it, this is perhaps the best advice for the eurozone's present political leaders as they struggle to preserve the single currency against the ever stronger tides of economic reality.

With the right amount of positive action a year ago they might have persuaded the world they would do what they must to retain the status quo. But today, after a still mounting catalogue of missed opportunities and false starts, they may well have missed that chance but they are still trying. They are in a hole. Should they stop digging?

Conventional wisdom has it that they have to keep trying because the consequences of the euro's collapsing are too awful to contemplate. But is that really true? It would be painful, but more painful than the cost of holding it together? More painful than years of austerity, unemployment and social division and political unrest?

The thing to get clear is that this crisis is not about debt, though it is that which preoccupies the markets and dominates the headlines. The real issue is competitiveness. In the past 10 years the southern European countries have become increasingly less able to live with Germany and that is why it is fracturing and threatening to break apart.

It is that lack of competitiveness which created the pressures which led to the pile-up of debt in the first place; more tellingly for the future it is that lack which means they cannot grow fast enough to have any chance of paying it off. What that means is that even if a deal can be done now to keep the eurozone intact it will not have solved the problem. It will have dealt with the symptom, not the disease, so at some point the disease will return.

Thus the logic of the austerity packages visited on the Greeks, the Irish, the Portuguese and the others seen as "sinners" is not in fact to punish those nations for past profligacy but to impoverish the population and cut real wages to a low enough level to make those countries competitive again.

If, as people say, Greece is 40% uncompetitive against Germany, and Italy and Spain 30%, then that is a measure of the necessary cut in living standards and costs which needs to take place for them to be able to produce as cheaply as Germany. It's not surprising there are riots.

But there is an alternative, which is to leave the euro and devalue. We aren't in the euro and we took that option, sterling dropped by a quarter, which has made foreign holidays more expensive and caused a surge in inflation, but overall has been a lot less painful than the alternative of an across-the-board 25% pay cut.

There is also a moral issue. The financial markets want a deal because they see that as a way to minimise the losses on their past imprudent lending to assorted governments, and they are terrified too about the fallout from their latest toxic product - the naked CDO, which has allowed them to insure assets they don't even own against losses. The cost of such a deal is pain for the people. It can be regarded as another bank bailout - the bankers made mistakes they can't afford; the people suffer the consequences.

So why do Europe's leaders, or at least those in the troubled South, persist in taking the hard rather than the easy way out of the problem? There are two reasons, one political, the other economic. The political is loss of face: the euro was a grand political project and its failure would be humiliating.

Second, there is a very real fear of economic turmoil as all those devaluations would almost certainly be accompanied by defaults, the losses from which would severely embarrass and even render insolvent some of Europe's best-known banks.

It could cause turmoil in the Balkans, which were heavily dependent on Greek and Italian bank lending and could rekindle the tensions there. Hence the belief that the financial consequences of a break-up would be too awful to contemplate.

But the Soviet Union was a currency as well as a political union and its financial break-up with the recreation of national currencies in 1991 was carried out smoothly. If they could manage it then surely Europe's political and financial elite could manage a similarly orderly break-up.

Doug McWilliams, who runs the Centre for Economics and Business Research, also thinks the fears could be exaggerated. He produced a paper this week which argued that the costs would be lower than feared though there would be pain, and probably the need for another bank bailout. But it would not be long before growth resumed, more so because at least there would be certainty about the direction of Europe, instead of the current debilitating uncertainty.

Thus he concludes Europe will get back on its feet quicker and have a much better chance of renewed prosperity if we face reality. It will be worse for everyone to continue to deny it.

It is time to stop digging

Time to say NO; Alternatives to EU membership

New Booklet from Civitas; Roger Helmer,TFA Website: November 9, 2011

Civitas has produced absolutely the best and clearest case for British withdrawal from the EU that I have ever seen. It is astonishingly credible and concise. You can read the main body of it in a quarter of an hour, though the appendices would take longer. The appendices themselves, packed with statistics, are a vital resource for all involved in the great EU debate. The paper is written by Ian Milne, who has a distinguished track record as a commentator on EU affairs.

Milne presents trade statistics that clearly show the declining relevance of the EU to Britain’s position in the world. He points out that the EU’s share of global GDP and world trade is set to halve by 2050 — while the rest of the world will grow. Much of that growth, fortuitously, will come in the Commonwealth, which we have shamefully ignored since our accession to Europe.

Some say that the costs of EU membership are worth it for access to the Single Market. Milne retorts that credible estimates of the cost of membership (including regulatory costs) actually exceed the value of our UK exports to the EU 26 (EU minus the UK). He notes that the EU structure (a Customs Union with a Single Market bolted on) has not been emulated anywhere else in the world. In fact Customs Unions are an idea whose time has come and gone. Milne says that the costs of collecting duties under the Common External Tariff exceed the amount of duty collected. It is a pointless exercise.

The paper summarises the likely impact on key economic sectors of leaving the EU, and concludes that most would benefit and none would be significantly harmed. He points out that just about all credible Cost/Benefit analyses of EU membership show that costs outweigh benefits — as did the Swiss government study in their case. Our government refuses a formal Cost/Benefit analysis, presumably because it knows what the answer would be. The paper goes on to analyse the post-EU options, which loosely speaking are European Economic Area (EEA); EFTA (like Norway and Switzerland); or leaving altogether.

I have always argued that on leaving the EU, the UK would certainly be able to negotiate a free trade deal with the rump-EU. It turns out that we don’t even need to do that. As signatories of the EEA Treaty, we would remain at least to start with in the EEA, and therefore in a free trade deal with the EU, automatically. We may decide not to remain permanently in the EEA — Milne makes a strong case that leaving altogether is the best option — but at least on leaving the EU we should have a free trade deal in place pro tem, without having to negotiate it.

Milne’s last section “The Road to Self-Government” is a sheer delight. It consists of a draft letter to be sent jointly by the British Prime Minister and the Leader of Her Majesty’s loyal opposition, to EU heads of state and others, in the aftermath of a NO vote in an EU Referendum, informing them of the nation’s decision and setting out the steps we propose to take to facilitate the transfer to full independence. He refers to the effective date when the transition is completed as “I-Day”.

If I could suggest just one slight improvement, I’d go the whole hog and call it what it will be: “Independence Day”. If you care about the prosperity of our country and the survival of British democracy, please read this paper.

By Roger Helmer MEP

Details on www.tfa.net

How David Cameron could keep all sides happy on Europe

By Daniel Hannan, Politics, October 26th, 2011

No one has yet answered Charles Walker's question. 'If not now, when?' asked the amiable and popular MP for Broxbourne during Monday's referendum debate, before promptly sitting down. Flawless brevity; flawless pertinence.

We used to be told that a major renegotiation would be inappropriate because the EU wasn't a pressing issue; now we're told it's inappropriate because the EU is a pressing issue. In fact, of course, the dégringolade of the euro offers us a unique opportunity. The 17 eurozone countries have rather bigger things to worry about at the moment than whether the UK is in the Common Fisheries Policy, the financial services framework or the employment directives. They need our permission to make treaty changes in which we have little direct interest. Any other member state in our situation would exact a price for its acquiescence.

Ministers are making vague noises to the effect that we might seek to repatriate jurisdiction in the event of a future treaty change, but almost no one is convinced. MPs know that there is already a treaty change before Parliament: the one-paragraph modification which will retrospectively authorise the bailouts. They know that the Government did not seek to recover powers from Brussels in exchange and that, despite all the verbiage about referendum locks, there was no question of putting the amended treaty to the voters.

When pushed, ministers claim that we did get something in exchange: we were not enrolled into the enlarged euro bailout fund. Again, though, no one is convinced. Why should there be any question of Britain paying to support a currency which it didn't join? The UK's exclusion from the new bailout mechanism wasn't a special concession, but a reaffirmation of the status quo.

Why didn't we hold out for something meaningful? Is it that ministers secretly oppose the repatriation of powers? No. Everyone can see that Brussels is currently doing too much, even Nick Clegg. The trouble, rather, is that no one has the appetite for a row – least of all the officials who would have to carry out the negotiations. The diplomatic service in general, and its Brussels arm, UKREP, in particular, is inveterately Euro-integrationist. For the Sir Humphreys of our EU mission, opt outs mean loss of influence. Being human, they tend to conflate their personal interest with the national interest.

If you think I'm exaggerating, read Hugo Young's book This Blessed Plot. There you will find, in their own words, the story of how our FCO mandarins repeatedly frustrated the declared will of their ministers in order to keep Britain's EU application on track. They're still at it. They might not refuse a direct order; but if, having failed to tame their minister, they were unequivocally instructed to seek, let's say, the repatriation of social and employment policy, they would go about it in the most reductionist and perfunctory way possible. 'Look here,' they'd mutter apologetically to their counterparts from the other 26 permanent representations, 'our government has got itself into a bit of a pickle. It needs to be able to take home some sort of concession on employment policy. What about a declaration limiting the applicability of the 48-hour working week? That ought to be enough to do the trick.'

I can think of only one way to resolve the problem. I know that several FCO officials and ministers read this blog – indeed, despite everything, I'm very fond of some of them – and I offer this suggestion absolutely seriously. The way out is to set a date for an In/Out referendum as an agreed end-point of any renegotiation talks. It doesn't have to be tomorrow, or next month or even next year. If the Government is genuinely worried about the timing, it could declare that the referendum will take place on, say, 7 May 2015, the date of the next general election. Supporters of EU membership would then have every incentive to improve our membership terms in advance of the poll. Even UKREP might pull its finger out.

Ah, say critics, but you'd divide the Coalition. Really? Why? The referendum on AV was potentially far more fractious, pitting the two parties directly against each other. In the event, far from breaking the Coalition, it resolved the issue with the finality of a popular verdict. A referendum on the EU ought to be easier, since both party leaderships want the same thing: to stay in on improved terms.

It's worth recalling that our previous European referendum happened in precisely this manner. Harold Wilson was elected in 1974 with a party and a Cabinet far more split than David Cameron's. His solution was a renegotiation followed by a plebiscite: 'Better terms or get out', as the Labour slogan had it. From a narrowly political point of view, the 1975 referendum was a total success. Labour's internal divisions were healed, and the question of EEC membership was settled for a generation – which is as long, in politics, as anything can be settled.

I have no idea how Britain would vote today and, if my compatriots opted to remain part of the EU, on whatever new terms the Coalition had managed to bring back, I'd accept the result with good grace. But let's at least let the country decide.

Tough-talking Germany takes the eurozone to the brink of a break-up

By Liam Halligan, Telegraph Business, 5 Nov 2011

I ended last Sunday’s column by predicting that the latest eurozone bail-out would unravel within two weeks. Amid the post-deal euphoria, this statement raised a few eyebrows. As it turned out, though, far from being alarmist, I was actually too optimistic.

Within three days, the much-trumpeted Franco-German “complete strategy” solution, having previously caused share prices to surge, collapsed in a heap. No one should be surprised. The failure of last weekend’s agreement was inevitable – not least because there was no agreement.

The “50pc haircut” that private sector holders of Greek sovereign bonds “voluntarily accepted” was a myth. There was no resolution in terms of coupons, maturities or participation ratios – as was clear to anyone who looked beyond the headlines. Presented as a victory for courageous politicians over nasty bankers, the Greek bond-holders’ deal, the centre-piece of last weekend’s entire rescue-plan, has been exposed as a tawdry publicity stunt.

Precisely from whom the newly “leveraged” European Financial Stability Facility will be able to raise borrowed funds, and on whose collateral, was also clouded in mystery last weekend, and still is. The possibility of China stumping up cash now looks even less likely than before. Around a fifth of the country’s massive $3,200bn (£1,997bn) reserve pool is already euro-denominated and Beijing’s earlier disastrous investments in various Wall Street banks attracted bitter internal criticism. Klaus Regling, the chief of the eurozone’s new bail-out fund, was received courteously enough in the Chinese capital last week. But it was always doubtful that a country with no welfare state would rescue nations whose welfare states are bloated and out of control.

The major reason that this latest single currency bail-out has failed, though, is that Germany is still not on board. The initial positive market reaction was based on the notion that a eurozone-wide guarantee of bank bonds and sovereign debts had been secured. That’s what was being claimed by stock-brokers and the other sell-side hired-gun experts who dominate the airwaves.

The German government, though, hasn’t signed-up for that. Such a guarantee would either require massive money-printing by the European Central Bank – which is unthinkable given Germany’s deeply ingrained inflation-aversion – or would put Berlin’s own credit-rating at risk. It doesn’t matter how intensely the French plead, how hard the eurocrats suck their pencils or how much America huffs and puffs, I just can’t see Europe’s economic powerhouse making that kind of open-ended commitment.

On that note, there has been a new harshness, and frankness, in the tone from Berlin in the past week. Chancellor Angela Merkel made clear she would treat any Greek referendum on acceptance of the latest €130bn bail-out package as a vote on Greek membership of the single currency itself. That threat to throw Athens out of the euro altogether forced the Greek prime minister, George Papandreou, abruptly to retreat from his referendum call.

By admitting that leaving the single currency is possible, though, both technically and politically, Germany broke the taboo. The reality that a member nation could default and re-state its debts in another, heavily de-valued currency has never been acknowledged. Merkel raised this prospect to pressure Papandreou to drop his call for a vote that would have likely seen the Greek public reject the bail-out, sparking an outright default and fears the same thing could happen elsewhere in the eurozone.

That outcome has been avoided, for now, but an important line has still been crossed. Re-denomination is now out there as an officially recognised possibility that could yet spark chaotic retail and wholesale bank runs. Firms and households in Greece, Italy, Spain – and eventually even France – could end up, to the extent they can, transferring domestic balances to German banks to avoid re-denomination risk. If this happens on a significant scale, what then? Capital controls? Within a single currency area? That sounds absurd, of course. But that is where the deeply flawed logic of Europe’s monetary union ultimately leads us.

In keeping with Germany’s more austere approach, Merkel also admitted there is “little appetite” among the G20 nations to invest in the EFSF. So the bail-out fund could well lack the firepower to stop sovereign debt contagion spreading from Greece, to the likes of Spain and Italy. That would imperil the entire European banking system, undermining further an already feeble global recovery.

The market reaction to this on-going eurozone fiasco is, for now, focused on Italy. Yields on Italy’s 10-year bonds, which breached new euro-era highs last week, remain well above 6pc. The eurozone’s third-biggest economy is flirting with borrowing costs that drove Greece, Portugal and Ireland into forced bail-outs, courtesy of the European Union and the International Monetary Fund.

Italian public debt is almost 120pc of GDP, second only to Greece within the single currency region. If market interest rates remain at current levels for an extended period, Italy would need to run a budget surplus excluding interest payments of around 4pc-5pc of GDP, just to keep its debt-to-GDP ratio constant. Even this pie-in-the-sky scenario, requiring more prudence and leadership than Italy’s body-politic has mustered for a century or more, rests on an assumption that domestic GDP expands by 2.5pc a year – which looks highly unlikely. A stable debt-to-GDP ratio is, anyway, probably not enough to maintain Italy’s access to global capital markets at single-digit rates of interest, with the market insisting on a cut.

The prime minister, Silvio Berlusconi, is having fun, thumbing his nose at Brussels and waving away as “unnecessary” low-interest IMF loans. But Italy is in a very serious situation. It is only the estimated $70bn of Italian bond purchases by the ECB in recent months that has stopped Italian yields spiralling ever further upward.

This eurozone crisis, even under the rosiest of the best-case scenarios, has already had a massive de-stabilizing impact on Europe and the world. The very idea that China could rescue the West, as opposed to the US, has revealed the extent of America’s fiscal impotence. This will have profound geo-political consequences.

Deeply held convictions regarding the “risk-free” status of Western sovereign bonds are now also being questioned. If Italy and Spain are pulled into the mire, such assumptions will be completely exploded. Even if that is avoided, though, the notion that AAA-rated sovereign bonds are actually more risky than their emerging market counterparts is now rapidly gaining ground. That could spark a huge regulatory shake-up, given that “zero-risk” Western government bonds are at the heart of the laws that govern, or are supposed to govern, the global banking system. At the very least, the recognition that “zero-risk” is, in fact, an arrogant, out-dated and increasingly absurd concept could spark a massive reallocation of capital from West to East.

The most immediate paradigm shift, though, could relate to Germany. There is still a widespread view that the eurozone’s Teutonic engine-room will eventually agree to ECB bond-buying on a much larger scale. When the market panic becomes intense enough, the argument goes, the Germans will capitulate.

The ECB’s decision to mark the arrival of the new president, Mario Draghi, by cutting interest rates a quarter point to 1.25pc last week suggests the eurozone’s central bank might show a little more latitude in the future.

But I truly believe that Germany’s political and economic establishment would rather see the eurozone break up than risk its own national prosperity, and political stability, by allowing the ECB – and thus, Germany – to backstop the rest of Europe.

A currency with “no lender of the last resort” – that’s the incoherent reality of the single currency project, a reality that is now being mercilessly exposed.

• Liam Halligan is chief economist at Prosperity Capital Management

Revenge of the Sovereign Nation

By Ambrose Evans-Pritchard, Telegraph, November 1st, 2011

Greece’s astonishing decision to call a referendum – "a supreme act of democracy and of patriotism", in the words of premier George Papandreou – has more or less killed last week’s EU summit deal.

The markets cannot wait three months to find out the result, and nor is China going to lend much money to the EFSF bail-out fund until this is cleared up. The whole edifice is already at risk of crumbling. Société Générale is down 15pc this morning. The FTSE MIB index in Milan has crashed 7pc. Italian bond spreads have jumped to 450 basis points.

Unless the European Central Bank step in very soon and on a massive scale to shore up Italy, the game is up. We will have a spectacular smash-up.

If handled badly, the disorderly insolvency of the world’s third largest debtor with €1.9 trillion in public debt and nearer €3.5 trillion in total debt would be a much greater event than the fall of Credit Anstalt in 1931. (Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency. The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.)

The Anstalt debacle triggered the European banking collapse, set off tremors in London and New York, and turned recession into depression. Within four months the global financial order had essentially disintegrated.

That is the risk right now as the reality of Europe’s make-up becomes clear.

The Greek referendum – if it is not overtaken by a collapse of the government first – has left officials in Paris, Berlin, and Brussels speechless with rage. The ingratitude of them.

The spokesman of French president Nicolas Sarkozy (himself half Greek, from Thessaloniki) said the move was “irrational and dangerous”. Rainer Brüderle, Bundestag leader of the Free Democrats, said the Greeks appear to be “wriggling out” of a solemn commitment. They face outright bankruptcy, he blustered.

Well yes, but at least the Greeks are stripping away the self-serving claims of the creditor states that their “rescue” loan packages are to “save Greece”.

They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state, without any offsetting monetary stimulus or devaluation.

The economy has so far collapsed by 14pc to 16pc since the peak – depending who you ask – and is spiralling downwards at a vertiginous pace.

The debt has exploded under the EU-IMF Troika programme. It is heading for 180pc of GDP by next year. Even under the haircut deal, Greek debt will be 120pc of GDP in 2020 after nine years of depression. That is not cure, it is a punitive sentence.

Every major claim by the inspectors at the outset of the Memorandum has turned out to be untrue. The facts are so far from the truth that it is hard to believe they ever thought it could work. The Greeks were made to suffer IMF austerity without the usual IMF cure. This was done for one purpose only, to buy time for banks and other Club Med states to beef up their defences.

It was not an unreasonable strategy (though a BIG LIE), and might not have failed entirely if the global economy recovered briskly this year and if the ECB had behaved with an ounce of common sense. Instead the ECB choose to tighten.

When the history books are written, I think scholarship will be very harsh on the handful of men running EMU monetary policy over the last three to four years. They are not as bad as the Chicago Fed of 1930 to 1932, but not much better.

So no, like the Spartans, Thebans, and Thespians at the Pass of Thermopylae, the Greeks were sacrificed to buy time for the alliance.

The referendum is a healthy reminder that Europe is a collection of sovereign democracies, tied by treaty law for certain arrangements. It is a union only in name.

Certain architects of EMU calculated that the single currency would itself become the catalyst for a quantum leap in integration that could not be achieved otherwise.

They were warned by the European Commission’s own economists and by the Bundesbank that the undertaking was unworkable without fiscal union, and probably catastrophic if extended to Southern Europe. Yet the ideological view was that any trauma would be a “beneficial crisis”, to be exploited to advance the Project.

This was the Monnet Method of fait accompli and facts on the ground. These great manipulators of Europe’s destiny may yet succeed, but so far the crisis is not been remotely beneficial.

The sovereign nation of Germany has blocked every move to fiscal union, whether Eurobonds, debt-pooling, fiscal transfers, or shared budgets. It has blocked use of the ECB as a genuine central bank. The great Verfassungsgericht has more or less declared the outcome desired by those early EMU conspirators to be illegal and off limits.

And as my old friend Gideon Rachman at the FT writes this morning: the Greek vote is “a hammer blow aimed at the most sensitive spot of the whole European construction – its lacks of popular support and legitimacy.”

Indeed, how many times did we chew this over in the restaurants of Brussels, Stockholm, Copenhagen, Dublin, or the Hague years ago, as one NO followed another every time an EU state dared to hold a referendum.

I think it is fair to say events are unfolding more or less as we expected.

Europe's four big dilemmas

By Laurence Knight, Business reporter, BBC News, 27 October 2011

In October, Europe's leaders reached yet another wide-ranging deal to prevent economic problems from causing financial meltdown in the eurozone. For many onlookers, the issues they face may seem complicated and interconnected.

But essentially they boil down to four big dilemmas. How these dilemmas are resolved will decide whether the eurozone stays together, or ultimately unravels despite the latest agreement.

Borrowers vs Lenders

Like the US and UK, Europe faces an enormous overhang of accumulated government and private-sector debt, much of which is now not repayable.

So the question is, how much gets written off, and who picks up the tab?

For the eurozone as a whole, the debt problem is comparable with that of the US, and potentially manageable.

The problem is that some eurozone countries are much more heavily indebted than others.

In October's deal some private sectors lenders have already agreed to write down the value of Greek debt by half.

Investors also think the Portuguese, Irish, and even the Spanish and Italian governments, may eventually follow suit.

But when bad debts get written off, someone has to take a loss.

While some of those debts are held in the US, UK or elsewhere overseas, most of it is held by the European banks, and increasingly by the European Central Bank (ECB).

Germany may end up footing much of the bill

This is the primary reason for the recent loss of confidence in the European banking system.

But while Germany can afford to rescue its banks, as the Irish Republic has already demonstrated, other countries may not be able to rescue theirs.

The October package calls for banks to invest more than 100bn euros building up their capital, but it is not yet clear if they will be able to do so without intervention from governments.

If other European countries join Greece in writing off their debts, banks may need even more money.

Ultimately Germany and other less-indebted countries may have to bear much of the cost of rescuing the eurozone's banks as well as its weaker governments.

Austerity vs Growth

Like everywhere else, most European governments have seen their borrowing balloon during the recession and anaemic recovery.

At the same time, fears over southern European governments' ability to repay their debts mean their borrowing costs have also gone through the roof.

Under pressure from Germany and the ECB, all of these countries have been pushing through painful spending cuts and tax rises.

Diverging fortunes

Rate at which markets are willing to lend to governments for 10 years:

Germany: 2.05%
France: 2.83%
Spain: 4.95%
Italy: 5.56%
Irish Republic: 7.41%
Portugal: 10.80%
Greece: 22.14%
Source: Bloomberg. Data as of 11 October 2011

To set a good example, Germany has even donned the hairshirt itself, promising to eliminate its own modest deficit by 2013.

But here's the problem: Austerity is killing growth throughout Europe.

And with less profits to tax and more dole cheques to write, weak growth makes it even harder for governments to cut their borrowing and repay their debts.

In order to turn the slowing eurozone economy around, the ECB now looks set to slash interest rates from their current 1.5%.

The central bank considered buying up more Italian and Spanish debt, pumping cash into the financial system and easing the pressure on those countries to slash their borrowing.

But this move has always been strongly opposed by German members of the ECB.

Another option to stimulate growth is for the few other countries that markets are still willing to lend to to borrow and spend more, offsetting spending cuts in southern Europe.

Yet for Germany, who can currently borrow at unprecedentedly cheap interest rates, borrowing is anathema.

Discipline vs Solidarity

Germany's view on the eurozone crisis is simple. Southern European governments borrowed recklessly at the cheap interest rates available inside the euro. Now they are being punished by markets, and must learn discipline.

Germany wants other governments to incorporate strict budget rules into their constitutions to stop such recklessness in future.

A 20% unemployment rate helped spark Egyptian-style mass protests in Spain
But rules, with penalties attached, may not be credible. Imposing a fine on an over-indebted government is rather like kicking someone when they are down.

Indeed, just such a "stability pact" of budget rules, insisted on by Germany at the euro's creation, was quickly broken with impunity by Germany itself.

Moreover, the focus on discipline misses a bigger point.

While Germany's view may be apt for Greece - whose government cheated on its borrowing statistics to qualify for the euro in the first place - it is grossly unfair for Spain.

Before the financial crisis, Spain's government had lower debt levels than Germany's, and (unlike Germany) actually spent less than it earned in taxes.

But the country experienced a property bubble that then burst spectacularly, leaving its economy high and dry.

Wages, inflated during the good years, are now uncompetitive, and unemployment has shot up to 20%.

Detroit, in Michigan, has suffered an economic disaster, mitigated by US government money
Yet, inside the euro, Spain cannot devalue to regain a price advantage. Nor can it necessarily expect the ECB to cut interest rates or buy up its debts.

Being put a fiscal straitjacket as well just makes things worse.

Compare this with the US state of Michigan, where the collapse of the US car industry has spelled disaster.

Unlike in Europe, the US has a federal government that can tax other states in order to help out Michigan, by paying for unemployment benefits and rehabilitating the big car companies.

If the euro is to function in the future, economists warn, then a similar system of centralised fiscal transfers will be needed there too.

And in the current crisis, again it is Germany that would foot much of the bill.

Europe vs the Nations

On the face of it, the big political standoff in Europe is one of paymaster Germany versus bankrupt southern Europe.

For German voters, their country's post-War economic miracle was built on a hard currency, prudent finances, and strong exports.

It is hard for German voters to fathom that these very virtues are at the heart of the current crisis.

But Germany has everything to lose if it does not help the south out, and the eurozone unravels.

If the Greeks, Italians and others default on their debts, German and French lenders would be the biggest losers.

As Greece's economy shrinks and shrinks, its people cry out. But can German voters hear them?
If they also leave the euro, it would be a legal and financial disaster for all concerned.

Moreover, German export success for the past decade has been built on the weaker, more competitive exchange rate that came with sharing a currency with southern Europe.

Without the euro, safe haven Germany could expect its currency to shoot up, with devastating consequences for the country's export-driven industry.

Southern Europeans meanwhile would see their currencies plummet outside the euro, leading to rises in inflation and their cost of living as painful as the austerity they are protesting against.

Yet these stark realities are not widely appreciated in Germany or its neighbours.

Because the real problem is that there is nobody who can credibly speak for the common interest of Europe.

Since its inception in the 1950s, the European project has been run and controlled by a club of national governments.

The political process has been one of haggling behind closed doors, with issues presented to electorates as a matter of competing national interests.

But such haggling is dangerous in a financial crisis.

Any solution must be agreed by 17 governments, and ratified by 17 parliaments, an impossibly slow process.

And the longer it takes, the more bitter each dispute risks becoming, and the greater the market's loss of confidence in the euro becomes, undermining Europe's fragile economy.

The European Commission president, Jose Manuel Barroso, has tried to speak for the common interest, pleading for the Commission to take the lead in solving Europe's problems.

But he is a political appointee, and as such, he is easily ignored by national leaders and scarcely noticed by the wider public.

Perhaps, if Mr Barroso were an elected leader, he could guide European public opinion towards a comprehensive solution to the crisis that balanced the interests of the different nations.

But as it is, the European public is very far from understanding the issues, or agreeing to the greater economic and political integration that may be needed to save the euro.

Sadly, this political dilemma is one that may not have a workable solution.

Europe: the plates are shifting – and David Cameron risks being stranded

As Europe is reshaped, both party and country are urging the Prime Minister to seize Britain’s moment.

By Fraser Nelson, Telegraph, 27 Oct 2011

It was not so much the scale of Monday evening’s rebellion that shocked Downing Street, as the composition of the rebels. No 10 had believed it was fighting a battle against the Conservative Party’s old guard, and was preparing to crush them. But of the 81 MPs who defied the whips over an EU referendum, 49 were from the new intake.

There has been so much obsessing about the ethnicity and gender balance of the new Tories that little attention has been paid to their political orientation. They seem rather passionate about politics, and not so worried about their careers. More importantly, their idea of political balance is to have a picture of Thatcher on the wall and Jacques Delors on the dartboard. They are deadly serious about Europe – and all of them can see that the nature of the EU is changing radically.

The deal agreed yesterday, while David Cameron was en route to Australia, fundamentally alters the balance of power. It massively increases the remit of Brussels, enabling it to interfere with nation states’ budgets. The idea of cross-border subsidy, previously verboten, will become a permanent fixture. And since the trillion-euro bail-out fund will probably require Chinese money, it will also require various concessions to Beijing.

The decision to bind the eurozone closer together will not, of course, lead to stability; merely a far greater, more spectacular implosion in coming months. Britain’s chance to renegotiate its EU membership – or withdraw – may come at any point, and David Cameron’s party will want him to be ready.

With each failed bail-out, the stakes grow higher. Angela Merkel is right to warn that peace in Europe cannot be taken for granted – but it is the single currency that is stoking the very tensions it was set up to dispel. Germans dislike seeing their savings used to bail out idle southerners, whose barbers retire at 50 on a full pension. Greeks dislike being ordered around by foreigners. Nazi jokes are making a comeback: Horst Reichenbach, the official in charge of the EU’s “technical assistance” task force, arrived in Athens to find himself dubbed “Third Reichenbach” by the media.

In the good old days, Greece would simply default on its debt: the drachma would hit the floor, and everyone would go there for a cheap holiday – helping export its way to recovery. That’s how economies are supposed to work. But now, Greece is trapped within the eurozone, and being treated with German fiscal medicine. To rub salt in the wound, the bail-out has little to do with saving Greece, and far more with saving the foreign banks that foolishly loaned its government 130 billion euros.

This has, entirely understandably, reawakened old concerns about German strength. In 1997, Martin Feldstein, a Harvard academic, predicted precisely this: that the contradictions within the euro would not just lead to its collapse, but to the return of nationalism. His analysis, dismissed as fantasy at the time, looks dangerously plausible now.

More than ever, the euro is a project beloved of the political classes but resented by the masses. Nowhere is the gap bigger than in Britain. All the main parties say that we benefit from EU membership – but the EU’s own polling suggests that this view is shared by just one in three voters. “That is the difference now,” one Cabinet member tells me. “The centre of gravity in the party is not between status quo and renegotiation. It’s between renegotiation and leaving the EU completely – and the same is true for the public.”

Across the Tory benches, the view is the same: that they are the mainstream, and the Government is on the fringe. On Monday, Cameron saw the extent to which his party is willing to confront him, even over something as trivial as a non-binding motion. As he will know, if he asks his party to approve any deal that does not include the return of substantial powers, he can expect Cabinet resignations.

The centre of gravity among his advisers, too, is shifting. Steve Hilton, his chief strategist, has discovered that a third of the Government’s workload comes from implementing various Brussels initiatives – some of which contradict Whitehall policy. He now believes in either radical renegotiation to a trade-only relationship, or complete withdrawal. Oliver Letwin has reached much the same conclusion, during his now famous strolls in St James’s Park. Both argue that Cameron should at the very least take a Chirac-style approach to the EU, and refuse to implement its more burdensome directives.

That, of course, is anathema to Sir Jeremy Heywood, the permanent secretary at No 10 and soon-to-be-head of the Civil Service. Ever since Cameron began discussions with Whitehall, a year before the election, he has been told that any confrontation with Europe would absorb his first term. He has other advisers, veterans from the Major years, who believe that they have unfinished business with the Eurosceptics. They were the ones who advised him to pick a fight in Parliament last Monday, unaware of just how far the party – and the country – had changed.

One especially significant change is that principle has returned to the Commons. Adam Holloway, who gave up his Government job to vote with the rebels, spoke for many when he talked of “a duty not to rebel against my constituents”. MPs say this sort of thing all the time, but No 10 is starting to realise – with some alarm – that its new crop might actually mean it. “David and George don’t understand how people can sacrifice their career for principle,” says one minister. “For them, their career has been their principle.”

The crunch will likely come sooner than anyone expects. If the eurozone starts to merge tax and spending plans, a two-speed Europe becomes an inevitability. Members with their own currencies will have to decide what relationship they want, and this will require a new treaty. This time last week, Cameron might have believed he could get away with pushing a deal through, and calling it a “tidying-up exercise”. As of Monday night, he knows that will no longer work.

The Prime Minister is discovering – and not before time – that keeping the Coalition together means more than keeping the Lib Dems on side. Indeed, the euro crisis is so deep-rooted that even they have to acknowledge the need for change. Cameron has built his career on being a “moderniser” – but the modernising position, backed up by a sizeable chunk of public opinion, is to change the rules for the better. Indeed, it is hard to talk about tweaking existing treaties when Merkel is telling the German parliament about a “now or never” opportunity to fix the flaws in the eurozone’s architecture.

If Cameron’s choice is between a renegotiated membership, or leaving the EU entirely, he should be able to make common cause with Nick Clegg. No friend of Europe can deny the need for radical reform. Der Spiegel recently put the problem succinctly. The single currency, the magazine said, has not just pitted north against south, but political elites against the people they purport to represent. Last week, Tory MPs made clear where their loyalties lie. Cameron must now either defend the old order, or negotiate a settlement that the British public will accept. The Prime Minister may not want this battle, but it is one he has no choice but to fight.

Fraser Nelson is Editor of 'The Spectator’

How Britain's Economy can Grow Apart from Europe and Prosper

Senior Conservative backbencher Bernard Jenkin sets out why the Government must take back power from Brussels

By Bernard Jenkin, Telegraph, 23 Oct 2011

Behind the current furore over Britain's relationship with Europe lies the most vexed question facing the Government: how can we promote economic growth?

Without it, the Chancellor's deficit reduction strategy, the very raison d'être of the Coalition, will fail.There is no scope for substantial tax cuts or yet more borrowing. "Quantitative easing" – printing money – is not only not working, but will stoke inflation.

The only option is supply-side reform to boost competitiveness: and deregulation is free, since cutting back laws and bureaucracy actually saves taxpayers money. Yet the British economy is increasingly hobbled by a massive burden of regulation, most of which originates in the European Union.

The British Chambers of Commerce calculate that the cost of additional EU regulation introduced between 1998 and 2010 is a staggering £60.75 billion. The working time directive alone costs £1.8 billion per year.

This falls not just on business, but public services: that single measure costs the NHS £300 million per year. And the burden is growing.

The new Agency Workers Directive, opposed by the Coalition, will cost another £1.8 billion a year, jeopardising 28,000 temporary employment contracts for those aged between 16 and 24.

These regulations are one of the main reasons that the UK has fallen from 7th to 12th in the World Economic Forum's Global Competitiveness Report.

They are why a majority of chief executives now think that the costs of EU regulation outweigh the benefits of the single market.

And that's before considering the direct costs: the UK's net contribution to the EU has risen from £3 billion in 2008/9 to £9.2 billion in 2010/11. This that means our subsidy to our wealthy partners far exceeds the aid budget. It is also more than a quarter of the defence budget and 40 times that of the BBC World Service.

Now, the regulators are moving into new areas crucial to the UK economy.

The EU is the worst possible body to regulate the City of London, driven as its officials are by an antipathy to "Anglo-Saxon capitalism" and a misplaced desire to promote Paris, Bonn and Frankfurt at the expense of London.

This is also a major motive behind the proposed tax on financial transactions. The EU is even moving in on the UK's highly successful defence industries, with a Defence and Security Procurement Directive aiming to establish "a truly European defence market".

To use a familiar phrase, "we cannot go on like this". Disillusionment with the EU is growing apace. The polls consistently show that few want European government.

That's why we are having a backbench debate tomorrow, on a motion that asks the Government to offer the British people not just an in-or-out referendum, but a chance to express their desire for significant powers to be repatriated.

As the eurozone crisis gathers pace, and the EU lunges toward some ill-defined fiscal union to try to stem it, even John Major is now arguing that the UK should use this opportunity to take powers back from the EU.

Fiscal union among the 17 euro members, without recourse to the usual process of EU treaty amendment, will change the political and constitutional character of the EU beyond recognition – the dynamic of decision-making will be transformed, with any vestige or memory of "the veto" evaporating.

If we miss this chance to retrieve control over our own laws, in order to start to restore our growth and competitiveness, we may never have such a chance again.

What powers should we take back, and how? It is all very well to point to specific areas that could be improved – but successive attempts to promote deregulation and competitiveness within the EU have always failed.

Youth unemployment across the EU stands at 20.5 per cent – and the UK is now above the average. David Cameron could object to the Control of Substances Hazardous to Work Regulations, which lead to safety warnings on school highlighter pens – but even if they are repealed, the creeping march of EU regulation will continue on a hundred other fronts.

What Britain needs is not to present a laundry list of demands, but to seek a fundamental change in our relationship with our EU partners, based on the basic democratic principle that those passing laws should be accountable to those affected by them.

At this week's EU summit, the British Government should be tabling the outline of this new settlement: one in which Parliament, and not the institutions of the EU, determines the nature and extent of the UK's legal and political integration into the EU. And as good Europeans, we should insist that this template be made available to any member state. This would be leading in Europe, instead of slavishly following.

Of course, other EU governments will be hostile. They are still in denial about how wrong they are about the euro and over-regulation.

The core states may refuse to negotiate. But the UK should make it clear that Parliament remains sovereign, and Parliament is free to amend the 1972 Act that gives legal effect to the terms of our EU membership. When they accuse us of threatening to breach our EU obligations, we should point to those who breached the Maastricht limits on annual deficits. The whole of the EU is now breaching of the infamous "no bail-out" provision – the first rescue fund is even based on a treaty article concerning natural disasters.

Switzerland, Norway, Turkey, Iceland have each set different and useful precedents for a new kind of relationship with the EU, one that need not adversely affect our trading position within it. Such a transformation of our position is in the national interest – and no true European should insist that shackling the UK to un-competitiveness is in the European interest.

A new deal with the EU, backed by a referendum, could be the foundation of a new, positive relationship with our EU partners. And David Cameron should point out that this would be in the interests of our Coalition partners too. Do the Lib Dems want to go down in history as the euro-Luddites, so dogmatically wedded to integration that they bring down the Government? That would be party dogma over national interest. At such a moment, the Prime Minister has to insist that the national interest – and the health of our economy – comes first.

Bernard Jenkin is Conservative MP for Harwich and North Essex and chairman of the Public Administration Select Committee

Budget Scandal the European Parliament tried to keep Secret

The European Parliament’s £1.5 billion budget is beset by the abuse of staff perks and expenses, nepotism and the wasting of taxpayers’ money, according to secret internal audits obtained by The Daily Telegraph.

By Bruno Waterfield, Brussels; Telegraph 20 Oct 2011

A series of reports by the parliament’s internal auditor found that significant breaches of the rules were common among the 7,000 unelected officials who work for the EU’s assembly.

Staff are allowed to authorise their own expenses and pay allowances to family members, despite the auditor warning of the risk of “conflicts of interest”.

The reports, covering three years, identify instances of officials being given double payments or allowances to which they are not entitled.

Officials are failing to secure the best value for money for taxpayers when awarding contracts, while extensive funds are being given to the assembly’s political parties without any proper audit of how it is being spent, according to the reports.

Despite these findings, the audits have been kept secret from most MEPs, allowing the abuses to continue unchecked.

Only 14 senior MEPs, who make a committee known as the “bureau”, which administers the assembly, have seen the reports. They have been required to sign a confidentiality clause barring them from disclosing the problems.

The three most recent completed reports, covering 2007, 2008 and 2009, have now been released to this newspaper following the threat of legal action and the intervention of senior MEPs who believed they should be made public.

Klaus Welle, the parliament’s secretary-general, tried to block the release by arguing that public exposure of the audits would “disrupt decision-making”.

But Diana Wallis, a Liberal Democrat member of the bureau, said openness would help MEPs to improve the working of the parliament.

“We had had plenty of time to look at the internal audit report and implement recommendations, and therefore I believe that we had to ensure that these documents were released,” she said.

According to senior officials, the auditor, a British accountant named Robert Galvin, has repeatedly written to Mr Welle and the bureau expressing his concerns. His reports disclose that “critical actions” needed to fix the problems have either been ignored or implemented too slowly.

Mr Galvin found persistent problems with how “personal entitlements” and perks, which were worth £81 million in 2006, were paid to civil servants. In 2008 the auditor identified “several areas of considerable risk”.

According to the auditor, administrative staff have been paying expenses to themselves or relations with other officials getting double payment or getting allowances they were not entitled to.

“Personnel [need to] raise awareness of its file managers of the risks of conflicts of interest and to instruct them never to handle their own or their relative’s personal file,” he warned.

The reports found “critical” irregularities and conflicts of interest concerning procurement contracts worth more than £600 million a year.

Even in the department of the parliament’s president, the auditor found “significant” and “materialised” problems with procurement and contracts.

There have been persistent rumours of nepotism in the department, which is run by Francesca Ratti, the parliament’s deputy secretary-general. The auditor noted that officials must in future “avoid inappropriate treatment of selection and exclusion criteria”.

In the parliament’s finance department, which has a budget of £298 million, the auditor found a “lack of assurance that the best value for money is obtained” and “ineffective” controls over contracts. The latest audit, from July this year, noted that the department had not replied to the auditor’s concerns.

“Systemic” problems were identified in the information and logistics department, which has a budget of £158 million.

Audits also found that political parties were given funds even though they had refused to abide by the rules.

The cash is paid without proof of “eligibility of costs” or any proper audit checks that the money is spent properly. In 2006, three EU political parties, which can receive subsidies of more than £5 million a year, refused to “disclose fully their sources of funding” in breach of the rules.

Martin Callanan, the leader of the Tories in the parliament, said: “It is appalling that these activities were kept secret for so long. Instead of addressing the problem, the authorities tried to stifle publication. The Telegraph is to be congratulated for its persistence in bringing this information to light,” he said.

Marta Andreasen, the former whistle-blowing chief accountant at the European Commission and a member of the parliament’s budgetary control committee, said: “The parliament’s bureaucracy operates with a total lack of transparency, which is how it gets away with these irregularities.”

David Lidington, the minister for Europe said: “Clearly, reports such as these are worrying and further emphasise the need for increased transparency across all EU institutional budgets.”

A European Parliament spokesman said: “The very aim of these reports is to improve the parliament’s management by identifying risks and weaknesses. The auditor makes recommendations to the management, which are then carried out and followed up again by the auditor, as the internal auditor points out himself.”

European Parliament's budget by numbers

By Bruno Waterfield, Telegraph, Brussels, 20 Oct 2011

£5.7 billion: This is the amount that the European Parliament will demand next week in extra spending for next year's EU budget, an increase of 5.23 per cent and an extra bill for British taxpayers of £834 million.

5,000: This is the number of European Parliament officials who are given an "unfair financial advantage" over other EU officials with a promotion perk worth up £17,000 each a year despite a Brussels watchdog ruling that the payments are "serious instance of maladministration".

£67 million: The amount that the European Parliament's 736 MEPs can collectively claim this year in "daily subsistence" and "general expenditure" expenses without having to provide any receipts or proof of expenditure.

£150 million: The annual cost of moving the entire EU parliament hundreds of miles from Brussels to Strasbourg for a plenary sitting once a month as a symbol of Franco-German reconciliation, at a cost to the British taxpayer of £22 million.

£26 million: The cost of giving bigger offices to MEPs that will only be used an average of one day a week in the EU assembly's Strasbourg seat.

£90 million: The European House of History, to be built by 2014 by MEPs, despite a continuing argument over fundamental historical events, such as what happened during the Second World War. DG INLO, the department in charge of the project has "critical" problems according to the parliament's auditor.

£15.5 million: The cost of a "parlamentarium" visitors' centre with a 360 degree projection of the EU assembly's debating chamber, including a 2.5 hour role-play game for secondary school pupils, using the latest computer technology and contributions from over 400 actors to create a virtual world experience of life as an MEP.

£8 million: The annual cost of EuroparlTV, a television channel, which highlights the work of MEPs, and has only 830 daily viewers, less than 10 per cent of the 9,000 people working in the parliament every day.

UK economy brought to grinding halt by euro crisis

British taxpayers may be dragged into a rescue package for the eurozone after a leading forecaster warned that the crisis has brought this country’s economy “grinding to a halt”.

By Robert Winnett, Deputy Political Editor, Telegraph, 17 Oct 2011

The Ernst & Young ITEM Club, which uses the Treasury’s forecasting models, warns today that the economic situation is “worse than we thought”.

It concludes that the “bright spots” in Britain’s economic recovery have “dimmed to a flicker” because of the ongoing crisis in the single currency.

George Osborne, the Chancellor, and Tim Geithner, the US Treasury Secretary, are becoming increasingly exasperated at the lacklustre response of European leaders to the ongoing single currency crisis.

Europe is expected to finalise plans for a two-trillion euro bailout for the single currency area over the next week. However, there are growing fears that the package will fall short. The International Monetary Fund (IMF) is expected to be asked to help shore up Italy and Spain, if this becomes necessary – a move which could lead to British taxpayers facing a multi-billion pound bill.

The euro turmoil has led to the respected Ernst & Young ITEM Club cutting by almost fifty percent its prediction for British economic growth in 2011 since the summer. It is now expecting the economy will grow by just 0.9 percent this year, signalling almost zero growth before the end of the year.

The forecaster also warned that the recent announcement from the Bank of England that it as adding another £75 billion of quantitative easing was unlikely to help restore Britain’s recovery. It recommends that the Bank should consider cutting interest rates from 0.5 percent to 0.25 percent.

Last night, Peter Spencer, the chief economic advisor to the Ernst & Young ITEM Club, said: “It’s worse than we thought. The bright spots in our forecast three months ago - business investment and exports - have dimmed to a flicker as uncertainty around Greece and the stability of the Eurozone increases.

“With the UK recovery grinding to a halt, new measures are now needed to help stimulate growth. We think there is scope for targeted tax relief and spending measures to help put us back on track.”

The ITEM Club also forecasts that the UK’s unemployment rate will increase to 2.7 million people by the spring of 2013.

Mr Spencer said: “With the public sector cuts starting to feed through in the UK, it’s vital that the private sector labour market continues to stay afloat.”

He added: “The housing market is an important driver of the construction industry and consumer spending. Cutting stamp duty, particularly for first time buyers would, in our view, be money well spent.”

Finance ministers from across the G20 spent the weekend in Paris discussing the eurozone crisis. European leaders will meet on Sunday for a summit which is expected to agree a continent-wide rescue package worth up to two trillion euros.

The scheme is expected to unveil new help for Greece, which may be allowed to technically go bankrupt and default on some of its debts. Many European banks will also be offered state money to shore up their balance sheets.

However, there are concerns that the scheme will not go far enough and that the European Central Bank will not pay a central role.

Mr Geithner, the US Treasury Secretary, said: “They clearly have more work to do. It’s all in the details.

“In financial crises, it is more risky to act gradually and incrementally than to act with bold force.”

However, he added that he thought that European leaders had now recognised it was in their interests to resolve the crisis.

“Even though the world has a big stake in Europe doing this effectively, Europe itself has the strongest interest,” he said.

“I think they’ve come to recognise that, if you underdo it, it’s going to be more expensive.”

However, European leaders are poised to ask the International Monetary Fund to offer temporary loans to countries such as Italy and Spain to bypass the financial markets.

Until now, the IMF has funded about a third of the bailouts of Greece, Ireland and Portugal. But, helping single currency countries to stop the contagion spreading, may require a broader use of resources that would go far beyond the IMF’s traditional role of providing rescue loans to cash-strapped governments.

“What has been asked of us is instruments that are more flexible, more short term, that allow countries in good economic health but in difficulty to [borrow],” Christine Lagarde, the managing director of the IMF, said.

She said that world leaders would consider the new scheme at a summit in Cannes, France, early next month. The new borrowing scheme may also be useful to developing world countries concerned that the impact of the eurozone crisis may spread globally as banks are more wary about lending to governments.

Mr Osborne has said that he is opposed to the use of IMF funds specifically to bailout the eurozone. Britain will not be involved in the EU bailout for the single currency.

However, he has indicated that Britain may be prepared to help underwrite an IMF scheme available to all countries.

Mrs Lagarde has previously said that the IMF’s financing may have to double to almost eight hundred billion dollars – a move which would increase Britain’s liability by about £20 billion.

The Chancellor said: “We are supporters of the IMF; we’re members of the IMF. And there’s a debate about whether it needs more resources, but that is separate from the Eurozone having to stump up money for its own bailout funds.

“And we’ve been very clear here, as have other countries round the world, that building up the IMF resources should be for the whole of the world not just for the Eurozone, and so they are distinct issues. And certainly we would not support IMF resources that were only targeted at one continent or one group of countries, like the Eurozone.”

MPs could vote on EU referendum within weeks

A vote by MPs on whether the UK should pull out of the EU could be held within weeks piling huge pressure on David Cameron, it emerged yesterday.

By Tom Whitehead, Home Affairs Editor, Telegraph, 17 Oct 2011

A powerful parliamentary committee is expected to confirm plans for a Commons debate on an EU referendum when it meets tomorrow and could set a date for it within the next three weeks.

The historic move would be the first time MPs have debated the issue for a generation and many Tories on the right of the party want to break ties with Brussels.

A vote in favour of holding a referendum would not be binding on the Prime Minister but he would be under intense pressure not to ignore the will of parliament.

William Hague, the Foreign Secretary, is said to have told a meeting of influential Tory backbenchers last week that the public mood on Europe is at its most “hostile” ever.

Yesterday he added that people were "very disillusioned" over Europe, a feeling compounded by "excessive regulation" and "unnecessary interference into daily life".

It came as a think tank report today warned membership of the EU is “damaging Britain’s economic recovery and sapping job growth”.

Mr Cameron is keen to claw some powers back from Europe but does not want a referendum, which would also put huge tension on the Coalition with Liberal Democrats mainly in favour of EU membership.

The Commons Backbench Business Committee, which can schedule at least 27 debates in the Commons in any parliamentary session, meets tomorrow and is expected to demand a debate on the EU.

One committee source said: “It is almost certain that there will be a debate on this issue and it will be a case of which date is available.”

It could force Mr Cameron to order MPs to vote against any call for a referendum.

One party source yesterday said: “Cameron will move heaven and earth to stop this.

“The last thing he wants is a Commons vote demanding a referendum.

“He can ignore Tory Euro-sceptics banging on about this but ignoring a Commons vote is another matter.”

At a private meeting of the Tories’ 1922 backbench committee last week, Mr Hague is understood to have told MPs the mood of the nation was more hostile to Europe than at any other points since 1973.

Yesterday Mr Hague Mr Hague told BBC Radio 4's The World This Weekend people were "very disillusioned" over Europe, saying: "The eurozone crisis has added to that."

He said "excessive regulation" and "unnecessary interference into daily life" from Brussels' institutions compounded the feeling.

But he also warned there was no "immediate prospect" of repatriating powers from the EU.

The Government's priority had to be ensuring the eurozone was stabilised without damaging Britain's interests, he said.

A report for the think tank Civitas today calls on Britain to plan an “exit strategy from a failing EU”.

The study, Time to Say No, said it is possible to break with the EU without breaking with Europe itself.

It concluded that the EU is in “ long-term structural demographic and economic decline” and that it is “damaging Britain's economic recovery and sapping job growth”.

The report sets out a timetable for an orderly withdrawal from the EU including holding a referendum in 2014.

After receiving the mandate to return to full sovereignty, it says, the British Government would gradually reduce its contributions to the EU budget over a 24-month period.

Eurozone teeters on the verge of a 'euroquake' if Greek default is bungled

More than one in three international investors expect a global economic meltdown within the next 12 months, according to a new Bloomberg poll. Far more - almost 70pc - say the world economy is deteriorating, up from just 18pc four months ago.

By Liam Halligan, Sunday Telegraph, 1 Oct 2011

At the heart of the gloom, of course, is the eurozone, with 90pc of those surveyed judging that the economy of the single currency area is getting worse. One wonders what planet the other 10pc are on.

The eurozone is clearly sliding. The European Commission's economic sentiment indicator fell to 95 in September, from 98.4 the month before, plunging at a rate not seen since the Lehman Brothers collapse. German retail sales dropped faster in August than at any time since May 2007.

This grim prognosis, though, is set against a more hideous backdrop – the danger of a "euro-quake". Greece will default. The only question is how the default is managed – indeed, if it is managed at all.

A bungled Greek payment failure will spark "contagion", as spooked creditors pull the plug on some big eurozone government, leading to non-payment of wages and benefits, serious social unrest, and a single currency break-up.

We face the very real prospect of a major economic shock, the negative impact of which will be felt around the world.

"The operational viability of the single currency won't be known until the system is tested by a serious downturn and that moment may come soon," this column warned in December 2007, as the credit crunch began to loom. "The ultimate victim of this sub-prime crisis could be nothing less than the single currency's existence."

When these words were written, many in Europe were feeling quite pleased with themselves. "Sub-prime" was America's problem, caused by American excess. The eurozone would majestically sail on.

So as the 2008 meltdown came into view, those of us who observed that "every currency union in the history of man has broken up, unless, like the US and UK, it has been preceded by generations of political union, and held together with a federal tax system" continued to be dismissed as "mad", "xenophonic" and "anti-European".

I recall these writings not to be smug. I recall them because those who've ignored all previous warnings, waving them away by attacking the character of those making them, remain in charge of rescuing Europe from this mess. And they still don't get it.

Far from feeling humbled, or contrite that their incoherent currency union is on the verge of disaster - a disaster which could trigger another global slump when we've yet to recover from the last one - the eurozone's architects remain in denial, continuing to question the integrity of those who advocate straight-forward common sense.

Common sense now tells us that any "short-term fix" for the eurozone will do nothing to address the basic incompatibilities which have been there since monetary union began. Yet all the current proposals are just that, "extend and pretend" efforts to buy time in the hope that the single currency's inherent contradictions will disappear given the requisite "political will".

Many investors, too, have convinced themselves a quick and easy solution can be found, if only Europe "shows leadership" and governments "act decisively". Equities rallied last Tuesday on leaked reports that a new, more powerful bail-out was near. That rally fizzled out Wednesday, when doubts emerged over the terms of the money Greece would receive.

Then, on Thursday, another rally, after the German Parliament approved Europe's latest rescue package, a €450bn fund designed to keep the crisis from spreading beyond Greece and Portugal to "core" eurozone countries.

Such euphoria was based on nothing more than blind hope and desperation, namely the impending end of the third quarter, with traders determined to make their accounts look good, or less bad, in a bid to secure pre-Christmas bonuses.

Already, reality is once-again breaking through. For Thursday's vote was on a package put together back in July, empowering the European Financial Stability Fund to buy bonds pre-emptively and recapitalise banks, but up to a limit that now looks paltry.

In the intervening months, the global downturn has sent debt and interest-payment trajectories rocketing. Spanish and Italian 10-year yields have been pushed above 6pc.

The EFSF that Germany just approved was inadequate in July and, in financial terms, now looks irrelevant. So, Germany goes through a massive political palpitation, agreeing to "this far and no further" measures after months of heated deliberation, resignations and constitutional court cases and all the package delivers is a mediocre half-day rally in a market desperate to hear good news.

To have any hope of covering the financing needs of Spain and Italy, the EFSF would need to be at least five times bigger than that just approved by Germany. This is basic arithmetic – and assumes, heroically in a rapidly escalating crisis, that sovereign yields stay where they are.

Anyone who thinks a pooled tax facility of that size is possible not only doesn't understand the first thing about German politics, but doesn't understand politics at all.

Europe's policy-making "elite" wants a fully-blown fiscal union and sees this crisis as a way to get there. It is simply not going to happen, because almost no-one outside of the Brussels salons, or the broader EU establishment, wants it. That is the fundamental truth that must be spoken, repeatedly, to power – whatever offence is now caused. Because this currency union experiment, essentially an exercise in bureaucratic megalomania and hubristic nation-building, is about to do serious damage that extends way beyond Europe.

A smaller, stronger eurozone might work. For a while. If everyone sticks to the rules. Not that they will in the long-term, of course, because local electorates always take precedence. That's how democracy works. But if the weaker, peripheral nations are now stripped-out, as their electorates want, the euro being reduced to a Franco-German rump, that would provide Europe with a 3-5 year pause for breath, allowing the global economy to recover, before the single currency is consigned, finally and irrevocably, to the dustbin of history.

The EFSF was, anyway, never the "final solution". Proposals are now on the table for the European Central Bank to "lever up its assets to buy up troubled government debt from the financial system". This is a euphemism for "quantitative easing", with mainland Europe following the US and UK down the road of massive virtual money-printing.

So the ECB will bail-out bankrupt governments which, in turn, have bailed-out bankrupt banks. Writing-down debts? Too difficult. Restructuring banks? Er, no. The outcome, of course, will be inflation - fine for some savvy investors, but ghastly for ordinary people who have worked hard, saved, and tried to provide a dignified life for their families.

Those who deny that QE is inflationary tend to be those who said the eurozone could never break-up. Do these people ever read history? Inflation was how the Western world addressed its massive sovereign debts when they were last at today's grotesque levels, after both the First and Second World Wars, albeit those debts were incurred for a rather more honorable purpose.

Inflation will be our response to today's debts too – the debts of pure indulgence. It just goes to show, for all the technological advances of the last century, how little true progress we've made.

Liam Halligan is chief economist at Prosperity Capital Management .

The Great Euro Swindle

Very rarely in political history has any faction or movement enjoyed such a complete and crushing victory as the Conservative Eurosceptics.

By Peter Oborne and Frances Weaver, Telegraph, 22 Sep 2011

The field is theirs. They were not merely right about the single currency, the greatest economic issue of our age – they were right for the right reasons. They foresaw with lucid, prophetic accuracy exactly how and why the euro would bring with it financial devastation and social collapse

Meanwhile, the pro-Europeans find themselves in the same situation as appeasers in 1940, or communists after the fall of the Berlin Wall. They are utterly busted. Let's examine the case of the Financial Times, which claims to be Britain's premier economic publication. About 25 years ago something went wrong with the FT. It ceased to be the dry, rigorous journal of economic record so respected under its great postwar editor Sir Gordon Newton.

Turning its back on its readers, it was captured by a clique of left-wing journalists. An early sign that something was going wrong came when the FT came out against the Falklands invasion. Naturally it supported Britain's entry to the Exchange Rate Mechanism in 1990. In 1992, it endorsed Neil Kinnock as prime minister. It has been wrong on every single major economic judgment over the past quarter century.

The central historical error of the modern Financial Times concerns the euro. The FT flung itself headlong into the pro-euro camp, embracing the cause with an almost religious passion. Doubts were dismissed. Here is the paper's Lex column on January 8, 2001, on the subject of Greek entry to the eurozone: "With Greece now trading in euros," reflected Lex, "few will mourn the death of the drachma. Membership of the eurozone offers the prospect of long-term economic stability." The FT offered a similarly warm welcome to Ireland.

The paper waged a vendetta against those who warned that the euro would not work. Its chief political columnist, Philip Stephens, consistently mocked the Eurosceptics. "Immaturity is the kind explanation," sneered Stephens as Tory leader William Hague came out against the single currency.

Even as late as May 2008, when the fatal booms in Ireland and elsewhere were very obviously beginning to falter, the paper retained its faith: "European monetary union is a bumble bee that has taken flight," asserted the newspaper's leader column. "However improbable the celestial design, it has succeeded in real life." For a paper with pretensions to authority in financial matters, its coverage of the single currency can be regarded as nothing short of a disaster.

Just as bad was the CBI, whose claims to represent British industry have always been dubious at best. By the mid-1990s a small clique of large corporations were firmly in control, and they had the director general they wanted in Adair (now Lord) Turner, later to become chairman of the disastrous Financial Services Authority. Few pieces of conventional wisdom are ever too conventional for Lord Turner. His corporate bosses (Niall FitzGerald of Unilever, David Simon of BP, British Airways' Colin Marshall) claimed an overwhelming majority of British businessmen backed the single currency – a vital propaganda tool for pro-euro campaigners. The figures used to support these claims were, however, very flimsy: they could only be sustained by ignoring the views of small businessmen. In due course they were exposed.

Now let's turn to the BBC. In our Centre for Policy Studies pamphlet, Guilty Men, we expose in detail how the BBC betrayed its charter commitment and became a partisan player in a great national debate – all the more insidious because of its pretence at neutrality.

For example, in the nine weeks leading to July 21, 2000, when the argument over the euro was at its height, the Today programme featured 121 speakers on the topic. Some 87 were pro-euro compared with 34 who were anti. BBC broadcasters tended to present the pro-euro position itself as centre ground, thus defining even moderately Eurosceptic voices as extreme.

But this was not the worst of the unfairness. The Eurosceptics were too rarely given time to state their reasons for favouring sterling. Their position was too often covered through a paradigm of deep, "explosive" splits within the Conservative Party rather than the merits of the policy argument. Again and again the BBC led its news coverage on scare stories that failure to join the euro would lead to economic or industrial disaster. When those reports turned out to be false, it failed to correct them. In fact Britain was enjoying record levels of foreign investment: but when Office for National Statistics figures showed this, the BBC made very little of it.

As Rod Liddle, then editor of the Radio 4's Today programme, said: "The whole ethos of the BBC and all the staff was that Eurosceptics were xenophobes." He recalls one meeting with a senior BBC figure over Eurosceptic complaints of bias. "Rod, the thing you have to understand is these people are mad. They are mad."

In truth the Eurosceptics were only too sane. Margaret Thatcher, John Redwood, David Owen, William Hague and Bill Cash were mocked. But they grasped the problems the euro would bring. Speaking in the House of Commons in 1936, Winston Churchill said: "The use of recriminating about the past is to enforce effective action at the present." So what should we learn from the argument over the euro?

First, we should cherish that British trait, eccentricity. Study of the public discourse at the height of the euro debate shows how often pro-euro propagandists isolated their critics by labelling them cranks. Take Observer columnist Andrew Rawnsley's column on January 31, 1999: "On the pro-euro side, a grand coalition of business, the unions and the substantial, sane, front rank political figures. On the other side, a menagerie of has-beens, never-have-beens and loony tunes."

Most of Rawnsley's "sane" political figures came together 12 years ago at the launch of the Britain in Europe campaign to take us into the euro – Tony Blair, Peter Mandelson, Michael Heseltine, Ken Clarke, Charles Kennedy, Danny Alexander. So here's another lesson: be wary of cross-party alliances. Again and again, it is the lonely, cussed figures who stand outside the establishment orthodoxy who are vindicated over time.

One urgent lesson concerns the BBC. The corporation's twisted coverage of the EU is a serious problem, because the economic collapse of the eurozone means a new treaty may be needed very soon.

The problem is that the BBC cannot be trusted not to become part of a partisan propaganda operation: just look at the membership of the BBC Trust. Both its chairman, Lord Patten, and the vice-chairman, Diane Coyle, took a heavily partisan position in the euro debate.

The facts concerning Lord Patten are well known, but we have unearthed very troubling evidence of bias concerning Ms Coyle as economics writer for the Independent 10 years ago. Take this: "The defenders of sterling are, in the main, a group of elderly men with more stake in their past than in our future. They clothe their gut anti-Europeanism and Little Englandism in the language of rational economic argument."

Of course Ms Coyle is welcome to voice whatever insulting assumptions she wants about the motivations of Eurosceptics – but they call into question her membership of the BBC Trust. Finally, it remains essential for our democracy that the pro-euro point of view should be heard. But first of all the euro supporters need to tell us why they tried to put Britain on the calamitous path of joining the single currency. Let's consider the remark made by Danny Alexander, Chief Secretary to the Treasury, that those he labelled as anti-European isolationists or nationalists were "enemies of growth".

For five years Mr Alexander ran the pro-euro campaign, and had he had his way would have steered Britain directly to economic catastrophe. How dare he denounce Eurosceptics in this way? It's way past time for the pro-euro supporters to be called to account.

Guilty Men by Peter Oborne and Frances Weaver will soon be published by the Centre for Policy Studies with a foreword by Peter Jay. Frances Weaver is a freelance writer and researcher.

The edited article is taken from the latest edition of The Spectator, published on 22 September

LABOUR REBELS UNITE WITH TORIES TO FORCE VOTE ON QUITTING EU

Support was mounting for Britain to leave the EU last night

By Martyn Brown, Daily Express, September 19,2011

SUPPORT was mounting yesterday for Britain to leave the EU as Labour backbenchers joined forces with Tory MPs to urge the Government to pull back from "occupying" Europe.

A powerful cross-party anti-Brussels coalition of MPs plans to put unprecedented pressure on David Cameron as the eurozone crisis deepens.

Around 50 Labour MPs are set to side with a new group of 120 Conservative eurosceptics who met last week to push the Prime Minister to leave the European Union altogether.

The group, spearheaded by Tory MP George Eustice, wants Mr Cameron to set out a "clear plan" for pulling back from Europe. "This issue is now far too important to sweep under the carpet," he said. "The crisis in the eurozone requires all three parties to work together to negotiate a new relationship between Britain and the EU."

Conservative backbencher Mark Pritchard, secretary of the Tory 1922 Committee, accused Mr Cameron of failing to honour his promise for a referendum on the Lisbon Treaty. The senior Tory called for a vote on whether Britain should have a "trade only" relationship rather than political union with Europe.

He said: "Conservative MPs will not continue to write blank cheques for workers in Lisbon while people in London and Leicester are joining the dole queue.

The EU has already become a kind of occupying force, setting unfamiliar rules, demanding levies, curbing freedoms, subverting our culture, and imposing alien taxes."

Labour MP John Cryer said: "There are a lot of Labour MPs who didn't want to join the single currency who feel the same way about the EU as a whole."

Labour's eurosceptic ranks include former Ministers such as Frank Field, Kate Hoey and Gisela Stuart, as well as prominent backbenchers Ronnie Campbell, Graham Stringer and Austin Mitchell. The hopes of anti-EU MPs have been boosted by a 100,000-name petition calling for a vote on EU membership which was delivered to Downing Street this month.

The Daily Express's petition, demanding a referendum on the UK's membership of the EU, has already crashed through the 30,000 mark.

To sign up to our petition calling for a referendum on EU membership go to express.co.uk/referendum and you will be taken to the Government e-petition site.

Tory MPs demand referendum on Europe

David Cameron must call a referendum on Europe or face a rebellion from his own party and a backlash from voters, a leading back-bench Tory warns today.

By Andrew Porter, Political Editor, Telegraph, 18 Sep 2011

Mark Pritchard, the secretary of the 1922 committee of Conservative MPs, is the most senior Tory yet to demand a vote on Britain’s membership of the European Union following the eurozone crisis.

Writing in The Daily Telegraph, Mr Pritchard says that the EU has become an “occupying force” which is eroding British sovereignty and that the “unquestioning support” of backbenchers is no longer guaranteed.

He says the Government should hold a referendum next year on whether Britain should have a “trade only” relationship with the EU, rather than the political union which has evolved “by stealth”.

He warns that the Conservatives will see constituents “kick back” if taxpayers are forced to foot the bill for the failure of “unreformed and lazy” eurozone countries to introduce fully-fledged austerity measures.

Mr Pritchard is a leading figure in a group of 120 Conservative MPs who are pushing the Prime Minister to set out a “clear plan” for pulling back from Europe.

George Eustice, a backbench MP and former close aide to Mr Cameron, is also demanding a “new relationship” with the EU.

William Hague, the Foreign Secretary, recently threw his weight behind the Eurosceptics by saying that Britain might prosper by loosening its ties with Europe.

Mr Pritchard’s intervention will further increase tensions within the Coalition.

In a clear warning to Mr Cameron, Mr Pritchard says Tory MPs have become tired of tolerating the “Europhile views” of Liberal Democrat ministers.

He writes: “Conservative backbenches can no longer be taken for granted.

''Conservative MPs will not continue to write blank cheques for workers in Lisbon while people in London and Leicester are joining the dole queue.

“For many Britons, the EU has already become a kind of occupying force, setting unfamiliar rules, demanding levies, curbing freedoms, subverting our culture, and imposing alien taxes.

''In less than four decades, and without a single shot being fired, Britain has become enslaved to Europe — servitude that intrudes and impinges on millions of British lives every day.

“Brussels has become a burdensome yoke, disfiguring Britain’s independence and diluting her sovereignty.”

Mr Pritchard accuses Mr Cameron of failing to honour a “guarantee” to hold a referendum on the Lisbon Treaty.

He says: “The Coalition should agree to a referendum on Europe asking whether Britain should be part of a political union or of the trade-only relationship we thought we had signed up to.

“This is a moderate proposition that would attract voters from across the political spectrum, unite many on the Left and Right within Parliament and galvanise the support of most in the media.” Mr Cameron recently ruled out a referendum on the EU asking whether Britain should opt in or out. Mr Pritchard believes his “stepping stone” approach will provide a compromise.

He says that if Britain votes for a trade-only relationship with the EU, there should then be a referendum about membership on the date of the next general election.

Mr Pritchard writes: “The British have grown weary of Europe. The Coalition government should end decades of political appeasement by successive governments and champion freedom and democracy for Britain – and agree a referendum.”

Mr Cameron and George Osborne, the Chancellor, know that the unfolding crisis in the eurozone will give the Conservative party’s Eurosceptic MPs a chance to argue more powerfully for a realignment of Britain’s position in the EU.

The 2010 intake of new Tory MPs is regarded as the most Eurosceptic in a generation and large numbers of government ministers remain privately anti-Brussels.

Some hope that Mr Osborne, the Conservative election strategist, will advance a series of policies that can address the concerns of his party before the next election and in the process tap into the worries of voters.

But Mr Osborne’s Liberal Democrat deputy at the Treasury, Mr Alexander, yesterday criticised those who want to take Britain away from the EU.

The Chief Secretary to the Treasury, told Liberal Democrat activists: “Sadly, Eurosceptics on left and right fail to understand Winston Churchill’s central insight that sharing sovereignty strengthens influence and isolation weakens us. (The DM says: Churchill wanted Europe to unite, but Britain to stay outside)

“Scottish Nationalists make the same mistake. We will never let the anti-Europeans or nationalists frustrate our national interest. They are enemies of growth.”

Backbencher Mr Eustice is spearheading the challenge to the Prime Minister over the EU.

Eurosceptic Tory backbenchers want the party leadership to act more decisively on Europe and return some powers to Westminster.

CRUSADE TO ESCAPE THE EU MARCHES ON NO 10

Daily Express, September 9,2011

By Macer Hall, Political Editor

A Petition with 100,000 names demanding a referendum over the UK’s EU membership was delivered to 10 Downing Street yesterday.

A cross-party group of MPs and Euro-MPs marched on the Prime Minister’s office to hand over the call for the first official national poll on Britain’s ties with Brussels since 1975.

And the move comes as tensions have been rising within the Coalition over Britain’s relations with the EU.

Independent Euro-MP Nikki Sinclaire, who organised the petition, said: “This is giving voice to more than 100,000 people who want a referendum on membership of the EU.

“This is an argument that has been going on far too long. We must have a referendum, and the Government must abide by the result.”

Labour MP Kate Hoey said: “It’s inevitable now Britain will have a referendum on our EU membership. It’s just a question of when.”

Kelvin Hopkins, also a Labour MP, said: “The vast majority of the British population wants a referendum on the country’s EU membership and I think they should have it.

“Europe is in an economic crisis and the EU is doing no good for the eurozone or for us.”

Nigel Dodds, Democratic Unionist Party MP for North Belfast, said: “This is the latest message in the growing demand from people across the UK for a referendum. People have had enough of the EU and they want Britain to get out.”

Ukip Euro-MPs Mike Nattras and Trevor Colman also joined the protest. “We need to end Brussels regulation,” said Mr Nattras.

A growing number of Tory MPs are calling for a major overhaul of relations with the EU, and around 80 are to hold a meeting on Monday in a defiant challenge to the Prime Minister.

Tory backbencher George Eustice, one of the Tory backbench group’s conveners, said that the Prime Minister had “two or three years” to restructure Britain’s links with Brussels. But Lib Dem Chief Secretary to the Treasury Danny Alexander enraged Conservatives by saying that the economic crisis in the eurozone should mean that Britain worked harder at being a “leading member” of the EU.

Meanwhile, fresh moves for an EU-wide tax on trading in shares and bonds were threatened by the European Commission last night. Brussels officials vowed to press ahead with the 0.1percent financial transaction tax despite opposition from the British Government.

Earlier this year, 373,000 Daily Express readers backed a separate petition calling for the UK to quit the EU.

And nearly 26,000 people have backed a new petition started by the Daily Express on the Government’s official e-petition website also calling for British withdrawal.

You can join our petition for a referendum on leaving the EU at www.express.co.uk/referendum

German Court Rejects Challenges to Euro Bailouts

Der Speigel, 7 September 2011

Germany's highest court has ruled that relief for Greece and the euro bailout program is constitutional. As expected, the judges are demanding a greater say for parliament in future decisions on providing aid to beleaguered euro-zone member states.

In a tensely anticipated judgement, the German Federal Constitutional Court moved on Wednesday morning to reject several legal complaints that had been filed against Germany's participation in massive efforts to prop up the European common currency.

The court said that the billions in aid provided by Germany in capital and guarantees to highly indebted partner countries in the European Union to shore up the euro had been constitutional. At the same time, the court stipulated that the German federal parliament, the Bundestag, needs to be given a greater say in future bailout measures.

Presiding Judge Andreas Vosskuhle said the verdict "should not be misinterpreted as a constitutional blank check for further rescue packages."

The judges ruled that aid package resolutions cannot be automatic and may not infringe on the decision-making rights of parliament. Aid packages have to be clearly defined, and members of parliament must be given the opportunity to review the aid and also stop it if needed, the ruling said. "The government is obligated in the cases of large expenditures to get the approval of the parliamentary budget committee," Vosskuhle said. The court said that check and balance was needed to ensure parliament retained its sovereignty over the budget, which it described as a "fundamental element" of democratic self-determination.

Preserving Sovereignty

In May 2010, the Bundestag voted to provide financial aid to Greece to prevent it from insolvency and to approve the €440 billion ($620 billion) European Financial Stability Facility, with €147 billion in loan guarantees. Germany's highest court ruled that the parliamentary criteria had been adhered to when the government agreed to those bailout measures. The court said the Bundestag had not ceded any of its authority in budget decision-making with its approval of the legislation. Plaintiffs in the anti-bailout lawsuits had argued that the bailout packages, each measuring tens of billions of euros in size, placed extreme pressure on the Bundestag's budget planning and its ability to determine government spending.

But the legislation, the German Financial Stability Law, the justices said, clearly determined the scope and purpose of the aid and also a foreseeable period of time in which that help would be provided. A further condition placed by the court is that the aid be mutually agreed by the European Union member states -- a provision that would ensure the German government preserves its sovereign power in decision-making.

The court also rejected the argument by the plaintiffs that the bailout packages, because of their sheer size, threatened to inhibit the state's capacity to act. The amount of debt Germany is capable of carrying, the court stated, is a decision to be made by legislators, "and the Federal Constitutional Court must respect that." The court cannot "place its own professional competence in the place of that of the lawmakers," the ruling stated.

In their ruling, the judges responded to three suits which had been filed in the past year against the bailout measures for Greece, which many Germans oppose. The plaintiffs are well-known euroskeptics including constitutional law professor Karl Albrecht Schachtsschneider and Peter Gauweiler, a member of parliament for the conservative Christian Social Union, the sister party to Chancellor Angela Merkel's Christian Democratic Union. The critics had argued that the bailouts violated parliament's right to control the spending of taxpayer money.

Markets reacted positively to the ruling, with Germany's DAX index of blue-chip companies temporarily rising by as much as 3 percent.

Herman van Rompuy wants second term as strengthened EU president

Herman van Rompuy is ready to run for a second term as EU president, at the head of a “United States of Europe”

His comments came as Germany further strengthened demands for a new treaty giving the president extra powers.

Mr Van Rompuy has announced he is willing to take on the “unfinished” euro zone debt crisis with new powers setting an “economic government” in Brussels.

“Because the work is not finished, I do not rule out a second mandate,” he yesterday. “I would not do it for personal glory.”

The former Belgian prime minister took up his post as president of the European Council, the regular summits of EU leaders, on a two and a half year term that expires in May 2012.

He is jockeying to have a second go at the job, with an annual salary of £120,000 more than the British prime minister, at the moment when calls for a new European treaty giving the EU president new powers are growing.

Many EU officials and diplomats regard Mr Van Rompuy’s announcement as a bid to put himself at the front of the new campaign for a federal “United States of Europe” with himself as president.

“It is no coincidence that he steps forward at the very moment that federalism is on the agenda again,” said an EU official.

Under German proposals, Mr Van Rompuy, an economist, would become eurozone as well as EU president in control of a powerful secretariat for economic and financial affairs.

Germany is pushing for a plan to create a euro zone economic government, measures that would almost certainly require a new EU treaty, despite the risk of a backlash from European voters angry at euro bailouts and Brussels austerity programmes.

Gerhard Schroeder, the former German Chancellor, told Der Spiegel magazine that the changes would “translate into a United States of Europe”.

He insisted, echoing comments made by Wolfgang Schaueble, the German finance minister last week, that a new EU constitutional treaty to replace Lisbon must be pushed through despite British opposition and the risk of repeat French, Dutch and Irish No votes.

“Lisbon was a compromise. Our original goal was to create a political union with the European constitution, which was defeated in the referendums,” he said.

“Great Britain is causing the biggest problem. Great Britain is not part of the euro, and yet the British always want to have their say in the design of an economic zone. This is inconsistent.”

Mario Draghi, the Italian due to take up the job of president of the European Central Bank in December, yesterday said that the EU’s Lisbon Treaty needed to be changed in the wake of the euro debt crisis.

“Let’s not forget that this crisis started from the incomplete European construction,” he said.

“To cope with this, we must have a treaty change. The aim of this effort should be a quantum leap up in European economic and political integration.”

Within David Cameron’s Conservatives calls are growing for the Prime Minister to demand more national sovereignty in return for allowing a two-speed EU built around a federalist euro zone.

Martin Callanan, the head of the European Tories, said: “It may well be the right thing for the Eurozone countries to pursue fiscal union – and if they wanted to fly a federal banner over that it would be their choice. But the UK should quite rightly reserve the right to renegotiate repatriation of key powers in any such fundamental change to our existing treaties.”

Mats Persson, the director of the Open Europe pressure group, warned that the coalition government risked falling out of step with both European developments and public opinion.

“Cameron needs to develop a positive blueprint for a revised EU-UK relationship  and be prepared to put that to a referendum. Unfortunately, there seems to be no such sense of urgency from no 10 at the moment,” he said.

The eurozone’s crisis is Britain’s opportunity

There is a unique opportunity to create the kind of EU most people in this country want.

By Telegraph View, 5 Sep 2011

Tomorrow’s ruling by Germany’s constitutional court on the legality of last year’s bailouts of Greece, Ireland and Portugal could prove a pivotal moment in the slow-motion collapse of the single currency. It is hard to see how monetary union could survive a ruling from the eurozone’s paymaster that the bailouts are unlawful – which is why most observers expect the court to rule them legitimate. However, there is also a strong expectation that the judges will demand a greater role for the German parliament in any further rescues. That would amount to a long overdue admission that the single currency project has been compromised from the start by an absence of any real democratic legitimacy.

The Germans themselves have been the biggest culprits. As Wolfgang Nowak argues on the opposite page, the Maastricht Treaty promised a culture of “fiscal rectitude”, upheld with the sternest sanctions for member states that broke the rules. Countries great and small then proceeded to treat those rules with contempt. It was Germany’s reckless decision to allow Greece to join the euro on the basis of fiddled budget figures that sowed the seeds of the current debacle.

If the court recognises that the running of the eurozone should be taken out of the hands of the EU’s power elite, it will be doing a service. It probably comes too late, however. Lord Lawson stated yesterday that the single currency is “among the most irresponsible political initiatives of the postwar world”. The former Conservative chancellor joins a growing band of Tories who see this existential crisis for the euro as a chance to change the terms of trade in the EU. He suggests calling a halt to the long march to “ever closer union” – of which the euro was an absolutely fundamental part – and putting in its place a legally binding declaration of the sovereignty of individual member states.

A looser-knit EU that is not driven by out-of-date, anti-democratic dreams of federalism would, we suspect, find wide acceptance among the voters of Europe, who have hitherto had little say in the process. There are reports that British ministers are looking at ways of diluting job-destroying measures from Brussels, such as the Agency Workers’ Directive, and that would be a step in the right direction. But Conservatives in the Government need to be far more assertive about the kind of EU they want to see emerge and give their Eurosceptic instincts freer rein – regardless of the squeamishness of their junior Coalition partners. The eurozone crisis offers a unique opportunity to create the kind of EU most people in this country want. It should not be wasted.

The DM says: The kind of EU most people want is one without the UK in it.

Germans don’t want a Europe of broken promises and big bail-outs

The eurozone demands so much money from its economy, yet offers little in return.

By Wolfgang Nowak,telegraph,5 Sep 2011

In the run-up to the launch of the single currency, there was a joke doing the rounds in Paris: “When the euro is introduced, all the poor Frenchmen will become rich Germans – and all the rich Germans will become poor Frenchmen.” It wasn’t particularly funny at the time, and it certainly isn’t now.

Today, the rest of Europe is looking to Germany to save the European project. The country’s constitutional court will tomorrow rule on the legality of last year’s bail-out for Greece, Ireland and Portugal. Later in the month, the German parliament will vote on whether to accept the rescue facility agreed by Europe’s leaders. If either body votes the wrong way, we Germans are sternly warned, it will plunge the Continent into chaos.

Frankly, however, an increasing number of my countrymen are finding it hard to see why they should come to the rescue of a currency that demands so much, and seems to offer so little. For them, the “Europe of the euro” has become a Europe of broken promises. We were told that Maastricht would produce a culture of fiscal rectitude, with sanctions for nations that broke the rules. Instead, its criteria were disregarded by all, including the German government. We were told by Gerhard Schröder that he would make an “honest” currency out of the euro. But his first official act was to admit Greece, a country that had been blatantly falsifying budget figures. We were told that the European Central Bank would be as independent and responsible as our beloved Bundesbank. It is now buying hundreds of billions of euros of low-quality government bonds. We were promised that the introduction of the euro would not lead to a fiscal transfer union in Europe. Instead, we are being asked to participate in one euro rescue fund after another, and the extent of the debt that potentially faces our country exceeds the imagination.

In short, we Germans are becoming increasingly aware that we are in a European Union that keeps piling up new debt to fight old debt. The golden thread holding it all together is Germany’s solvency – but the fact that the EU can rely on our contributions means that France, Italy and others can ignore the reforms that their economies desperately need. And when the Germans start asking for guarantees in exchange, they are accused of trying to create a “Fourth Reich”. German money is fine, but not German reforms.

Now, we are faced with the ultimate expression of this trend. In unison, speculators such as George Soros and politicians such as Luxembourg’s Jean-Claude Juncker – and, more covertly, nearly every southern European country – are calling for the introduction of “eurobonds”. These, they say, would stave off the debt crisis, by making government borrowing cheaper and less risky for investors. Yet it would also place the burden of liability on Germany. Eurobonds are being hailed as the remedy to cure the Continent’s ills – yet as we all know, nothing can keep countries like Italy, France or Greece from breaking any new promises they make. Germany would not just become liable for other countries’ failings. It would be paying for the election promises of other governments that have neglected their own structural reforms.

Of course, Germans are aware that fiscal transfers can work: we became a successful nation after the Second World War because such transfers took place, and are still taking place, between the wealthy and poor states of our own country. What Germans would like to refuse Greece and others, they are happy to tolerate in their own country. The debt levels incurred by Berlin, Bremen and North-Rhine Westphalia are scandalous, and nothing is being done about them.

Yet it is expecting too much of Germany – and other wealthy nations, such as Finland and the Netherlands – to transfer this concept to Europe as a whole. The European Union, and the eurozone, have become too big. The only way the euro can become “honest” now is if its members launch the necessary reforms, streamline their bureaucracies and stop borrowing beyond their means.

A Europe supported by eurobonds would certainly make everything a lot easier – and everyone much more reckless. But in Germany, their introduction would lead to a large majority of the population rejecting such a Europe entirely. At the moment, Angela Merkel still faces a pro-European opposition. Yet public opinion is wavering, as indicated by opinion polls and the poor performance of Merkel’s party in elections at the weekend. Were a transfer union to become a reality, public enthusiasm for the European project would plummet with every fresh payment made to compensate for the failings of other countries. The strength of sentiment would be such that no government in Berlin could ignore it.

We need a Europe that invests in new technologies instead of interest payments, one that devotes itself to improving education instead of organising new borrowing at favourable terms using German money. Only an economically strong Continent can play the role in global politics that everyone expects. So far, we Germans still want to be good Europeans. However, a Europe that is held together only by German money is bound to fail – because it is not one that the Germans will accept.

Wolfgang Nowak was a senior adviser to Gerhard Schröder, and is the managing director of the Alfred Herrhausen Society, the international forum of Deutsche Bank

Britain can only grow if we ignore the EU

The agency workers directive from Brussels will load costs on to hard-pressed employers.

Telegraph leader, 1 Sep 2011

Yesterday’s poor manufacturing figures provided further evidence that the recovery is faltering. Factory activity fell to a 26-month low, with output, orders and employment all down. Despite the weak pound, the rapid growth in export demand – which hit record levels during the winter – appears to have come to an abrupt halt, and the sector that was supposed to power the economy back into the black has stalled. It was no surprise, therefore, that the British Chambers of Commerce (BCC) chose yesterday to downgrade their growth forecast once again. At the start of the year, they predicted that the economy would grow by 1.9 per cent. In April, they cut that to 1.3 per cent, and yesterday to 1.1 per cent. The one shred of consolation is that at least they envisage the economy expanding, albeit feebly.

The BCC renewed its call for measures to stimulate growth, making a particular point of urging ministers to lift the burden of regulation. They could also have asked the Coalition to halt the imposition of new regulatory burdens. The agency workers directive, a meddlesome new law from Brussels, comes into force a month from now. When it does, those employers who are not conversant with its contents – especially small businesses – are in for a nasty shock. From October 1, temporary agency employees will be granted the same employment rights as permanent staff, after just 12 weeks in a job. One of the key strengths of the British economy, the flexibility of its labour markets, will be undermined at a stroke. The CBI has estimated that the directive could cost as many as 250,000 jobs, snuffing out what little growth we are seeing.

This measure is not only a classic example of unwanted and costly new regulations being foisted on this country by the European Union, at the behest of trade unions. It also exposes the frailty of the Coalition’s growth package. Most companies are in surprisingly robust financial health, but are holding back from investing because of uncertainty over the Government’s intentions, and the wider economic picture. Having made the right call on deficit reduction, the Coalition has made no call on growth. This has been a serious failure of leadership. True, George Osborne unveiled a raft of micro-measures in his spring Budget, all of which helped a little. But none was a game-changer – and any good they did is likely to be swept away by this new directive. As our eurosceptic Chancellor finalises the details of another new growth package, we suggest that he defies the EU, and insists that the directive’s implementation be delayed or abandoned, for the sake of British jobs and businesses. In such dangerous times, extreme measures are sometimes called for.

EU demands that Britain admit immigrants intending to go straight on to benefits

By Daniel Hannan, Politics blog. August 2nd, 2011

The European Commission may finally have hit on an issue that jerks Britain from its euro-torpor – an issue that simultaneously presses the buttons of border control, welfare abuse and Brussels intrusiveness. Whether from hubris, power-hunger or from sheer stupidity, Eurocrats are demanding that Britain stop asking immigrants to show that they won’t immediately start accesing the social security system.

As the law stands, people wishing to settle in Britain must demonstrate that they have the means to support themselves, either through work or through an alternative source of income such as a pension. The European Commission claims that this amounts to discrimination against EU citizens, who are supposed to enjoy the same rights as British nationals.

In fact, as so often happens, Eurocrats are disregarding the plain text of their own rules. Article 7(1) of the Free Movement Directive gives EU citizens the right to reside in another member state only if they have “sufficient resources for themselves and their family members not to become a burden on the social assistance system of the host Member State”.

In order to get around this clause, the European Commission is deploying a piece of sheer sophistry. It argues that, if immigrants were able to top up their income with British benefits, they would have “sufficient resources”.

In May, the Supreme Court ruled on the claim of a Latvian pensioner, who had just moved to Britain and had demanded Pension Credit on grounds that her Latvian pension was too small. Although our courts like to rule in favour of immigrants, the law here was so clear-cut that, by 4-1, judges turned her down. If the European Commission were to get its way, she would not only be able to claim Pension Credit, but also council tax and housing subsidies – despite not having paid a penny into the system.

This blog has droned on and on about the way in which the EU is preventing the Coalition from fulfilling its manifesto promises. This ruling – if upheld by the European Court of Justice – would strike down Iain Duncan Smith’s pension reforms. His scheme, which has been warmly applauded across the political spectrum, aims to replace the current complicated system of state pensions with a flat entitlement, available to all pensioners regardless of assets, employment history or past contributions. Such a scheme, however, depends on a minimum residency requirement. (New Zealand, which operates a system very like the one IDS is proposing, makes payments only to those who have spent at least ten years in the country.) If every EU resident over the age of 66 whose income came to less than £140 a week were able to draw a British pension, the system would be bankrupted. Are we past caring?

Majority of Dutch want Greece out of euro zone - poll

By Gilbert Kreijger, (Reuters) AMSTERDAM, Aug 14, 2011

A majority of Dutch voters, or 54 percent, want Greece and other peripheral countries thrown out of the euro rather than rescued, according to a poll taken ahead of parliamentary debates on euro zone bailout measures.

Recent opinion polls have shown that Dutch taxpayers are increasingly disenchanted with the enormous financial cost of rescuing euro zone members, views which could well influence parliamentary debates this week and affect parliament's support for such bailouts at a key vote due in October at the earliest.

The poll followed another week of financial market turmoil, in which France's triple-A credit rating came under scrutiny and the European Central Bank had to step in to buy Italian and Spanish sovereign bonds in a bid to restore stability.

A Maurice De Hond poll published on Sunday showed that 60 percent of those surveyed wanted the Netherlands to stop lending money to other euro zone countries. A week ago, 55 percent said support should not be extended to Spain and Italy if they needed it.

Just under half, or 48 percent, said the euro's negatives outweighed its benefits.

A separate poll, commissioned by Dutch newspaper AD and published on Saturday, found that 48 percent of those questioned wanted out of the euro and a return to using the Dutch guilder.

The fiscally conservative Netherlands has been among the more demanding euro zone countries in the bailout debate, insisting on private sector and IMF involvement, aware of the risk that Dutch public support is fading.

The Liberal-Christian Democrat coalition relies on the support of its main ally, Geert Wilders' Freedom Party, to pass legislation, but Wilders is strongly opposed to euro zone bailouts and has said his party will vote against such rescues.

That means the government will need the support of opposition parties when official voting on some of the rescue measures which have not yet been approved takes place, in October at the earliest.

Opposition parties Labour and Democrats 66 have so far supported all the bailouts and on Saturday again reiterated their support on Dutch public radio, despite public discontent, because the single currency brings trade benefits.

On Tuesday, Prime Minister Mark Rutte and Finance Minister Jan Kees de Jager will appear before parliament's finance committee to discuss the Greek bailout and additional rescue measures agreed last month by European leaders.

A follow-up debate is tentatively scheduled in parliament the next day, when voting on motions filed by members of parliament could also take place, indicating the degree of parliamentary support.

Rutte told reporters on Friday the Netherlands had benefited from membership of the euro because it was an export-oriented economy that sold most of its goods to other euro zone members.

The prime minister apologised for creating confusion over private sector involvement in the Greek bailout after he and the finance minister announced different figures for the overall size.

Labour, the biggest opposition party which is important for reaching majority support, and Democrats 66, said they still wanted more details from Rutte about the cost of bailouts.

(Editing by Sara Webb and Mike Nesbit

70 Tory MPs set to join new group to fight EU integration

Up to 70 Conservative MPs are to join a new group dedicated to "reversing the process" of closer European Union integration in a move likely to place fresh strain on the coalition.

By Patrick Hennessy, Political Editor, Sunday Telegraph, 20 Aug 2011

Dozens will attend a Commons meeting next month to discuss the formation of the Eurosceptic group which aims to provide "helpful advice" to the government.

The move carries echoes of the formation – more than 20 years ago – of the Bruges Group, which took its name from one of Margaret Thatcher's speeches in which she attacked the formation of a European superstate and which became a focus for Eurosceptic Tories in the 1990s.

The new grouping is being put together by three MPs who were all elected for the first time in last year's general election: 3, who was David Cameron's former media chief, Chris Heaton-Harris and Andrea Leadsom.

The trio wrote to fellow Tory MPs last month to invite them to a meeting in the Thatcher Room at the Commons on 12 September. Mr Eustice last night said the letter had so far attracted 71 positive replies – around a quarter of the party's MPs.

The letter states: "It has ... become clear that events in the European Union are going to dominate British politics in the coming years across a wide range of policies.

"We think it might be helpful if we set up an informal group of like-minded MPs who could come together to talk, receive regular quality topical briefings, exchange ideas and, indeed, provide support and helpful advice to the government.

"The political objective of the group would be to reverse the process of ever-closer union."

The move risks incurring the wrath, however, of the Tories' Liberal Democrat coalition partners, whose party continues to maintain broad support for Brussels.

Mr Eustice said: "There is a lot of interest in such a group. It aims to be constructive and the ensure that we make the most of the opportunity presented by a Eurosceptic PM and a changing context in Europe."

The new breed of younger Eurosceptic MPs takes a much more pragmatic view of the EU than the veterans of the old ideological battles over the Maastricht treaty that hamstrung John Major's government in the 1990s, some of whom, such as Bill Cash, are still in parliament.

Nevertheless it is estimated that up to half of the 148 Conservatives elected for the first time in 2010 think Britain should quit the EU altogether, with scores more believing the UK's relationship with the EU is ripe for a fundamental overhaul.

As well as the financial crisis gripping the eurozone and the lead-up to the future funding of the EU from 2014, several flashpoints are mentioned by MPs, including moves due to take effect in 2014 that would see the Luxembourg-based European Court of Justice have greater say over policing policy in the UK.

"As the fundamental nature of our relationship with the EU changes over the next couple of years, there will be greater pressure for referendums on key issues," one Tory MP predicted.

Plans to do away with all or part of the Human Rights Act will also carry on being a major issue. "David [Cameron] promised a British Bill of Rights before the election," a Tory MP said. "But he can't deliver it – the Lib Dems won't let him. In extremis that could be a coalition breaker and the PM won't risk it."

Away from Europe, taxation is a thorny issue. Many of the new intake support moves to scrap the 50p top rate of tax on incomes above £150,000 in a bid to boost business – as Eric Pickles, the Communities Secretary, advocated this weekend.

Like Mr Pickles, and unlike among Lib Dems, there is little or no appetite for replacing it with another form of imposition on the wealthiest.

"I don't want to scrap the 50p tax band and bring in a mansion tax," one Conservative elected last year said. "In any case our main efforts should be focused on helping business and promoting growth."

Even moves to repeal the ban on hunting with dogs, brought in under Labour, and a touchstone for many rural Tory supporters, is likely to be a big problem for Mr Cameron.

Some new Tory MPs, many of them women with urban or suburban seats, favour keeping the ban in place – as do the overwhelming majority of Lib Dem and Labour MPs.

One backbencher confidently predicts there is no way the ban will overturned. "The numbers don't exist. The PM should just get on with it – lose the vote and move on."

An indication of the strength of feeling about the direction of travel the party should take can be seen from the fact that no fewer than three books are scheduled for publication around the time of the forthcoming party conference season in which Conservative MPs will attempt to seize the agenda.

One of them, provisionally entitled After the Coalition, features contributions from Kwasi Kwarteng, Dominic Raab, Elizabeth Truss, Priti Patel and Chris Skidmore, all members of the 2010 intake.

David Davis, Mr Cameron's main opponent in 2005 for the party's leadership and the former shadow home secretary, is also overseeing a book with contributions from mainly right-leaning MPs – including new members Steve Baker, Therese Coffey and Richard Drax.

A third tome, snappily-titled Masters of Nothing: The Crash and How It Will Happen Again Unless We Understand Human Nature, is being written by another pair of up-and-coming MPs, Matthew Hancock and Nadhim Zahawi.

Younger MPs are careful to couch their desire for change in terms of support for Mr Cameron and the coalition.

Mr Raab, a former business lawyer who is MP for Esher and Walton, said: "The mood is positive because the coalition is delivering – whether its deficit reduction, welfare reform or raising teaching standards.

"The challenge for us comes from the unforeseen and the unpredictable. The riots inevitably feel like a vindication of David Cameron's diagnosis of the broken society and the importance of family, while the Eurozone crisis has created a crossroads for the EU as a whole."

Tracey Crouch, a former head of public affairs for the insurance company Aviva who is now MP for Chatham and Aylesford, said: "Constituents understand that we've had to prioritise reducing the deficit in our first year of Government, but now they want to see us deliver on the key manifesto promises that they voted me and others into parliament on the back of.

"Every time there is a story in the paper about some ridiculous human rights claim, or outrageous EU spending commitment, I get reminded by constituents of not only what was on my leaflets but what was in the coalition agreement too."

David Cameron can't reshape the EU – but the prime minister can reduce Britain's exposure

Dan Hannan, Telegraph 8 July 2011

As Brussels seeks even greater economic integration, it's time for Britain to strike a new and better deal

I attracted unusually dirty looks as I entered the European Parliament last week. Not that I'm a stranger to dirty looks – you don't expect to be popular in an institution you want to close down – but the murderous intensity of the stares was unwonted. Suddenly, I realised what it was. I had been for a gentle run – more of a ruminative lope, really – around Leopold Park, and I was still wearing my "Keep the Pound" T-shirt, dating from the 2001 general election.

If there is one thing that a Eurocrat dislikes more than a stand-offish Brit, it's a stand-offish Brit who has been vindicated. Our refusal to join the euro was always an affront to the Brussels establishment. But where we used to be pitied and patronised, now we are envied and resented.

Which is why it is silly to talk, as some hopeful Conservative MPs do, of "seizing the agenda" or "shaping a post-crisis Europe". The fact that we got it right on the euro doesn't add to our moral authority; it makes us less popular than ever. No one likes a smart alec.

In the current issue of The Spectator, David Cameron talks – for the first time, as far as I can see – of wanting to renegotiate Britain's relationship with the EU: "There will be opportunities for Britain to maximise what we want in terms of our engagement with Europe."

It is important to be clear about what he is saying. He is not fantasising about a general overhaul of the EU. He knows perfectly well that the other member states are bent on establishing what Herman Van Rompuy calls "European economic government".

Where you or I might conclude that the euro crisis was a consequence of jamming widely divergent economies into one currency, Eurocrats have concluded the precise opposite. What the system needs, they insist, is more integration. They want a permanent wealth-transfer mechanism. They want an independent EU revenue stream, so that Brussels doesn't depend on contributions from its member states. They want common European taxes on air travel, on carbon trading schemes, on emails and phone calls, on businesses and, above all, on financial transactions.

Of course, most of the EU's financial transactions take place in City of London. Thus does Britain risk being dragged into the crisis, despite having declined to join the euro. Indeed, we have already been dragged in. Our total liability in the Greek, Irish and Portuguese bailouts is £12.5 billion – more than twice as much as the Government saved in its first 12 months from all its domestic expenditure cuts put together. This exposure comes on top of an almost unbelievable 74 per cent increase in our net contribution to the EU budget in 2010, and a doubling of our IMF subscription.

Eurocrats are keen to make Britain stump up. It's not just that they are taking umbrage at our imagined smugness. Many of them have actually convinced themselves that the euro is in trouble, not because it was a bad idea to begin with, but because it is under a co-ordinated attack from Anglo-Saxon speculators.

I had an extraordinary conversation last week with an Italian MEP who kept ranting about some article in The Economist which had predicted a Greek default. I suggested to him that a) saying that something is likely to happen isn't the same as wanting it to happen; b) The Economist is a Europhile paper which supported the euro from its inception; and c) the British Government doesn't control British newspapers. He was having none of it.

Nor was he exceptional. In a truly bizarre press conference on Tuesday, the President of the European Commission, José Manuel Barroso, blamed Portugal's financial crisis on Moody's, the US credit rating agency, whose analysis he called "biased" and "speculative". He seriously suggested that, in order to break the dominance of the big three American agencies – Moody's, Standard & Poor's and Fitch – Brussels might have to develop a rival agency of its own (as if anyone would believe a word it wrote).

When the leaders of the EU start blaming their travails on speculators, when they demand that some tame EU agency come up with a rosier set of statistics, when they jam their fingers in their ears and hum Beethoven's Ninth, you wonder whether they are losing their grip.

No one in Britain should take pleasure in the turbulence on our doorstep. It's not just that the countries using the euro are our friends and allies, nor that they account for 40 per cent of our trade. It's that a union in crisis makes an unstable neighbour. To borrow a metaphor from Lenin, the eurozone is exporting its internal contradictions.

If he can't reshape the EU, what can the Prime Minister do? He can reduce Britain's exposure. As things stand, we are like a man huddling at a bus-stop in a severe storm. The bus shelter is a better place to be than the middle of the street, but we are still getting wet. How much more satisfying to be indoors, listening to the rattle of the windowpane.

If Britain were to extricate itself from its current EU obligations, it would become a sanctuary for every investor fleeing from the chaos of the eurozone. Get this right, and we could become as Hong Kong to the EU's China: a low-tax, deregulated, off-shore haven.

What would this mean in practical terms? The repatriation of a series of powers. Britain should aim to resume control over those areas of policy which do not impact directly on other EU states: taxation, immigration, employment law, social policy, agriculture and fisheries, foreign affairs and defence, the interpretation of human rights.

This would, of course, revolutionise the nature of our relationship with the EU. Instead of being full members, we would have an amplified trading relationship, along the lines of that enjoyed by Switzerland. Two questions arise. Would the EU ever grant us such a deal? And, even if it did, would the Coalition be prepared to ask?

On the first question, the short answer is that the other members are more concerned about getting through the euro crisis than they are about British opt-outs. In order to establish what Mr Barroso calls "fiscal federalism", even among the euro states alone, they need our permission. We should give it warmly, in return for permission to withdraw from those policies which are of no immediate concern to anyone else.

Would the British Government make such a demand? It seems unlikely. While ministers are reportedly frustrated about their inability to pursue domestic reforms because of EU rules, they have so far shown no interest in taking powers back.

None the less, no one can have missed the suddenness with which the argument is lurching. Virtually every day, some long-standing British Europhile turns his coat and pretends to have had his doubts all along. When 60 per cent of the electorate want to leave the EU, but only 3 per cent of MPs admit to sharing their view, something has to give.

Sooner or later, one of the parties will grasp that there is an electoral premium in letting the country as a whole settle the issue of EU membership through a referendum. Perhaps our politicians will feel the heat; or perhaps they will see the light.

Daniel Hannan is a Conservative MEP for South East England

Why half of all Tory MPs want to pull out of the EU

By Iain Martin, Mail Online, 5th July 2011

When William Hague, then Conservative leader, likened membership of the Euro to being ‘stuck in a burning building without exits’, he was condemned by bien pensant opinion as a ‘little Englander’ and crazed extremist.
But with Athens ablaze this week and protesters fighting baton-wielding police outside the Greek parliament, it is Hague who has been vindicated and his critics who are on the back-foot.
Of course, those who insisted a decade ago that Britain must join the single currency experiment and axe the pound (Mandelson, Heseltine, Clegg et al) are all silent on the subject today. Only a deluded Tony Blair still thinks Britain should go in.
As Greece’s government is forced to accept spending cuts in return for more bail-out billions designed to keep their bankrupt country afloat, the EU’s leaders are terrified of what will happen next.
With some justice, they still fear the Greek government will be unable to enforce the necessary cuts and pay back its debts, with a petrifying consequent impact on their own countries’ banks.
The bitter irony — and it’s one that is not lost on Greek demonstrators — is that the solution to their country’s indebtedness is to force a further increase in its borrowings which it will inevitably be unable to repay.
This should be a moment for EU leaders to stop and reflect with humility on the folly of their Euro experiment and on the perils of trying to squeeze disparate economies into a one-size-fits-all currency zone.
And how silly of me to think that in the wake of the Greek crisis, there might have been such a pause in the relentless drive to build a continent-wide superstate, crushing the freedom of sovereign democracies. But, of course, that is not how the federalist zealots in charge of the EU empire think.
It was business as usual in Brussels this week as bureaucrats audaciously demanded a rise in their budget.
If agreed, Britain will have to cough up another £1.4 billion each year, taking our annual contribution to £13 billion as the EU’s spending soars by £100 billion — all this at a time of dire austerity and severe fiscal restraint throughout much of the Eurozone.
There was worse to come. The EU wants to introduce a continent-wide sales tax (which would cost British consumers up to £5 billion a year) and a financial transactions tax which would hit the City of London, Europe’s leading financial centre, particularly hard.
Such developments horrify David Cameron. Europe is the issue which the Prime Minister has always been keenest to avoid, fearing, quite rightly, that it riles the Tory right. Indeed, as leader of the opposition he used to say in private how relieved he was that the party wasn’t ‘having a row about Europe’.
And, of course, in government, his Europhile Lib-Dem Coalition partners make sensible discussion about the EU even more awkward.
And yet the truth is that Britain’s relationship with Europe is increasingly central to this country’s problems.
For example, it becomes daily more obvious that EU laws and rules prevent Britain from governing itself effectively and controlling our own borders.
In particular, the plethora of employment laws that emanate from Brussels (and the resulting explosion in the number of industrial tribunal cases) make it harder for small and medium-sized businesses to operate properly.
The situation is bound to get worse later this year when a new EU directive will give all temporary and agency workers the same holiday, sick pay and maternity rights as full-time employees. This will pile further costs on business owners as they try to pull Britain out of a slump.
Then there is the wretched European-inspired Human Rights Act, made law by the Labour government.
This week judges in Strasbourg blocked the extradition from Britain of 200 Somalis who came here illegally, including serial burglars and drug-dealers.
So why won’t Cameron and George Osborne honour their promises to reform the Human Rights Act?
The answer is that Europe has never been a great issue of principle for either man. A colleague explains: ‘David and George are pragmatic politicians. They like power and the fact is that they enjoy being members of the club of European leaders.’
Although it has been said that both the Prime Minister and his Chancellor are Eurosceptics, the proof of this has always been hard to find.
Indeed, their actions have been the very opposite of Eurosceptic: they let
Britain’s involvement in the bail-out of Portugal stand (a decision taken in the dying days of the Labour government, but which they could have blocked), they approved the extension of the controversial European Arrest Warrant (which can lead to injustice for Britons wanted on spurious charges in countries with less sophisticated justice systems) and they have handed much regulation of the City of London to the EU.
Hague (who mislaid his Eurosceptic beliefs somewhere along the way) even assented to the creation of a European External Action Service run from Brussels. This corps of EU diplomats has unsurprisingly started trying to usurp the role of Britain’s diplomatic service.
As Prime Minister, Mr Cameron has fallen for the argument made by successive British ministers and officials that if they go along with such developments, they will gain ‘influence’ at Europe’s top table.
But this is sheer self-delusion. History shows that if you give the EU an inch, it will proceed to take a kilometre.
Against this backdrop, the Tory Party is unsurprisingly increasingly restless.
As I reported some weeks ago, Mr Cameron’s close adviser Steve Hilton now wants Britain to withdraw from the EU. His views are supported by Oliver Letwin, minister of state at the Cabinet Office, and a mood of Euroscepticism is spreading to fellow ministers who are becoming increasingly frustrated by the power of the EU to thwart the policies they believe are necessary to restore Britain’s fortunes.
Work and Pensions Secretary Iain Duncan Smith, Liam Fox (Defence) and Philip Hammond (Transport) are among those who are losing patience with the EU.
Meanwhile, several backbench Tories are busy setting up various Eurosceptic groups and it is estimated that as many as half of all Conservative MPs now want Britain to pull out of the EU.
One group of this year’s intake of MPs, though, are looking at a less drastic approach and advocate ‘one last push’ to try to reform the EU so that it interferes less in the affairs of individual nation states.
Their chances of success, it must be said, are not high. Perhaps (if we had a PM bold enough to demand it) there could be a renegotiation of the terms of membership of the EU membership for Britain and those other countries who want to remain outside the single currency, but who still want a European trading partnership.
However, the superstate federalists of Brussels would never allow such flexibility.
From the original laudable aim of getting the countries of this war-scarred continent to co-operate peacefully and trade together, we now have a dangerous, meddling monster. Somehow, Britain must be freed from its grip.
Of course, full divorce would be a huge step. But it is becoming increasingly difficult to see what other options Britain has unless the EU changes course.

David Cameron and his party are on a collision course over Europe

By Benedict Brogan, Telegraph, June 28th, 2011

Does crisis bring opportunity? This is the question that is dividing the Conservative Party on Europe. On one side, there are those who see the slow implosion of Greece and the turmoil across the Channel as a heaven-sent chance to achieve a grand renegotiation of Britain’s membership. On the other, are those for whom the crisis is, above all, a threat to our economy that needs to be managed. For them, the idea that in any circumstance – let alone the present mess – the EU would contemplate indulging British fantasies of partial withdrawal is laughable.

The debate is potentially explosive, as it pits David Cameron against a new breed of hard-headed Tory MP, most of whom are members of the vast new intake that poured into Parliament last year. Yet few will have noticed that this discussion is under way, so desperate is the party to avoid being discovered having an argument over Europe. Indeed, one of the features of the Tories in coalition has been their silence on a matter that once defined them. A brave few, veterans of past battles, carry the standard of defiance against the relentless advance of European rule, but they are marginalised, derided by the leadership as barmy and shunned by their newer colleagues who want nothing to do with the toxic arguments of previous generations of parliamentarians.

On the face of it, the case for a grand reorganisation of the EU has never been clearer. Every day, Athens produces more evidence of the unsustainability of the euro. When its public sector metro drivers offer to keep working in order to help strikers get to the Greek parliament and barricade its MPs, the farce only gets darker. The ambitions of the euro’s founders are being rapidly eroded by the facts. The German taxpayer has realised that monetary union has turned into a perpetual transfer of resources from those members who have, to those who have not. This week, it took the visit of Wen Jiabao, the Chinese premier, to underscore the mess Europe has got itself into. He offered Europe his trust and his cash, to help first Hungary and then Greece with their debts. Like addicts pleading with their dealer, they submitted. Not content with buying up companies and resources, the man with the £2 trillion surplus sounded like he was ready to move on and start buying whole countries. How pathetic those boasts that Europe could be a bloc to rival China seem now.

There are plenty of Tory MPs who hope David Cameron is among those who have spotted the opportunity. In the past week they have surfaced in a concerted attempt to prod him in the right direction. Their campaign opened with a letter in the Financial Times from 14 members of the 2010 intake, organised by Chris Heaton-Harris, a former MEP and a leading light among pragmatic Eurosceptics. It argued that a policy vacuum exists in Europe, and that Britain has an opportunity to get it on the right track towards a leaner, cheaper and less intrusive free trade area. Like-minded MPs have also come together to form a group that will devote itself to what they describe as nothing less than a European takeover. With the Left in retreat across the EU, and the integrationists routed by the euro crisis, they believe that the current turmoil is full of possibilities.

By their calculation, were Greece to seek an exit from the single currency, the resulting renegotiation would provide the opening Britain needs to secure a review of its terms of membership.

This new group – so new it hasn’t got round to giving itself a name – is being put together by George Eustice, the member for Camborne and Redruth, who previously worked for David Cameron and was a key organiser of the No to the Euro campaign. He insists its purpose is not to be divisive: the 2010 intake is both robustly Eurosceptic and acutely aware of the electoral damage the feuds over Maastricht did to the party. To its members, power matters just as much as principle. Mr Eustice is also clear that the group will not be a front for a secret withdrawal movement, even if plenty of MPs would now – privately at least – be happy to see Britain pull out. Instead, he says fear of withdrawal and its imagined consequences should no longer be an excuse for ducking reasoned debate about the ways the terms of our membership of the EU could be altered.

So the no-name group will draft a plan setting out the areas where the Coalition’s work is being thwarted by the suffocating grip of EU regulation. First on the list is social regulation – what used to be known as the social chapter. Europe, they believe, should no longer interest itself in social policy. Burdensome employment laws and union powers need to be cut back to allow Britain and the rest of the EU a chance of returning to significant growth.

In this, they are being encouraged by the noises from Downing Street and elsewhere in Whitehall, as ministers discover the web of restrictions limiting their room for manoeuvre. The cries of frustrated rage from among Mr Cameron’s allies grow by the day. Whether it’s the ever-present fear of European judicial review, or the stifling nature of EU-enforced workplace and equality regulations, there is a growing frustration within government with Europe and its ways.

So by that token, this new group and its ambitions might ostensibly be welcome. After all, leaders like having outriders who can say what they can’t. Cameron, fresh from what he described as a success on the future EU budget at last weekend’s summit, might be glad of a Eurosceptic chorus to urge him on.

Except all the evidence is that he will not let himself be driven in that direction. No 10 denies the central thrust of the 2010 intake’s argument, that there is a political vacuum in Europe. They point to the work of successive summits to mandate the European Commission to speed up work on a deregulation agenda, helped along by the fact that the political landscape has changed, with the Left pushed into a powerless rump in many of the 27 member countries. Talk of opportunities after the crisis is beside the point, they say, as we are still in the middle of it. Greece’s implosion should be seen as an economic disaster for the City, not as a political gift for the Tory party. “They are getting ahead of themselves. There is simply no appetite in the EU for this kind of conversation,” is how one minister puts it. If the new group has any usefulness in the eyes of No 10, it is not what they imagined: “Anything that fragments the Eurosceptic Right weakens it. And that’s not unhelpful,” one insider told me.

Conservative MPs rejoice in a leadership team of Mr Cameron, George Osborne and William Hague that is unequivocally sceptical about the EU. But they are unlikely to be satisfied with hard-won but modest successes that over time tilt the EU towards being more competitive, less costly, and less ambitious. At some point they might realise that the Prime Minister has no appetite for attempting the renegotiation he promised, and which the Coalition usefully prevents him from considering. Beset by debt, distracted by foreign adventures, confronted by the shocking sapping of our military might, it may be that Cameron has discovered a profound appreciation of Britain’s weakness. Seen from No 10, the deepening euro crisis offers too much trouble ahead to dare contemplate a favourable outcome.

Time for Plan B - How the Euro Became Europe's Greatest Threat

Der Spiegel June 2011

The euro is becoming an ever greater threat to Europe's common future. The currency union chains together economies that are simply incompatible. Politicians approve one bailout package after the other and, in doing so, have set down a dangerous path that could burden Europeans for generations to come and set the EU back by decades.

In the past 14 months, politicians in the euro-zone nations have adopted one bailout package after the next, convening for hectic summit meetings, wrangling over lazy compromises and building up risks of gigantic dimensions.

For just as long, they have been avoiding an important conclusion, namely that things cannot continue this way. The old euro no longer exists in its intended form, and the European Monetary Union isn't working. We need a Plan B.

Instead, those in responsible positions are getting bogged down in crisis management, as they seek to placate the public and sugarcoat the problems. They say that there is only a government debt crisis in a few euro countries but no euro crisis, citing as evidence the fact that the value of the European common currency has remained relatively stable against other currencies like the dollar.

But if it wasn't for the euro, Greece's debt crisis would be an isolated problem -- one that was tough for the country, but easy for Europe to bear. It is only because Greece is part of the euro zone that Athens' debts are a problem for all of its partners -- and pose a threat to the common currency.

If the rest of Europe abandons Greece, the crisis could spin out of control, spreading from one weak euro-zone country to the next. Investors would have no guarantees that Europe would not withdraw its support from Portugal or Ireland, if push came to shove, and they would sell their government bonds. The prices of these bonds would fall and risk premiums would go up. Then these countries would only be able to drum up fresh capital by paying high interest rates, which would only augment their existing budget problems. It's possible that they would no longer be able to raise any money at all, in which case they would become insolvent.

But if the current situation continues, the monetary union will invariably turn into a transfer union, a path the inventors of the euro were determined to prevent.

Democratic Deficiencies

The euro's founding fathers did not anticipate such a crisis, and thus did not include any provisions for it in the European Monetary Union's set of regulations. The euro welds together strong and weak countries, for better or for worse. There is no emergency exit, and there are no rules to follow in an emergency -- only the hope that everything will turn out well in the end. This is why the crises of a few euro countries are a crisis for the euro, as well as a crisis for the European Union, its governments and its institutions. And this is why the euro crisis has suddenly and expectedly mushroomed into a crisis for the political Project Europe, its future and its cohesion.

The fact that the countries funding the bailouts are lacking democratic legitimization is now becoming the greatest impediment to joint crisis management. Gone are the days of subtle debate over whether the European Parliament involves citizens in a just and proportional way in the decisions reached by the European Council, the body headed by the leaders of the European Union member states, and European Commission, the EU's executive. When things get serious, as they are now, decisions will no longer be made in the somewhat democratically legitimized EU bodies, but at the more or less secret meetings of a handful of leaders.

During the German chancellor's and the French president's quiet walks together, and at the behind-the-scenes meetings of discrete central banks, policies are being made that are then handed to the parliaments to rubber-stamp, even though hardly any of their members understand them.

The costly decisions that are ultimately reached by the luminaries of European solidarity don't just affect the citizens of the ailing member states in an existential way; they must also fear for their social security, their jobs and their assets.

The decisions of European politicians are just as troubling for citizens who live, like the Germans, on the sunny side of the union, and are worried that their country is running up debt that could remain on the books into a remotely distant future.

One of the reasons that Europeans are so incensed at their respective governments is that they are not involved in the decision-making process. Another is that they inevitably perceive their political leaders as being motivated by alleged factual constraints and the requirements of the financial markets, without having any plan of their own.

The euro debt crisis has already swept aside two governments, in Ireland and Portugal, and the Spanish and Greek governments could soon follow. Things are also getting precarious for the government in Berlin, where Chancellor Angela Merkel could lose her parliamentary majority in upcoming votes on bailout measures.

Resistance to Austerity Measures

A crack now bisects the continent, running between those countries that need more and more money and those that are expected to pay. With the Greeks frustrated over the Germans and the Germans over the Greeks, the Portuguese, the Spaniards and the Italians, the political peace project of European unity threatens to end in a great economic dispute among the nations.

In the debtor countries, there is growing resistance against the constant barrage of new austerity programs, while the people of the creditor countries are increasingly incensed over the billions in new aid. The "Outraged Citizens" are taking to the streets in Madrid and Athens while the " True Finns" gain strength in the parliament in Helsinki. Some 60 percent of Germans are opposed to a new aid package for Greece, and there is at least as much resistance among the opposition and trade unions in Athens to the government's efforts to rein in spending -- a precondition for additional loans.

Last Wednesday, thousands of Greeks staged a general strike intended to block access to the parliament building, where the new austerity program was being debated. Prime Minister Georgios Papandreou's limousine was showered with oranges, while rocks were thrown elsewhere. The police used tear gas to protect the elected representatives from the people they represent.

To secure payment of the next loan tranche under the European aid package, Papandreou intends to put together another austerity package worth more than €6.5 billion ($9.3 billion) by the end of the month. The protesters outside the parliament building, unwilling to accept the prime minister's course of action, shouted: "Thieves, traitors. What happened to our money?"

How long will citizens in the weak euro countries -- Greece, Portugal, Ireland and Spain -- continue to accept the harsh reforms? And how long will voters in the creditor countries tolerate their own governments taking ever-higher risks to rescue the euro?

Euro Has Become Greatest Threat to Continent's Future

Finland is a country that is often held up as a successful model for other European countries, but the success of the right-wing populist "True Finns," who captured 20 percent of the vote in April's parliamentary elections, came as a wakeup call to the political establishment in Brussels. As the skeptics gain ground throughout the EU, anti-European sentiments are growing in even the core countries of the union, like France and Germany.

The euro, created with the aim of permanently uniting Europe, has become the greatest threat to the continent's future. A collapse of the monetary union would set Europe back by decades, dealing it a blow from which it might never recover, especially with Europe's position already threatened by the fast-growing Asian economies. How is a fragmented Europe to prevail against this new competition?

This is why Europe's politicians want to defend the euro at all costs, and why they are approving one bailout package after the next. They are playing for time, hoping that the markets will settle down and the reforms will take hold.

The business community is supporting their efforts, too. In a major advertising campaign scheduled to run in leading publications this week, top German business executives, including ThyssenKrupp Chairman Gerhard Cromme, Siemens CEO Peter Löscher and Daimler CEO Dieter Zetsche, promote the monetary union and insist: "The euro is necessary." They argue that ailing member states must be assisted financially, and that the common currency is "absolutely worth this commitment."

How the Euro Became Europe's Greatest Threat

APPart 2: The Euro Is a Fair-Weather Construct

But the causes of the euro crisis are more deep-seated than that. The monetary union is a fair-weather construct, as a number of economists said from the beginning. American economist Milton Friedman, for example, predicted that the euro would not survive its first major crisis, and later, in 2002, he added: "Euroland will collapse in five to 15 years."

For these reasons, the euro crisis, as suddenly as it occurred, was expected. However, the warnings had been ignored and treated as a minor nuisance. More than anything, the euro was a political project. Its advocates, most notably then German Chancellor Helmut Kohl and then French President François Mitterrand, wanted to permanently unite the continent's core countries and embed Germany, which many neighboring countries perceived as a threat following reunification, in the European community.

Politicians hoped that as a result of the common currency, the underlying problem of the euro's design would resolve itself, namely that the member states would almost automatically settle in at the same pace of economic development.

It was a deceptive hope. In fact, it was only interest rates that converged, now that the European Central Bank (ECB) was setting uniform rates for strong and weak members alike throughout the entire economic zone. As a result, a great deal of capital flowed to Spain and Ireland, where a real estate bubble developed, while the Greeks and the Portuguese were able to live shamelessly beyond their means. They imported more than they exported and took on more new debt to pay for their consumption.

This behavior continued unabated until the financial crisis put an end to it. Suddenly money was scarce. The bubbles in Ireland and Spain burst, the economy in the euro zone collapsed, and the Greeks were forced to admit that their debts were much higher than they had ever disclosed before -- and that they had falsified their numbers from the beginning and should, in fact, never have been allowed to join the monetary union in the first place.

Has the Euro Pushed Europe Apart?

Since then, the monetary union has been on the brink of collapse. Far from growing together economically, Europe has in fact grown even further apart. As a result, the chances that the euro will survive in its current form are slimmer than ever. Politicians who ignore the laws of economics cannot go unpunished in the long run.

If national currencies still existed, countries like Greece and Portugal could resort to a proven means of reducing their lack of competitiveness. They would simply have to devalue their drachma or their escudo, and then the laws of supply and demand would see to it that the flow of commodities was diverted.

The prices of Greek and Portuguese products would go down to make them more marketable abroad. At the same time, money would be worth less in Athens or Lisbon, so that residents of those countries could afford to buy fewer imported goods. This would be beneficial for the trade balance. Exports would rise and so would the foreign currency revenues, allowing the countries to service their debts more effectively. Not the government but the markets would reduce economic imbalances.

But in a monetary union, the exchange rate is no longer available as an adjustment valve. Instead, the member countries must regain their competitiveness in different ways, namely by imposing tough austerity measures and reducing wages and prices. In a monetary union, it is up to the governments to enforce what the exchange rate would do in a system of competing currencies.

Muddling Through

If this fails, the mountain of debt will continue to grow. In the end, a country with a large deficit has three options. First, it can declare itself insolvent and, after restructuring its debt, attempt to rebuild its economy. Second, it can also withdraw from the monetary union and reintroduce its national currency. Third, it can convince the creditor countries to keep issuing new loans, thereby providing it with permanent financing.

For more than a year now, European governments have been trying out a fourth option: muddling through.

And for just as long, politicians have been assuring the people that this approach is the alternative, and that it will end up costing taxpayers nothing at all, because the ailing countries will repay the debt, with interest and compound interest, once they've been bailed out. In fact, they argue, the whole thing is even a good business arrangement for the rescuers.

The truth is that governments and monetary watchdogs, despite all protestations to the contrary, have continually expanded their bailout programs, have built up massive risks that could significantly burden future generations and have violated both the European treaties and the iron-clad principles of the ECB.

To date, the history of the euro rescue program has not been a successful one. In fact, it is more of a history of mistakes and broken promises.

'There Will be No Budgetary Funds for Greece '

On March 1, 2010, Chancellor Merkel's spokeswoman said: "A clear no. There will be no budgetary funds for Greece." At that point, Athens was on the verge of bankruptcy, and politicians with Germany's center-right Christian Democratic Union (CDU) and pro-business Free Democratic Party (FDP) were suggesting that the country sell off a few islands.

On May 2, the euro countries and the International Monetary Fund (IMF) approved a €110 billion bailout package for the beleaguered country. Although the German portion of the loans was coming from the government-owned development bank KfW and not the budget, the federal government still served as guarantor. Every euro the Greeks do not repay will constitute a burden on the German taxpayer.

It was the first lapse, the first violation of the European treaties, which categorically rule out aid payments to needy euro countries. This so-called no-bailout clause was intended to guarantee that the monetary union didn't become a transfer union, and that the strong wouldn't have to pay for the weak. It was crucial to the acceptance of the treaty by the national parliaments; without it the German parliament, the Bundestag, would not have agreed to the monetary union.

The second lapse occurred soon afterwards. On May 9, 2010, the first euro bailout fund was launched. Although the volume of €440 billion alone made it clear that the opposite was the case, Merkel and Finance Minister Wolfgang Schäuble tried to downplay the importance of the European Financial Stability Fund (EFSF). They insisted that the fund was purely a precaution, would not be used and, most of all, was temporary.

"An extension of the current bailout funds will not happen on Germany's watch," Merkel said in Brussels on Sept. 16, 2010. This promise, too, lasted only a few months. On March 25, 2011, the leaders of the euro zone approved a new, constant crisis mechanism. Although it has a different name, the European Stability Mechanism (ESM), it will function on the basis of the same principle as its predecessor fund, the EFSF, beginning in mid-2013. The euro countries want to pry loose €700 billion for the fund, which will include a cash contribution for the first time. The Germans will be asked to pay at least €22 billion. To do so, Germany would have to take on additional debt.

'Outcome Is Very Close to a Transfer Union '

As if this weren't enough, in March the euro-zone member states also agreed that both the current bailout fund, the EFSF, and its successor, the ESM, would be authorized to buy government bonds from bankruptcy candidates with low credit ratings in the future. As a result, countries living beyond their means will no longer be punished with high interest rates, and market mechanisms will be eroded. Even the CDU's Michael Meister, one of the financial policy experts loyal to Merkel, says: "The outcome comes very close to a transfer union, which we reject."

All assurances aside, performance in return for Germany's willingness to play along would be absent again and again. Representatives of Merkel's government coalition government in Berlin have outdone each other in calling for strict penalties for countries that violate the euro-zone's deficit rules. There was talk of eliminating voting rights, of freezing EU subsidies like the bloated agriculture fund and, as a last-ditch solution, even of exclusion from the monetary union.

Most of all, however, the penalties were to be imposed automatically in the future when a country's budget deficit exceeded three percent of its gross domestic product. "We support the greatest amount of automatism possible," Merkel said in September 2010.

After taking a walk with French President Nicolas Sarkozy in the French seaside resort of Deauville, the chancellor abandoned the position that the deficit process was to be triggered automatically. Instead, the finance ministers in the euro zone must set it in motion first, meaning that any decision would be subject to the usual horsetrading in Brussels.

Part 3: A Clear Market Reaction

The reaction by the markets to what is the biggest failure to date in the efforts to rescue the euro has been very clear. The yields for Greek and Irish government bonds rose, and Ireland sought protection from the bailout fund in November 2010, followed by Portugal in April 2011.

In recent months, the governments of the euro-zone countries have gradually expanded their bailout programs, and the risks for the German people and taxpayers have grown with each step.

There are already estimates of how much the Greek crisis will truly end up costing German taxpayers if the crisis drags on for years or a debt haircut becomes necessary. Economists Ansgar Belke of the University of Duisburg-Essen and Christian Dreger of Viadrina University in Frankfurt an der Oder estimate the cost at about €40 billion.

The Cologne Institute for Economic Research (IW) estimates the cost to German taxpayers at €65 billion if Portugal, Ireland and Spain also become insolvent. In the event of a complete collapse of the euro zone, Germany would be liable for all the guarantees and bailout aid it has provided.

And the potential costs for German taxpayers wouldn't stop there because they are also indirectly affected by the risks lurking in the accounts of the ECB and the state-controlled banks. Since May 2010, the ECB has spent €75 billion purchasing government bonds from ailing euro countries. Its goal was to bring calm to the markets and prevent the risk premiums for the bonds from skyrocketing. But many used the opportunity to unload the risky securities on the central bank.

The ECB is believed to have spent €40-50 billion to date on Greek government bonds. In addition, as of the end of April it had refinanced Greek banks to the tune of €90 billion.

Hardly anyone knows how high the risks are for the ECB. It has also accepted €480 billion in structured securities from the banks as collateral. The euro crisis has already turned into a threat to the ECB. German taxpayers bear 27 percent of the risk, which corresponds to the German Bundesbank's share of ECB capital.

Back at the Brink

Despite all of these bailout measures, and despite the risks that their rescuers have assumed, the weak euro countries are back where they were a little over a year ago, namely on the brink. The risk premiums on their government bonds have climbed to new record highs. The Greeks need fresh cash to avert bankruptcy, and the risk of the crisis spreading to other euro countries is far from averted.

The aid that euro countries and the IMF have provided to Greece so far is not enough. They had naïvely assumed that the crisis would end quickly. And they had seriously anticipated that the Greeks would return to the capital markets within the next two years, in order to raise about €60 billion on their own.

The money is missing because the Greek government, despite all of its reform efforts, is still not seen as creditworthy. This is why the funding gap needs to be closed, including with fresh money from the Europeans.

In return, the Greeks must fulfill even more stringent requirements. Given the Greek government crisis, achieving this seems more uncertain than ever. When the first bailout package of €110 billion was approved, Athens reacted with tough measures. Pensions were slashed, tobacco, petroleum and value-added taxes were drastically increased, and it was made easier for companies to lay workers off.

Nevertheless, Prime Minister Papandreou failed to meet the targets set by the so-called troika, consisting of the IMF, the ECB and the European Commission, the EU's executive arm. A maximum budget deficit of 8.1 percent of GDP had been stipulated for 2010, but in the end the deficit was 10.5 percent. After a "strong start" in the summer of 2010, the implementation of reforms has come to a "standstill in recent quarters," the troika concludes in its latest report. It also states that the gap between the planned and the actual deficit has once again "grown significantly" in recent months.

"There are many holy cows that were not slaughtered," explains Jens Bastian, an economist living in Athens. While more than 200,000 jobs were cut nationwide, many state-owned companies in particular are still seen as goldmines when it comes to sinecures.

In contrast to those privileged Greeks working in state-owned companies and government agencies, more and more people are now forced to live on small pensions or minimum-wage earnings of €750 to €800 a month, plus bonuses. Such incomes were hardly enough to live on in the past, and now they are to be reduced across the board or offset by drastic increases in the rate of tax on consumer goods.

Suffering and Sacrifices in Greece

"People don't know why they are suffering and making these sacrifices," says Athens political science professor Seraphim Seferiades. "The privilege of being in the euro zone is losing more and more of its value for people, because they benefit less and less from it." Almost 30 percent of Greeks would prefer to return to the drachma sooner rather than later.

Now the government will have to approve additional austerity measures if it is to obtain fresh cash from the EU and the IMF, in the form of a second aid package worth between €90 billion and €120 billion for the period until 2014. Greece will have to pay off old debts and make new ones. The government debt is currently about 150 percent of GDP and will likely rise to 160 percent soon.

How can such a weak country ever pay off such a huge debt? For once, almost all economists agree: It will be impossible without a debt restructuring involving creditors writing off large parts of their debts.

But a so-called haircut on Greek debt is not politically feasible at the moment. The financial markets are still too fragile, opponents argue, warning that it could trigger a new financial crisis like the one that followed the collapse of the US investment bank Lehman Brothers.

Germany Demands Private Investor Participation

But the Germans have been insisting that private sector creditors must also make a contribution to overcoming the crisis. Members of parliament with the governing parties -- the CDU, its Bavarian sister party the CSU, and the FDP -- recently made it clear to the government that they will reject another aid package in parliament if that doesn't happen. The chief budget expert with the CDU/CSU's parliamentary group, Norbert Barthle, urged his fellow members of parliament to act quickly. "If we wait much longer," he says, "there will hardly be any bonds left in the hands of private investors. Then taxpayers will end up shouldering the Greek bailout by themselves."

CSU Chairman Horst Seehofer agrees wholeheartedly. He is all too familiar with the constraints imposed by the general public in Germany, the majority of whom oppose a second bailout for Greece. "Experts have been telling me for a year that a restructuring of Greek debt is necessary," he says. "The time has come to start involving private lenders."

The German government recently came up with a proposal that would involve lenders in a relatively painless fashion: They would exchange their bonds for new securities with longer maturities. The contribution by the euro-zone countries would be reduced accordingly.

But with this demand, the Germans found themselves largely isolated. They were already viewed as troublemakers during the first Greek bailout, when they reluctantly yielded to the will of the majority and pressure from the ECB. Now, once again, they have been pressured from all sides to go along with the majority view.

That point was reached last Friday, when Merkel and Sarkozy agreed to a toothless compromise in Berlin. They agreed that private lenders should be involved in the new bailout package for Greece, but only on a voluntary basis -- a largely ineffective provision.

This solution is much too feeble for many German parliamentarians. "This is not the lender involvement that the Bundestag had demanded," says Frank Schäffler, a financial policy expert with the FDP. His CDU counterpart, Manfred Kolbe, even characterizes it as "fraudulent labeling," saying: "We need a debt haircut, and it won't happen voluntarily." CSU European expert Thomas Silberhorn calls for "binding regulations with the mandatory participation of private investors."

But from Sarkozy's standpoint, a tougher solution could jeopardize French banks. They are heavily exposed to Greek debt and could face serious difficulties.

Part 4: German Banks, Insurers Unload Greek Bonds

German banks and insurance companies have systematically reduced their holdings of Greek government bonds. Since the beginning of 2010, they have reduced their total exposure from €34.8 billion to €17.3 billion, not including debt held by the state-owned development bank KfW. Insurance companies have reduced their investment in Greek bonds from €5.8 billion to only €2.8 billion in the last year.

In Germany, it is state-owned banks who have the greatest exposure to Greek debt. Commerzbank, a quarter of which is owned by the federal government, holds €2.9 billion in Greek bonds. The state-owned regional banks known as Landesbanken and their so-called bad banks hold additional risks of more than €4 billion.

The biggest dangers by far lurk on the books of FMS Wertmanagement, the bad bank for the nationalized mortgage lender Hypo Real Estate. It holds Greek government bonds and loans that constitute an economic risk of €10.8 billion. In the event of a debt restructuring, taxpayers would be hit hardest in Germany. A haircut would mean that FMS alone would need several billion in fresh equity capital.

ECB Considers Debt Crisis Greatest Risk To Banks

Now that the Germans and the French seem to be largely in agreement, they merely have to convince the ECB, the most determined opponent to date of the German proposal to require private sector involvement. The Frankfurt-based central bankers fear that this would trigger massive turmoil on the international money markets. In its new financial market stability report, the ECB categorizes the euro-zone sovereign debt crisis as the greatest risk to banks.

Most of all, the ECB doesn't want investors to be forced to write off part of their debt. The monetary watchdogs warn that the consequences would incalculable.

They argue that as soon as the powerful rating agencies gain the impression that the Greek government is not fulfilling its obligations without the complete consent of its creditors, they will have to downgrade its credit rating to D, the lowest level. The letter stands for "default." Even if the maturities of Greek bonds were extended with the consent of the lenders, they would have to be downgraded to a rating of SD, or "selective default."

Either way, under its statutes the ECB would no longer be allowed to accept such securities as collateral in returning for providing liquidity to banks. The consequences would be catastrophic. Greek banks would be largely cut off from the European money cycle and would thus run the risk of becoming illiquid. The Greek banking system would find itself on the brink of collapse.

Paving the Path to Euro Bonds

This is precisely where a compromise proposal that Finance Minister Schäuble plans to present to the ECB and to his counterparts from the euro-zone countries comes in. Under the proposal, if Greek bonds are no longer accepted as collateral following the participation of private lenders, the ECB will simply have to be offered bonds that satisfy its requirements.

A 10-member "Greece Task Force" at the German Finance Ministry has worked out how this could function. The experts propose that the Greek government, in addition to the €90 billion-€120 billion in fresh cash it may receive from the euro-zone countries and the IMF as part of a second bailout, also be given access to bonds issued by the EFSF, the euro rescue fund. It could pass on these securities, which have the rating agencies' highest rating of AAA, to Greek banks, which in turn could use them as collateral to obtain liquidity from the ECB.

The problem is that this measure would make the new bailout package significantly more expensive. To ensure that the EFSF had sufficient funds for the operation, its financial scope would have to be increased so that it could really make €440 billion available, as it was originally intended to do. To achieve this, the member states would have to double the scope of their respective guarantees. Germany, for example, would be liable for €246 billion in the future, instead of the current €123 billion.

The would-be euro rescuers are also considering accessing the so-called Hellenic Financial Stability Fund. This fund, set up as part of the first Greek bailout package in May 2010, contains €10 billion, which could be used to boost the capital of Greek banks in an emergency. The fund hasn't been touched yet.

Part 5: Berlin Expecting the Worst

The details of the new bailout plan are to be worked out by July. This is absolutely necessary, because if the next tranche of aid is not paid by mid-July, Greece will be bankrupt.

Despite all of these hiccups, the money will flow to the Greeks. But no one, including the German government, believes that this will solve the problems in the euro zone. After more than a year of uninterrupted attempts at fighting the crisis, officials in Berlin are expecting the worst and intend to be ready just in case.

For this reason, Schäuble's crisis team has been instructed to review all possible scenarios. For example, what happens if a country can no longer meet its payment obligations or if a member leaves the monetary union? And how can imbalances in a common currency zone be averted?

There are essentially two alternatives. The first is a radical one, in which the governments pull the plug and leave the beleaguered countries to fend for themselves. The second, more pragmatic solution is to continue muddling along, though somewhat more efficiently, and to hope that things improve. Neither option will be cheap.

The radical cure works like this: Disappointed by the lack of progress and prospects for improvement, the euro-zone countries leave Greece to fend for itself. They refuse to throw even more money at Athens after all the money they have already spent.

The country would quickly become insolvent, because it would no longer be able to borrow any money on the markets. Because Greek lenders still shoulder a substantial portion of the government debt, the country's banking sector could see a number of bankruptcies.

This approach also carries with it the threat of contagion. If Greece slides into uncontrolled bankruptcy, investors might refuse to invest their money in other ailing euro-zone members. Even more banks could collapse in the ensuing chain reaction.

The Nuclear Option

In light of these incalculable developments, many are now considering the nuclear option as a real alternative: Greece withdraws from the monetary union and reintroduces the drachma. The government in Athens was already toying with the idea weeks ago, and now even internationally respected economists are recommending it. "A withdrawal from the euro would be the lesser of two evils," says Hans-Werner Sinn, head of the respected Munich-based Ifo Institute for Economic Research.

Nouriel Roubini, an economist at New York University, also supports the idea. The renowned professor argues Greece's only chance is to devalue its own currency and thus improve its competitiveness. Roubini was one of the few to predict the financial crisis three years ago.

In every financial crisis to date, it has taken a devaluation of the currency to reinvigorate the economy of a crisis-stricken country, Roubini argues. But historic examples can only be applied to the conditions in a monetary union to a limited extent.

The crisis would not end after Greece's withdrawal. In fact, it could even get worse. The country's debts would still be denominated in euros, which would turn them into foreign-currency debts overnight. Their value in the new national currency would rise rapidly, because the drachma would be devalued. Greek borrowers would be all but unable to meet their obligations.

Banks, in turn, would come under pressure, both in Greece and in the rest of the euro zone. And costly bailout measures for the banking industry would be needed once again.

At the end of such a development, the monetary union could disintegrate into a hard-currency bloc and a group with its own, weaker currencies. Critics of the common currency, like former Bundesbank board member Wilhelm Nölling, favor such a solution. Nölling and a group of like-minded people once filed and lost a suit against the introduction of the euro before Germany's Federal Constitutional Court, and now he is suing the government once against over the euro bailout fund. The court's decision is still pending.

The alternative to the breakup of the monetary union is hardly any less threatening, leading as it does directly to a transfer union. After a year of Greek bailouts, the beginning is already underway, and starting in 2013 the planned permanent bailout fund, the ESM, (which EU finance ministers approved on Monday) will be yet another step on this dangerous path.

Echoes of Italy's Mezzogiorno and Belgium's Wallonia

The end result could look something like this: The deficit countries would require permanent financing from the more stable north. What was treated as a loan in the past would be transformed into a subsidy, and thus requiring neither interest nor repayment. The monetary union would become a financial union and the debtor countries the permanent recipients of subsidies, dependent on contributions from their economically more powerful neighbors -- much like the Mezzogiorno in Italy or Belgium's Wallonia region.

To prevent this from happening, many politicians specializing in financial and economic affairs recommend bringing about the political union of Europe as quickly as possible, a union with a strong central government. They argue that if the nations in the euro zone formed a closer union, they could coordinate their financial systems more effectively, thus providing the common currency with a political foundation.

This would make it easier to implement reforms in the recipient countries and improve their competitiveness. Just recently, ECB President Jean-Claude Trichet proposed installing a European finance ministry equipped with the right to intervene in the individual member states.

A Cautionary Tale in German Reunification

But it isn't quite that easy. More integration doesn't necessarily mean that economic imbalances would disappear as a result. No one understands this better than the Germans, who had similar experiences with the monetary union between the two Germanys about 20 years ago. Effective July 1, 1990, the deutschmark became the official currency of East Germany. It was largely exchanged for the former East German mark at a ratio of one-to-one. The East German states joined the Federal Republic of Germany only three months later. It was the model case of a monetary union that was accompanied by a political union.

But anyone who believed that rapid unification would lessen the economic shock of the monetary union between the two Germanys was soon disappointed. In fact, the economic imbalances in reunified Germany became entrenched after that. Thousands of companies in the former East Germany went out of business, because they were unable to bring productivity up to Western standards.

The unemployment figures exploded, and financial transfers between the two parts of the country soon exceeded the trillion mark. To this day, the former East German states still lag behind the former West German states in terms of economic strength, productivity and income.

German reunification did nothing to change this. It merely helped to financially cushion the negative consequences of the monetary union. The states of the former East Germany were incorporated into the West German inter-state fiscal adjustment system (under which money is transferred from richer to poorer states) under favorable terms, and the former East Germans were suddenly given access to the blessings of the generous West German social system.

The lesson is clear: German unification is not a valid role model for European politicians, but rather a cautionary tale. It shows how quickly a poorly designed monetary union can lead to a permanent transfer union.

Such a model would in any case be incompatible with the European treaties. New agreements would have to be negotiated and ratified by all national parliaments, and perhaps even approved in referendums.

But perhaps the people of Europe and their representatives will decide the fate of the monetary union first. It could happen in Athens or in Lisbon, if the necessary reforms fail as a result of popular protests. Or in Berlin -- should the billions in loan guarantees actually come due.

REPORTED BY THOMAS DARNSTÄDT, ARMIN MAHLER, PETER MÜLLER, CHRISTOPH PAULY, CHRISTIAN REIERMANN, MICHAEL SAUGA AND ANNE SEITH

Translated from the German by Christopher Sultan

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