This surely is where the debate goes now. Angela Merkel, that most canny of European leaders, put it exactly right when she said the best answer to those who voted in regrettable ways was “improving competitiveness on growth and creating jobs”.
These thoughts were echoed by other leaders, though from Italy and France there was more emphasis on easing austerity than improving competiveness. But making such assertions is much easier than changing policies, not least because most pro-growth policies have to come at a national level, not a European one.
Still, on a two- or three-year view, there are at least four reasons why Europe should do better, giving an opportunity for the established European leaders to regain some credibility.
For a start, there is a global cyclical upswing, and while much of Europe has lagged behind, even the weaker economies are bound to be pulled up. If your neighbour in a free-trade area is growing, you catch some of that growth. We are beginning to see this now, with all the major European economies expected to move forward this year.
There is a second reason for optimism: an easier monetary policy. If inflation in Europe stays very low, the European Central Bank will take action. We don’t know quite what this will be, but its president, Mario Draghi, has made it quite clear that he won’t let deflation strike across Europe, and the ECB staff are working on measures that look like being announced after the bank’s next policy meeting on 5 June. These may include a cut in interest rates, but the key thing will be to find a way of getting funds directly into company investment. The euro has started to weaken in anticipation, which is good news insofar as that will make European goods more competitive.
The third reason to be hopeful is that the tough measures that some European governments have taken are starting to result in improved performance. For example, in Spain there has been a series of labour-market reforms that have cut employers’ costs and have helped a turnaround in exports. Spain may match German growth next year. This is the result of domestic policy, not some EU initiative, but the EU does supply the market. There is not quite the same resentment in Spain towards the EU as there is in France. You can see the same phenomenon in Ireland, where the country has pulled itself up, accepting austerity imposed from Europe with relatively little dissent.
And finally, the fact that countries have made these structural changes means that austerity can credibly be eased. Take Greece. It now has a primary budget surplus – that is a surplus before debt interest – and the question is how large that should be. If Greece is forced to impose yet further cuts (and the economy is 25 per cent smaller than it was in 2007) then the far-right is more likely to win the next election and take Greece out of the euro.
So Europe will see some retreat from austerity. The detail will vary from country to country but in the short-term any easing of budgetary constraints will give some stimulus to growth. You can already see the positive response in the financial markets, which yesterday saw European shares reach a new six-year high.
All this will buy Europe time. Living standards in Italy and Spain are unlikely to recover to their pre-crisis levels for a decade, but they will start to creep up again. If the European leaders learn from the disaster of the past few years and nudge the region towards growth-friendly policies, then they will begin to recover support. But the big sell must be that they contribute to prosperity, rather than subtract from it. They have to prove their use.
There is one opportunity coming up, which is to produce a successful free-trade deal with the US. Talks have run into the usual difficulties that all such enterprises do: the desire to protect some politically important group, usually farmers. We will see.
If there is a deal, then the EU will be able to argue that it can get a better deal out of America than its members could on their own. If not, countries will question the supposedly strong bargaining position the EU is said to occupy.
Breaking up the banking sector
The first step towards the rebirth of the Trustee Savings Bank (TSB) as an independent entity is on the way: a public float of 25 per cent of its shares, reversing the takeover by Lloyds Bank in 1995. Eventually it will become one of the two main challenger banks, so called because of the idea of creating a network of smaller banks that can bring greater competition into the sector.
There are a number of new banks being formed, but the other main group with an existing network of branches and a customer base will be created out of the English branches of Royal Bank of Scotland, rebranded under their old name as Williams & Glyn’s. Without wanting to downplay the rest of the new arrivals, the fact is that it is a lot easier to challenge the big four if you start with an established base.
In part, this is a story about banking. Will these banks really make a difference? Will they struggle to grow their market share? Will they offer a better service or better rates? Are people prepared to switch accounts? And so on.
It is also, however, a story about share markets and savings patterns. The UK has become a home-owning democracy (though ownership is now receding a bit). It has not become a share-owning democracy, despite a string of attempts by governments to nudge it in that direction, including allowing the mutually owned TSB to go public.
The most recent nudge, the sale of a majority stake in the Post Office, has not been a wild success either. So the question is whether this sale, with special incentives for small shareholders, will be different. It is only one sale, but given the strong markets and the forthcoming shift in pension arrangements, it could be a building block.
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