Eurozone crisis may trigger Britain's exit from the EU, Martin Wolf claims

The Chief Economics Correspondent at the Financial Times, Martin Wolf, lent his voice to the growing debate over the UK's place in Europe, warning in a lecture on behalf of the Foundation for Law, Justice and Society and Wolfson College, that the eurozone crisis will cause fundamental changes in the UK's relationship with the EU and may even trigger a break-up of the UK itself.

Wolf, who is considered to be one of the world's most influential writers on economics, delivered the lecture at Jesus College Ship Street Centre on Friday 5 October to a packed audience.

Analyzing the fates of the five countries currently in most trouble Greece, Italy, Spain, Ireland and Portugal Wolf argued that the eurozone crisis has demonstrated beyond doubt that the monetary union, as designed, hasn't worked. He predicted that it will either break up entirely, or, more likely, fundamentally change, with serious repercussions for the UK.

"What will emerge is a very different European Union, which will present Britain with some uncomfortable choices that we won't like". Furthermore, he said, these profound changes within the EU and in Britain's relationship with it "could lead, even quite quickly, to partial or complete exit".

How can the eurozone solve the crisis?

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

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

Banking union, he argued, is key to a long-term solution to the crisis, with eurobonds and a supportive central bank. Considerable obstacles to long-term stability remain, however, owing to the huge scale of the economic problems, the huge ideological stresses involved, and political differences between nations, simply expressed as, “the countries and peoples don't like or trust one another very much”.

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

What does this mean for Britain?

Wolf said that, assuming the eurozone were to survive, it would have to become a genuine fiscal union. This would have huge political implications for Britain, since the issues it is most concerned about the financial system, the banking system, and the single market will be decided within the eurozone. “On the most important areas of policy affecting Britain, we would have no voice at all”.

Wolf concluded by reiterating the unpredictability of developments in Europe, but speculated on one of the more interesting possible scenarios that the pressures the eurozone is facing could precipitate the fragmentation of the UK as a whole.

The lecture was the first of a series of lectures, workshops and panel discussions held by the Foundation for Law, Justice and Society this term, which include on 18 October a lecture by Judge András Sajó of the European Court of Human Rights. More events

PowerPoint slides and podcasts from the lecture will be available to download from the FLJS website later this week.