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The Euro Paradox: The Lesson is Better Institutions, not Less

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This week, our sleepy European politicians seem to be waking up to the dangers of the euro crisis: even George Osborne seems to be starting to panic just a little. Aside from the delicious irony of a Euro-sceptic Tory Chancellor arguing for more integration, there are important lessons which we need to be drawing.

Britain, it is surely obvious, will be as affected by a euro-zone disaster as much as any other major European country; that is, an awful lot. To disabuse oneself of Osborne's rather ill-judged recent suggestion that the pound is a "safe haven", one has to look no further than the euro-sterling exchange rate, which has barely budged over recent months. In simple terms, the markets are discounting the fact that the economies are rather locked together, and that what ever miserable misfortune may befall the euro and Europe is likely also to be visited on sterling and the UK in similar measure.

The immediate danger is that, by the time these lethargic leaders are appearing on the media saying "time is short to save the euro", the markets, which move at the speed of light, have already discounted that some time ago, have realised that politicians are very likely not going to save it and are now moving to ensure that it is impossible to do so.

The convenient, short-term lesson which many are drawing is "Britain good, Europe bad". This, as Britons, nicely fits with our comfy scepticism towards Europe. Hugo Young's brilliant volume on Britain's fraught relationship with Europe, This Blessed Plot, documents how Europe's history, from Churchill on, is full of Britain being at the centre of the constitutional decision-making, while standing outside of the main results of it. We have become experts at deciding what everyone else should do.

It started with Churchill at the creation of a modern Europe which did not include us, passing late entry into the EU by Heath, on less good terms, and arriving at Blair's central role in defining the euro, while remaining outside of it. Cameron and Osborne are just the last in a long line of British politicians of all parties to carp or cheer alternately during a major European upheaval, but always with the proviso that it is from the sidelines.

On the one hand, Europe's leaders are rightly criticised for allowing a system to develop which had inherent flaws that many economists warned of at the time. But using this as a stick with which to beat the European concept is the wrong lesson. The obvious conclusion of a world in which China will dominate, and a world which is rearranging itself into new sets of geopolitical players, is that a Europe which cannot speak with one voice is ultimately doomed to irrelevance.

What the euro crisis points up, more than anything, is the obvious fact that Europe's decision-making process, and the institutions which underpin it, is entirely dysfunctional. To state the obvious: a Franco-German dinner is not the ideal way to decide the future of Europe, and anything which requires agreement across countries cannot continue to require months, if not years, of wrangling.

The short-term reading not only fits a subconscious wishful thinking of the public majority, deeply buried in the British psyche, believing - in the face all evidence to the contrary - that Britain is still some kind of Great Power. Young quotes civil servant Sir Henry Tizard, observer of the Churchill-Attlee era of European birth:

We are not a Great Power and never will be again. We are a great nation, but if we continue to behave like a Great Power we shall soon cease to be a great nation.

This "Europe bad" reading also plays to the prejudices of the Tory right, whose visceral dislike of all things European is so emotionally-based that it often rejects anything containing the word "Europe" out of hand, before even listening to the argument. And, at present, they clearly hold the dominant view on the issue within their party.

When your opponent reacts emotionally, rather than rationally, to a policy challenge, sooner or later they will come unstuck because people will see their inherent contradictions. And, as John Rentoul pointed out in the Independent on Sunday, there is also a risk that there may be another round of damaging Tory in-fighting on the subject:

What would be dangerous for Cameron's chances of re-election...would be if the economy, already falling behind Osborne's "on the road to recovery" forecasts of last year, became part of a divisive argument within his own party about Britain's relations with the rest of Europe.

All in all, the Tories are unlikely to have a coherent, outward-looking policy towards Europe by 2015. It may sound counter-intuitive, but there is ultimately a medium-term opportunity here for Ed Miliband: if, that is, he chooses to take it.