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Cameron faces a fight on two fronts against Germany's Merkel

Cameron is fighting Merkel on two fronts; in resisting a tax on financial transactions and over the role of the ECB

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Financial transactions tax: does Germany want the shirt off Britain's back?
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John Phelan
On 20 November 2011 10:46

It has become a terrible cliché to discuss Anglo-German relations using World War Two metaphors. But as David Cameron advanced on Berlin for a showdown with Angela Merkel on Friday other military antecedents sprung to mind.   

Cameron is fighting Merkel on two fronts. First, he is attempting to resist the tax on financial transactions which the European Union wants to introduce. And so he should. The tax, which is supposed to fund future Eurozone bailouts, will get an estimated 80 percent of its take from the City of London.

Why should Britain fund bailouts for misbehaving members of currency it isn’t in?

Some European leaders even now refuse to accept that the real causes of the euro’s woes are the inherent and obvious flaws in a disastrously designed and constructed currency arrangement.

Instead, as Philippe Mills, head of France’s budget management office put it this week, “What is clear is that you have a market environment which has recently developed and which has its own dynamic, its own self-fulfilling prophesy in a way, which is very far from any evaluation of any elements of fundamental analysis of whatever country”. Spanish finance minister Elena Salgado wailed that the euro was under “systemic attack”. The real architects of the Eurozone’s ills are held to be speculators based in the City of London.

The second front is over the role of the European Central Bank in fighting the crisis. As yields on Italian, Spanish and, now, French bonds spiral up to “unsustainable” levels Cameron and Merkel differ on how the Eurozone should deal with this.

Merkel believes that the countries involved should aim to bring their bond yields down by using spending cuts and tax rises to get borrowing under control. Cameron, while supporting fiscal consolidation in these countries, believes the ECB should also be playing a role by buying their bonds in order to reduce yields. This is similar the Quantitative Easing program of asset purchases carried out by the Bank of England.

But German aversion to anything whiffing of inflation is deep rooted. The deputy leader of Germany’s Christian Democrats, Dr Michael Fuchs, explained to Radio 4 that “Printing money means inflation…The Germans have it in their genes, they are against inflation. Every German is very much scared about inflation”. The spectre of the mid twentieth century haunts German policymakers just as much as British tabloid editors.

With battle lines drawn, Cameron was met with a verbal barrage as he headed to Berlin on Friday. Angela Merkel urged him to fall into line at the risk of the old federalist threat of being “left behind”. Voker Kauder, the parliamentary leader of the CDU, complained that Britain was “defending only its own interests” and Der Speigel branded Britain a “diseased empire”

But this was an unusual skirmish in Britain’s volatile relations with its fellow EU members; it was bilateral. Usually Britain is alone or has the support of only a couple of east European countries in its struggles with Brussels and the Franco-German axis. Here Germany was alone in its battle with Britain.

This is because, unusually but none too surprisingly, there is plenty of support for Cameron’s stance among the European countries afflicted by eye watering borrowing costs.

The day before Cameron and Merkel’s showdown in what the Telegraph’s Ambrose Evans-Pritchard said was “clearly a co-ordinated move by top EU players”, French budget minister Valérie Pécresse said “The ECB’s role is to ensure the stability of the euro, but also the financial stability of Europe. We trust that the ECB will take the necessary measures”.

Meanwhile Jose Manuel Barroso the (Portuguese) head of the European Commission said “Should the central bank be responsible for financial stability as well as price stability? My reply is yes, definitely”.

There has been talk of Britain leading a coalition of non-euro EU members. Now it looks like a few euro members might be willing to sign up too.

So this is not 1940. Rather, it is more like 1815, 1809 or 1704. Britain is not stood alone against a German dominated Europe. It could, potentially, be stood at the head of motley coalition like that led by the Duke of Marlborough to the Danube to thwart Louis XIV’s domination of Europe or any one of the seven which fought Napoleon’s plans for continental dominance.

A future Tory Prime Minister, the Duke of Wellington, led the seventh coalition in 1815. David Cameron could lead an eighth in 2012.

John Phelan is a Contributing Editor for The Commentator and a Fellow at the Cobden Centre. He has also written for City AM and Conservative Home and he blogs at The Boy Phelan. Follow him on Twitter at @TheBoyPhelan  

Read more on: germany, germany and britain, cameron and merkel showdown talks, cameron fighting merkel on two fronts, tobin tax on the city, why should Britain pay a tobin tax to help save the euro?, napoleon, duke of wellington, David Cameron, angela merkel, phillipe mills, quantitative easing, dr michael fuchs, der speigel, ecb, and Jose Manuel Barroso
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