Frankfurt stock exchange - Bloomberg - 19082011
The Frankfurt stock exchange. The euro zone is “dangerously close to recession,” Morgan Stanley warned. Photo by Bloomberg
Text size

Chancellor of the Exchequer George Osborne is one of the more gratified public officials in Europe these days. One might wonder why. The British economy is poised on the brink of a double-dip into recession; the budget deficit is one of the highest in the western world, as the English finance minister admits himself; unemployment among the young is at a record 20% and change; and two months ago, London and other cities were rocked by violent protests, in part because of the cost of living.

Yet Osborne can feel a sense of relief about one thing at least: Britain, one of the biggest and most important members of the European Union, has remained separate from the monetary union, the euro zone. Some 10 years on, and the euro zone is being torn apart. Its strongest members are groaning under the burden of carrying their weak sisters; but Britain can stand by, clucking its tongue, offering advice, and reveling in its monetary independence.

Osborne had been scheduled to come to Israel on Thursday, for the inauguration of a British-Israeli high-tech hub. But his trip had to be delayed for a day so the chancellor could participate in the summit of European Union leaders, in their latest bid to reach an agreement on the Greek rescue package. Many pundits believe the deal hashed out, which includes the private sector investors, mainly banks, accepting a 50% haircut, is a long shot from what is needed to resolve the crisis. Osborne seems more sanguine.

"I think we made very good progress this week," he says. "I think what's now required is to maintain the momentum and put the detail in behind the deal. I delayed my trip to Israel for 24 hours to ensure the deal was a good one for Europe and for the euro - from a good deal in theory to a good deal that will work."

Naturally, Europe's problems cannot be solved overnight, Osborne continues. "It takes more than just 24 hours to solve the problems. But I think what we saw this week is that the leaders of the euro and of the whole European Union are coming together. People can see they're determined to make this work and that will help confidence return - and confidence will bring with it jobs and growth."

But the palpable relief on his face is probably less because of the specific agreement, though he calls it "very good," and more because Britain isn't in the eye of the storm.

Last week, the British parliament rejected a proposal to hold a referendum on withdrawing from the European Union. David Cameron's government probably wouldn't advocate that, but it could demand changes in the terms of Britain's EU membership.

Would you support changes that would bring Britain closer to becoming part of the monetary union and perhaps a fiscal union, too?

"No!" Osborne says, then adds with a laugh: "That is the short answer. Britain is in Europe but doesn't want to be run by Europe. Britain is in the EU. We want the EU to be a success. We want to promote free trade," he says, noting that with urging from Britain, the union just struck a free trade deal with South Korea. "But we don't want to be part of the single currency. We want to keep our own currency, the pound. We're happy not to be part of the euro zone."

Statements Osborne made last Thursday buttress the sense that Britain prefers to keep its distance, not cuddle any closer to continental Europe - or at least that part that uses the euro. He says Britain will provide funding to the International Monetary Fund but only on condition that it won't be used in a rescue mechanism for the EU, or as bailout funds to help specific EU members.

"We are a leading member of the IMF. We are one of the biggest shareholders," Osborne told TheMarker. "We think the IMF resources should be available to all countries in the world. What we want is the IMF to provide support to individual countries, not to a currency. We are against the IMF providing resources just for the euro zone."

Osborne seems to believe the EU has split into two camps - the euro zone and countries that don't use the euro. Last week, he told the British press that U.K. Prime Minister David Cameron had held talks with the Swedish and Polish prime ministers on how to prevent the eurozone countries from forming a consolidated bloc ahead of the summit of 27 EU nations that could weaken the other camp.

"What we want to do is make sure that while the the euro countries integrate more, the voice of the 10 countries not part of the euro but part of EU must continue to be heard on important issues such as the financial market. That will be a key objective," he says, adding: "Britain is absolutely a leading power in Europe. But you can be a leading power in Europe without joining the euro."

Growth, then crisis

Britain's relative isolation from the euro zone crisis hasn't helped it evade economic troubles of its own, as well as profound social unrest. Unemployment is rife and rising. It has developed its own form of the Occupy Wall Street movement. On Friday, the City of London and Anglican Church struggled to evacuate a tent city that had settled down on the cathedral grounds.

Cameron said he supported the freedom to protest, but added: "I don't quite see why the freedom to demonstrate has to include the freedom to pitch a tent almost anywhere you want in London."

Do you feel the protests will change the political, economic and social order?

"I think there are a couple of things going on here," Cameron answers. "Everywhere around the world, in Israel, Britain and other countries, families are feeling squeezed at the moment, by rising prices, higher oil prices and, in the case of countries like Britain, high budget deficits. Understandably, people, families feel squeezed. That's one thing. The second thing - at the same time people feel financial services have behaved irresponsibly. I think it is important for governments who have to put their own budget finances in order, to do so at a time and in a way that is fairer and seem to be making sure that financial services are more responsible. I think if we can get that right, then we will be addressing a root cause of these protests."

As for his visit to Israel, as finance minister: "The reason isn't just to talk about the usual issues British politicians talk about in Israel, security issues, Middle East peace process issues, but to talk about what our two economies can do together - particularly the high-tech industries," Osborne told TheMarker.

He sees the high-tech industry in Israel and the high-tech industry in Britain working together, "creating jobs and investment in Israel, and jobs and investment in London. We want the U.K. to export more, trade more. We want Israeli investment in the U.K. and investment by other countries."