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Inside Out: The EU and the UK

ResPublica's Phillip Blond on the importance of EU participation and a new European agenda for the UK

The present EU budget dispute between David Cameron and the other European leaders, which concluded in its expected impasse, is of course an expression of deeper conflicts and divisions in Europe. And if the UK/EU dispute can be taken as emblematic of these divisions – its resolution is of deeper importance than just a bilateral quarrel. But there is a double blindness at play in the present dispute between the EU and the UK, where each believes in its own fictions and belittles the critique and vision of the other.

The Euro and Europe

On the EU side there is almost no consideration given to the idea that what might be in the interest of the Eurozone is not in the interest of the European Union. In part this stems from the almost universal insistence on the part of the governing elites in Europe that the Euro must be saved, and a deep irritation that Britain is doing nothing to help. Understanding this Euro resolve requires understanding European history and the visceral fear that all Europeans have of another conflict. In short what Britons cannot understand is that the Euro now stands proxy for European peace and European security.

Yet the opposite analysis that the Euro is the fundamental threat to European security is a sustainable and rational position, especially given the on-going economic crisis. On this account the Euro forces different and divergent economies into one fiscal model under which all cannot prosper. At its most simple Germany’s exchange rate is artificially low while Greece’s is wildly elevated. At its most complex there are issues of internal capital imbalances that arise between divergent economies which nobody has yet addressed and nobody seems to know how to tackle. Internal devaluation is oft mooted as the means to reduce costs and restore competitiveness but that involves Germany and similar nations accepting rising wages and a loss of relative competitive advantage. Plus there is a level below which internal devaluation cannot go – no matter how poor people are. Inbuilt costs such as housing tend not to fall as precipitately as wages. All of this means that the Euro is a source of permanent financial disparity and therefore political instability.

While the Euro clearly lowers the transaction costs of trade, perhaps its most notable negative achievement has been the massive flows of capital into unproductive sectors of recipient economies most notably housing and pay. From Portugal to Greece, the checking of these flows through limits on debt expansion has seen frightening falls in living standards and destruction of asset values and the savings linked to them. By this reading it is not quite clear what the economic future of the Southern European economies is and when they face over 50% youth unemployment as they do in Spain and rising support for extreme fascist parties in for example Greece (15% for Golden Dawn and rising) – it is uncertain how long social stability can be maintained. Plus all of this is before the final fiscal pact for the Eurozone members is agreed and national financial autonomy is stripped away to be reinstalled at some EU centre where national public expenditure and conditionality are traded off – such as agreeing national budgets in return for reducing debt or improving labour market flexibility. This will in effect determine national politics in the weaker debtor nations and since it will rob desperate people of any ability to respond to their own situation one can immediately see political parties who support leaving the Euro being elected with large mandates.

So it is not self-evident that doubting the Euro is doubting Europe and if the case that the Euro might not be in the interest of all European nations is accepted, then what follows from this is far more amenable to UK interests and perceptions that many Brits would believe. But before we address a new structure for the EU and a potential settlement with the UK let us examine the current state of the debate in Britain herself.

The UK and The European Union

For what David Cameron did when he first welded the veto was to preserve the distinction between the EU institutions and those of the Eurozone. Now he may well not have exercised the veto for reasons of institutional distinction and EU integrity but in effect this was what was achieved and I believe this to be both laudable and desirable. If the arguments of the foregoing paragraphs are accepted then there clearly is a rationale for maintaining different ways to be in the EU.

From Britain’s perspective, euroscepticism has poisoned British political debate on the right for decades. What the British right most objects to is the perceived and real loss of UK political and parliamentary sovereignty. Recent decisions by the European Court of Human Rights overturning UK terror control and deportation orders have helped to further inflame popular opinion and create the appearance at least of a populist UK euroscepticism. This coupled with a cross party concern at the Euro crisis and a belief on the left that a simplistic pro-EU stance is no longer politically possible has created a climate for a final in/out referendum on the UK’s membership of the EU. A November 2012 poll in the Observer newspaper showed 56% of Britons would vote to leave the EU in a referendum and that included 68% of Tory voters and 44% of Labour supporters as well.

Cameron’s problems with his own party on the EU issue are well known. Issues on Europe have split the party before and could easily do so again. Simply put the EU has been the source of the largest Conservative party rebellion of this administration and the government is no longer assured of any majority on this issue in the House of Commons. Adding to the pressure on Cameron is that his party is haemorrhaging support on its right flank to the avowedly eurosceptic UKIP. And UKIP are now polling above the in government and pro EU Liberal Democrats nationally. At the last election UKIP cost the Conservatives at least ten seats – possibly more – and this figure could easily double at the 2015 election, costing Cameron his majority and premiership.

Leaving aside party considerations it seems possible that Britain will have an in/out referendum after the next general election. If Labour wins Ed Miliband would want to avoid such a vote, while Cameron would feel obliged to hold one. Even so none of the leadership of the main UK political parties wants the UK to leave; even Cameron favours membership of the EU but with an extension of various opt outs: a maximal autonomy compatible with maintenance of the single market and Britain’s ability to access it. A sizable minority of conservative MP’s favour exit whilst a majority of all MP’s do not but are clearly open to a more populist stance on the EU.

But the assumptions governing the present UK debate are highly questionable. Firstly the purported British majority for EU exit reflects a population that has only heard for years one side of the argument. That it is barely over 50% shows if anything that the majority position is capable of being won by an effective pro-EU campaign, which incidentally has yet to form. And this is before British business has weighed in with dire warnings of the loss of jobs and capital that would follow from a UK vote for EU exit. Plus the United States has a clear interest in the UK being its bridge into Europe and would doubtlessly say so. To my mind an in or out referendum would more than likely be won by those who wish to remain inside the EU, leaving euroscepticism as a defeated minority position utterly bemused by its loss.

After all this is what has always happened when the UK has been offered such a stark choice. Those arguing for an EU exit have always lost whenever it has been put to the national vote. Harold Wilson won the referendum on EU membership in 1975 with a crushing victory for the pro EU position. And when the Labour party in 1983 and 1987 offered in their election manifestos withdrawal from the European Union they were heavily defeated. As all the eurosceptic Tory campaigns since 1997 have been as well. And Cameron got to number 10 by wholly ignoring the Europe issue.

The Wholly Out Option for the UK

For what the eurosceptics struggle with explaining to the British population is quite how they gain from leaving Europe. Yes there is a loss of sovereign autonomy on joining the EU club but this surrendered independence is arguably no longer the asset it once was. Across the world countries are grouping for trade benefits and going it alone seems a 19th rather than a 21st century vision. Enjoying splendid isolation as a trading nation unencumbered by European bureaucracy sounds attractive but it would involve surrendering the very thing that most other nations would want to trade with you for – access to Europe’s single market. Tory eurosceptics envisage a Commonwealth option for the UK and the Commonwealth is certainly an advantage, as the Economist recently pointed out (The Economist November 24th 2012 p. 42). While Europe is barely growing the Commonwealth is averaging 7% a year and trade inside the group is 20% cheaper than for those outside but the sum of all Britain’s exports to the Commonwealth stood at £54 billion in 2011 less than a quarter of its European trade. But quite why eurosceptics view this as an either or is difficult to see, it seems obvious that European and Commonwealth trade can augment one another – a Commonwealth and EU trading strategy seems much more likely to succeed.

Plus if you pool sovereignty you also increase it. It is hard to see how a relatively small individual trading nation can strike advantageous trade deals with China or the United States, whereas as a trading block of some 550 million souls you self-evidently can. With a massive economic and demographic shift towards China and India and the global south, the idea of Britain successfully operating alone as a trading nation without the internal and external advantages of EU leverage in trade negotiations seems fanciful. With the EU as our largest trading partner even if we wholly exit we will still be trading with them and will need some regime for doing so. And even the eurosceptics argue for the maintenance of Britain’s access to the single market. To be wholly outside the EU regime under a World Trade Organisation (WTO) only relationship and have the same position as the US or African nations would be deeply damaging to UK trade interests. In summation the wholly out option looks suspect and hardly in the UK’s interest.

Britain’s In Out Option

To be inside the single market but outside the EU has high costs and less gain. The UK could enter the single market under some European Economic Area arrangement (EEA) like Norway which is subject to all the EU rules without being able to influence them or it could seek a more bespoke bi-lateral series of agreements such as exist with Switzerland but this also has its downsides. For example any goods offered for sale in any of the EU’s 27 member-states can be sold in Switzerland but not all Swiss goods can be sold in the EU. Nor do these inside outside options come without financial costs. As David Buchan put it in a recent paper for the Centre for European Reform, the UK under such a regime would presumably be expected to pay on a similar basis to the Norwegians and Swiss: ‘Currently, Norway contributes Euros 340m a year to the EU. If multiplied by 12 for Britain’s much larger population, that rate would imply a contribution for the UK of just over €4 billion, or nearly half its current net contribution to the EU budget as a full member.’

Recapitulating the Relationship

Neither Britain nor the EU are in a settled relationships with themselves or each other. Britain has to face down Scottish nationalism in 2014 and then in its own mind it has still yet to settle on a version of its own future. With America’s pivot to the Pacific and Europe in crisis, and its Commonwealth relationship never seriously explored, Britain is certain it needs to maintain a global role but is profoundly unsure of how to do so. The danger for the UK is that it remains fatally undecided and trapped in a kind of negative stasis unable to act positively – for it cannot build a future it believes in if it does not know what future it wants.

Likewise with Europe, its leaders are terrified by the demographic dwarfing of the continent that will shortly ensue and are profoundly unsure of its own global role especially when Britain, its most international and globally connected member, is its most recalcitrant. The internal dangers in Europe are blinding people to the emergent dangers in its own near abroad. The Arab spring has left a legacy that looks unlikely to turn to summer since it could well seed fractured states and fundamentalist cantons along Europe’s southern border.

Likewise in the East, Russia wholly reliant for its political stability on an oil price of around $120 a barrel is facing, with the shale gas revolution and new oil finds, the probability of a halving of that price in the next five years. The political consequences of an unstable Russia with Ukraine in play and Belarus so frozen in time it’s likely to shatter are profoundly dangerous. And Britain with its military reach and power projection is the only military power in Europe that in concert with others, most likely the French and the Poles, can really defend the continent. Europe needs Britain with its military, diplomatic links and innovation to truly become a force in the world and a place that can defend itself. And of course the more that Britain as the sixth largest trading nation on earth distances itself from Europe the lesser Europe truly is. And Britain as a genuine force for change is probably the only nation that can lead the genuine bottom up reform that the EU so desperately needs. Europe needs Britain.

But does Britain need Europe? Economically that is in a simplistic sense self-evident. The effect of EU membership can be seen in the trade statistics. Britain joined the then EEC in 1973, since when its trade with the other member states has grown at an annual rate of 3.3% (after adjusting for inflation). Its trade with countries outside the EU has, by contrast, grown at an annual rate of only 1.3%. Now the argument might be that we have neglected our trade with the rest of the world as a result of EU membership but that indicates a sort of state centralised direction that has been absent from British economic policy and reality almost ever since we joined. Doubtless we should concentrate on the emerging and growing markets but that couldn’t mean abandoning our current position. That would be a form of economic suicide. The EU accounts for 48% of total UK goods and services exports. This breaks down as 53.5% of UK goods exports and 39.7% of services. And in terms of services, which are really the future for the UK, Europe is the UK’s greatest customer (£68bn out of a £171bn total) well ahead of the USA in second with 20%.

But the EU is more than just a customs union. It represents a political decision and a geo-political opportunity. What Britain’s eurosceptics perhaps don’t realise is that by 2050 (if Turkey doesn’t join the EU) the UK may well be the largest member of the European Union by population and as a consequence the country with potentially the greatest political weight. Given that so many of the new accession countries are excluded by and are hostile to an exclusive Franco-German centre, and positive about the traditions and beliefs of the UK, Britain could really lead in Europe and that coupled with all its other advantages and international connections would make the United Kingdom first among equals as Europe’s pre-eminent power. That possibility far more capable of realisation than any other putative vision of global influence is worth something and should not be given up lightly.

The New Future?

So each needs the other but how to facilitate this and make it happen? In short Europe and Britain must find an accommodation. But Britain is not the only country that Europe must seek to broker a new settlement with. There are many. Nobody is happy with the current arrangements for Switzerland, Norway or Turkey, the EU is utterly confused as to how to approach Ukraine or Belarus. Plus given the internal troubles it is also clear nobody will be in a rush to join the Euro any time soon and even though leaders may not want to countenance it, the current currency union may break up, or centralise around a far smaller number of states. So it cannot be the case that one has to accept the Euro or leave the EU.

After all, the Euro is currently only shared by 17 of the 27 EU nations and agreements already recognise there are members who may never join. Both Britain and Denmark for example have permanent opt outs from the Euro and others can wait and join when their economies are sufficiently aligned. And as mentioned above this wait could be a long time. Poland would probably not like to rush in until the present crisis is resolved, Sweden has a permanent Euro derogation and Bulgaria, the Czech Republic, Hungary and Lithuania do not currently even have a target date for adoption of the Euro. Plus if one considers that the Greeks may exit, it will be necessary to have an institutional space where countries can leave the Euro and yet still remain in the EU. So it is in the clear interests of the EU to create a structure that does not create an exclusive Euro core that in effect subverts the institutions of the European Union. A multi-tier Europe that escapes from the language of inner and outer circles and that is flexible enough to cope with the various needs of those who will never join the Euro, those who may wish to wait and those who may need to leave would be a genuine advance.

Hence the current British wish to renegotiate its relationship with the EU need not be a purely negative engagement. Thought through properly and in relationship with other counties Britain could be a popular force for the reform of the EU. Creating a much more flexible and plural union that better serves the interests of its members. The language of localism and the decentralisation of current powers has already been heard in Europe from the Czechs and opposition parties in the European nations themselves. And localism and decentralisation represents the best of modern British Conservatism. Such a movement for a bottom up reform of the EU could create a quite unexpected mutuality between the UK and other member states. Localisation of various supra-national budgets like agriculture, could free the union from subsidising local vested interests and create a truly innovative framework for a 21st century European future.

Given the travails to come, it would be wise for the current set of European leaders who are so strongly committed to saving the Euro to build alongside that project other forms of EU association that maintain and create a place for countries like Britain to be full and participatory members of the European Union. This would draw the sting from British euroscepticism and create a future pathway that both the EU and the UK could build on. That also would free Britain from its position of constantly threatening to deploy its veto to block its own exclusion. Europe is greater than the Eurozone and is always likely to be so – so create a new politics that recognises this and fosters another form of membership and that is flexible enough not to force countries to break with the EU. Institutions survive and prosper by creating spaces for difference and distinction. Abandon the notions of inner and outer and talk instead of what is appropriate to and proper for the needs of members. Angela Merkel is already thinking and acting like this – her statesmanship was notable in her generosity to Britain in recent interventions and was widely and warmly welcomed in the UK . More of this would go far indeed and Europe would be better for it. Create a place where Britain can remain and Britain will not leave. Europeans moreover might well be surprised at the number of countries that subsequently wish to join the United Kingdom such that the EU might even extend to all of Europe.

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Comments on: Inside Out: The EU and the UK

Gravatar Margaret Bowker 11 December 2012
An interesting and comprehensive article by Phillip Blond. As he and many others have said, the issue seems to depend on how the EU/Eurozone reacts to the UK"s proposed revised relationship. The accomodation of certain measures, mainly regarding interna
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Date Published
26 November 2012

About The Authors

Phillip Blond

Phillip is an internationally recognised political thinker and social and economic commentator. He bridges the gap bet...