The Future of Europe: Economics, Politics & Identity | Presidential Lecture Series
Rekjavik, Iceland
September 26th, 2012
My family history provides some explanation for the passion I bring to the question of Europe’s future. I am proud to be British and comfortable to be European. I am convinced that Britain will suffer if Europe is weak; and that Europe will be stronger if Britain plays a leading role.
Today I want to discuss: - Why the Euro is in trouble? I think this is relatively clear. - Second, the burden of adjustment, and whether it is politically sustainable. This is less clear. - Thirdly, if the Euro crisis is resolved through the establishment of a more federal structure for the Eurozone, what does this mean for the EU as a whole? This is only just beginning to be discussed. - Fourth, where does the UK fit in?
You will be pleased to know that I will not be giving my views, at all, on the choices facing Iceland.
The Troubles of the Euro
We are meeting in a month when for the first time in a long time, there have been good news stories coming out about the Eurozone crisis. I heard Finnish Europe Minister Alex Stubb in Oxford last week enumerate nine such points:
- The ECB decision on bond buying and the consequent drop in Italian and Spanish bond yields. - Mrs Merkel’s support for the decisions of the ECB President - The German Constitutional Court’s support for the ESM. - The Dutch election victory for pro European parties. - The European Commission proposals on Banking Union. - The Irish economy picking up and the country back borrowing in the market. - President of the Commission Barroso’s speech which had confidence and brio. - And real economic reform in the member states.
The alert amongst you will have noticed that is eight points. Alex Stubb’s ninth – that we are on the verge of agreement of a new EU financial perspective - seems to me a stretch.
But having tried over three years doing all the wrong things, on this reading Europe finally seems to be doing the right things. And it is worth reminding ourselves that the EU as a whole, and the Eurozone countries as a subset, are in current account balance, have a debt to gdp ratio lower than the US or UK. The EU remains the world’s largest and richest single market.
But that is only part of the story. In all honesty it is clear that the European ‘project’ is facing challenges the like of which it has never seen. Born of the overwhelming desire and need to prevent Europe convulsing the globe with its wars, in other words to prevent Europe being the source of internal devastation and global tumult, it is a terrible irony that the greatest EU project to date, the creation of the Euro, today remains the biggest threat to global economic stability because of its struggling currency union.
There are good grounds for pro Europeans – never mind sceptics - to fear that the end of the road for EMU will be a messy car crash:
- Spanish and Italian yield rates remain near penal; and even if Spain could fund at German levels, the debt/GDP ratio will keep rising since GDP is falling so fast - The Bundesbank is on the warpath, with the President at public odds with the Chancellor for the first time since the disagreement over the exchange rate for Easter and Western D-Marks at the time of reunification. - Mrs Merkel is torn between her real father who taught her the virtue of prudence and her political father Helmut Kohl who taught her that European unification and German reunification were two sides of the same coin. - The European Stability Mechanism is still small relative to the size of the problem. - Spain has not yet applied for a programme to trigger ECB bond buying. - France remains deeply sceptical about political union. - The French economy is heading in the wrong direction. - There is nothing close to a shift in the EU budget from agriculture to innovation. - Greek solvency problems remains structural and real.
More than two years into the Euro crisis, there is now quite widespread consensus at least on the following: that the political institutions and rules of the Eurozone are too weak to combat the economic imbalances stimulated by financial flows from North to South; that the structural problems of the Greek, Italian and Spanish economies were ignored in the creation of EMU, and beyond, for wider political reasons; that Mrs Merkel’s insistence in 2009 that there was no joint and several liability for sovereign debt has created the flight to safety within the Eurozone; and that there has been too much wishful thinking on the part of politicians in debtor and creditor countries alike – in the South about what it means to live in a hard currency area, in the North to set out the blessings, notably in terms of a competitive exchange rate, that come from EMU and that provide compensation for the financial burdens of the transfers that are an inevitable part of a single currency area.
The Eurozone crisis is therefore about economics, politics and identity. You could say that there is an acute economic crisis, a medium term political crisis, and a long term identity crisis.
- The economic problem is partly about growth, or lack of it, partly about competitiveness in the face of big global shifts in economic power, and partly about democgraphic and welfare costs. - The political problem is that a wider union is less willing to share its burdens. There is bailout fatigue in creditor countries and austerity fatigue in debtors. - The identity problem is the call of shared sacrifice carries less sway than in the post-war period, and has not been replaced by a sufficiently compelling vision of the EU’s role in the 21st century.
Paul Krugman, who wants Europe to succeed, calls the Euro “a nightmare”. In a recent speech he contrasts it with the fall in Iceland’s Krona, the 25% fall in wages relative to the European core in one fell swoop. In optimal currency area theory, labour mobility and fiscal integration are supposed to make up for the rigidity of the interest and exchange rate structure. Krugman’s argument is that the sound fiscal policy and structural economic reform that were promised in 1999 were never going to able to do enough to make the Euro work – because of the massive capital movements after the creation of the Euro.
My own view, not an original or extraordinary claim but certainly not a unanimous one either, is that the policies of collective austerity pursued over the last two years, in creditor and debtor countries alike, have made the problems of EMU near insoluble. Far from addressing the root causes of the crisis, austerity has deepened them. We are in a balance sheet recession, with a private sector deleveraging at a rate of knots, and the contraction of government spending exacerbating sovereign debt concerns by killing off growth.
Austerity is lengthening the tunnel rather than bringing the light closer, by reducing growth and weakening the banking system, as private borrowers try to reduce leverage, collateral deteriorates and capital flees
There is a striking contrast here with the US experience. The payroll tax cut and Quantitative Easing has kept the economy ticking over, against very strong headwinds.
The Burden of Adjustment
So much for how we got here. How about where we go from here. The official story about the rescue of the Euro over the next year or two has three structural elements:
- The banking crisis addressed through a Banking Union, with supervision and resolution mechanisms.
- A fiscal union, in which support for debtors is conditional on agreement to centrally agreed terms and conditions of national budgeting.
- And a political union to match a monetary union, with closer cooperation among Eurozone members. It has to be said that this remains obscure and contested – notably in France, a country which receives remarkably little attention in discussions on the political viability of EMU, but which is key to its success. After all it was Francois Mitterrand who blocked political union in 1991, and French ire at the idea of Germans deciding their fiscal policy remains real and strong.
The ECB has bought time for this package with its recent commitment to intervene in the secondary bond market. But the justification for it was an admission that the Euro would otherwise come apart at the seams. The Governor of the ECB Mario Draghi was explicit in announcing the new bond buying package that scepticism about the durability of the Euro was creating severe distortions in government bond markets. He went as far as to say that the objective of his new policy instrument was to recreate a single currency area.
The problem ahead seems to me two fold.
First, economics. The governing policy mix is ‘austerity plus reform’, or ‘pro austerity pro reform’. But austerity has an impact now and the reform only in a matter of years; and when austerity drives up unemployment, especially youth unemployment, or drives people out of the country, or drives business to bankruptcy, there is a structural economic impact. Human capital is being destroyed by unemployment; capital formation is declining with the weakness of domestic banking. As growth weakens, so does total factor productivity – and the price is paid by all those in the middle and at the bottom of the income spectrum.
To my mind, this is a dead end. Western economies do need to follow Germany and embrace reform to address the structural economic and demographic/welfare challenges we face. Southern European economies do need to make labour markets work better, raise levels of innovation in public as well as private sectors, and fashion a social bargain that can cope with constrained tax revenues and rising needs arising from an ageing population.
But if they also embrace German approach to fiscal policy, the result is a pro-cyclical policy mix that is deadly. Something in the national income equation needs to point in the right direction – or the cure exacerbates the disease. We need to break the vicious circle of low demand and contraction of supply. So the right place to be is anti austerity/pro reform.
Second, politics. There are big challenges in creditor countries - to explain why adjustment in debtor countries needs to be subsidised, to justify transfers of sovereignty to European level. But to my mind the problems are greater in debtor countries.
Despite the bailouts, and the less well understood capital market support from creditor to debtor countries, the burden of adjustment is falling very heavily on the less well-off in debtor countries. Just look at Spanish levels of youth unemployment, now over 50 per cent.
To me, it is actually remarkable how little backlash there has been in debtor countries. But if the creditor countries want to the Euro to survive in its present form, the question is what breaks the vicious cycle of public sector cuts leading to unemployment, private sector deleveraging which freezes investment, and sovereign debt concerns which lead to capital flight. Austerity plus reform is not enough.
George Soros has provided one answer: Germany must ‘lead or leave’. I think he is right – and I want it to lead.
Germany has a remarkable consensus-based system of government, full of checks and balances. But it is capable of remarkable leaps of imagination – Erhard’s opening to Europe in the 1950s, Brandt’s Ostpolitik in the 1970s, Kohl’s reunification in the 1990s, and Schroeder’s welfare state reforms in the 200s. That is what is needed now.
Leading means addressing the core reasons for the rise in yield spreads over the last two years – and therefore addressing the economic and political gaps in the operation of the monetary union. It means more power at the centre; but also more solidarity between Euro members; and it requires addressing the growth part of the Bermuda triangle of growth, banking and sovereign debt that has trapped the Eurozone’s ship of state. It is a huge project. But it is necessary for a euro of 17 to survive.
Political Consequences
I don’t agree with David Cameron about much, but he is right on one thing: the Euro crisis is going to change the European Union in fundamental ways. If the Euro is saved, it will be because of a shift to more federal structures within the Eurozone. If it fractures, there will need to be serious redesign, in a federal direction, if what’s left of the Euro is to be saved. In either case, we will need to think about the way the European Union works.
For fifty years the EEC, and then the EU, has steered by the star of ‘ever closer union’. By any historical standard, it has been dramatically successful. The idea of a Europe whole and free has actually happened. What is more, Europe is more integrated and in many areas interdependent, than ever before. It was this interdependence, after all, that makes the internally generated shocks since 2008 so dangerous.
The political and institutional ambiguity of ever closer union yielded the idea of “two speed” Europe. The fiction was that opt outs, transitional arrangements and other legal innovations recognised different speeds of travel but not different destinations. That metaphor must now be given a decent burial. The issue is what is the alternative to a two speed vision?
One answer is to say that the future is a ‘two tier’ Europe. Joschka Fischer, former German Foreign Minister, describes a vanguard Euro group and a rearguard of the rest. David Owen, one of my predecessors as UK Foreign Secretary, argues for a top tier of countries who merge their governance arrangements into a “single government”. A second tier, including Norway and Turkey, would embrace a “restructured single market” (though note that there is no single market without a set of acquis associated with social and environmental policy). Iceland might be interested.
The Fischer/Owen plan founders on a number of points. One reason is practical: I don’t see other countries embracing this vision. A second is more substantive: deepening the divide between the Euro ins and outs, and squeezing the choice for countries between a minimalist European Economic Area and a fully integrated EU, is a recipe for decline not renewal.
The diversity of the EU’s membership, and the breadth of areas of policy cooperation, require flexibility not rigidity. If Britain pursues this two tier option, it will end up talking itself out of the EU altogether.
There is an alternative to two speed and two tier. In 1994 Wolfgang Schauble (the current German Finance Minister) and Karl Lamers, who were at the time leaders of the German CDU Bundestag caucus, produced a paper reiterating traditional German commitment to a federal state structure, but also embracing ‘elasticity and flexibility’. “Those countries which are willing and in a position to go further than others in their cooperation and integration should not be blocked by the vetoes of other Members” they wrote. In English, or at least diplomatic English, we call this “variable geometry”.
It means that the European Club has a group of founding rules – from the single market, which is decided by qualified majority voting, to foreign policy cooperation, where each nation has a veto. On that foundation, further integration is possible – on the Euro, on defence, on migration and the like.
This is what countries like Poland are pursuing at the moment. Her Foreign Minister signed the recent Future of Europe group report on foreign policy coordination, and is making himself part of the wider conversation about the future of Europe. As I will set out, this is where the UK should be.
There are two major objections to this vision. One is that the Euro is such a big exercise that its members will inevitably overrun the rest of the EU. But this falls on the critical point that important members of the Eurozone club, like Germany, will have more in common on for example single market issues with countries like Britain or Poland than with Euro members like Italy or even France. Membership of the Euro, or a Euro-zone hard core, is not the end game for all EU members. But it is not in the interest either of the Eurozone or the EU countries outside the Euro should have second class status in the EU.
The second objection is that it does not resolve the democratic deficit. That is true, but is an argument for developing more transparent political structures - whether formalising the role of national parliamentarians or directly electing the President of the Commission – rather than ditching the idea that the EU encourages coalitions of willing members to work together.
Time is now of the essence in this debate not just for Britain, but for countries like Sweden, Denmark and Poland. At the moment, the British Government’s stance has dealt us out of the game. But experience has shown that the EU is much stronger when its structures include rather than exclude Britain. For all our pragmatism, and sometimes because of it, we can add weight and value. The same is true for the other countries I mention.
At the same time, Britain’s debate about Europe is not pretty. On the pro European side, too much of the debate in Government was conducted on the basis of a negative argument – that we had sufficient defences against frightening or misguided European proposals, a kind of double negative. On the Euro-sceptic side, there is anger at the costs of the EU, but no recognition of the benefits. The focus on repatriation of powers – according to President of the Commission Barroso in an interview with me in July – has no supporters on the Continent, and so threatens further accusation of betrayal from those for whom the slipway to exit is the logical consequence of their worldview.
The Prime Minister attempted to ‘veto’ the Fiscal Pact last December on the grounds that he feared the political consequences for those not in the Euro. But the Treaty went ahead outside the EU framework, and ended up including 8 of the 10 non members of the Euro. So the veto weakened Britain and weakened Europe.
It is vital that we in Britain learn the right lesson: the rest of Europe will cut us some slack, but not if we are ambivalent about the success of the whole European enterprise. The UK Government is chronically weakened by its inability to empathise with any vision of the European project recognisable on the Continent. That cannot stop the rest of us. If we cannot make variable geometry work then we end up locking ourselves out of the EU altogether. So we need to argue for it with vigour and urgency.
Conclusion
Timothy Garton Ash has written of a ‘dysfunctional triangle’ of national politics that is enduringly strong, European policies that seem remote, and global markets that are demanding and fickle.
There is a fundamental point here. There is an argument that the modern world – the global village – renders regional associations redundant. It builds on the close interdependence of people and nations to argue for flexible networks of cooperation not bureaucratic multilateral alliances.
I take an alternative view: there is a global village, but the neighbourhood still matters. A country like Britain is stronger in the world if it is a strong player in a strong EU. Stronger in Washington, Beijing and Moscow because we are not on our own, but anchored and influential in our own region.
I also think the next decade is going to see closer regional cooperation around the world – in Africa, in Latin America, perhaps even in Asia. If your neighbour’s house is on fire, then your house is on fire, so it makes sense to work together to prevent fires in the first place.
That is a long and tortuous process. But it is noble and possible. And here is the key to success.
The last few years have seen economics and politics pulling in opposite directions. The economics calls for more international sharing of sovereignty; the politics argues for localisation. The economics calls for more labour mobility; the politics argues for the opposite. The economics calls for investment in the productive potential of the economy tomorrow; the politics is dominated by older voters for whom the prime issue is the debt we owe them for a life of work yesterday.
The result has been economics that carries on slipping; and politics that carries on sliding.
The key to the future of Europe is to align the political and economic stars. The centre-left has an important role to play in this. Out of government in the vast majority of European countries, but now led by M.Hollande, the centre-left has to think its way out of Oppositoin, and develop a governing mindset. This role provides my concluding point.
A lot of discussion of the future of Europe pits pro Europeans against sceptics, federalists against decentralisers, North against South, creditors against debtors. Very little confronts a centre-left vision of Europe against a centre-right vision. This has strengths – creatingstrong coalitions. But it also creates weaknesses – giving the impression of a political stitch up, and giving the impression that there is no choice.
There needs to be a centre-left vision for the future of Europe. In my book it would be anti austerity pro reform. It would recognise that Keynes has something to say, but also recognise that there are structural issues that need to be addressed. It means confronting some very difficult issues that divide people according to national interest – from the budget to energy and migration. It means thinking hard about what is essential European business, and what can be left to nations and regions. It means acknowledging the democratic deficit, but addressing as a matter of urgency the delivery deficit.
That is easier said than done. But it is essential.
Rekjavik, Iceland
September 26th, 2012
My family history provides some explanation for the passion I bring to the question of Europe’s future. I am proud to be British and comfortable to be European. I am convinced that Britain will suffer if Europe is weak; and that Europe will be stronger if Britain plays a leading role.
Today I want to discuss: - Why the Euro is in trouble? I think this is relatively clear. - Second, the burden of adjustment, and whether it is politically sustainable. This is less clear. - Thirdly, if the Euro crisis is resolved through the establishment of a more federal structure for the Eurozone, what does this mean for the EU as a whole? This is only just beginning to be discussed. - Fourth, where does the UK fit in?
You will be pleased to know that I will not be giving my views, at all, on the choices facing Iceland.
The Troubles of the Euro
We are meeting in a month when for the first time in a long time, there have been good news stories coming out about the Eurozone crisis. I heard Finnish Europe Minister Alex Stubb in Oxford last week enumerate nine such points:
- The ECB decision on bond buying and the consequent drop in Italian and Spanish bond yields. - Mrs Merkel’s support for the decisions of the ECB President - The German Constitutional Court’s support for the ESM. - The Dutch election victory for pro European parties. - The European Commission proposals on Banking Union. - The Irish economy picking up and the country back borrowing in the market. - President of the Commission Barroso’s speech which had confidence and brio. - And real economic reform in the member states.
The alert amongst you will have noticed that is eight points. Alex Stubb’s ninth – that we are on the verge of agreement of a new EU financial perspective - seems to me a stretch.
But having tried over three years doing all the wrong things, on this reading Europe finally seems to be doing the right things. And it is worth reminding ourselves that the EU as a whole, and the Eurozone countries as a subset, are in current account balance, have a debt to gdp ratio lower than the US or UK. The EU remains the world’s largest and richest single market.
But that is only part of the story. In all honesty it is clear that the European ‘project’ is facing challenges the like of which it has never seen. Born of the overwhelming desire and need to prevent Europe convulsing the globe with its wars, in other words to prevent Europe being the source of internal devastation and global tumult, it is a terrible irony that the greatest EU project to date, the creation of the Euro, today remains the biggest threat to global economic stability because of its struggling currency union.
There are good grounds for pro Europeans – never mind sceptics - to fear that the end of the road for EMU will be a messy car crash:
- Spanish and Italian yield rates remain near penal; and even if Spain could fund at German levels, the debt/GDP ratio will keep rising since GDP is falling so fast - The Bundesbank is on the warpath, with the President at public odds with the Chancellor for the first time since the disagreement over the exchange rate for Easter and Western D-Marks at the time of reunification. - Mrs Merkel is torn between her real father who taught her the virtue of prudence and her political father Helmut Kohl who taught her that European unification and German reunification were two sides of the same coin. - The European Stability Mechanism is still small relative to the size of the problem. - Spain has not yet applied for a programme to trigger ECB bond buying. - France remains deeply sceptical about political union. - The French economy is heading in the wrong direction. - There is nothing close to a shift in the EU budget from agriculture to innovation. - Greek solvency problems remains structural and real.
More than two years into the Euro crisis, there is now quite widespread consensus at least on the following: that the political institutions and rules of the Eurozone are too weak to combat the economic imbalances stimulated by financial flows from North to South; that the structural problems of the Greek, Italian and Spanish economies were ignored in the creation of EMU, and beyond, for wider political reasons; that Mrs Merkel’s insistence in 2009 that there was no joint and several liability for sovereign debt has created the flight to safety within the Eurozone; and that there has been too much wishful thinking on the part of politicians in debtor and creditor countries alike – in the South about what it means to live in a hard currency area, in the North to set out the blessings, notably in terms of a competitive exchange rate, that come from EMU and that provide compensation for the financial burdens of the transfers that are an inevitable part of a single currency area.
The Eurozone crisis is therefore about economics, politics and identity. You could say that there is an acute economic crisis, a medium term political crisis, and a long term identity crisis.
- The economic problem is partly about growth, or lack of it, partly about competitiveness in the face of big global shifts in economic power, and partly about democgraphic and welfare costs. - The political problem is that a wider union is less willing to share its burdens. There is bailout fatigue in creditor countries and austerity fatigue in debtors. - The identity problem is the call of shared sacrifice carries less sway than in the post-war period, and has not been replaced by a sufficiently compelling vision of the EU’s role in the 21st century.
Paul Krugman, who wants Europe to succeed, calls the Euro “a nightmare”. In a recent speech he contrasts it with the fall in Iceland’s Krona, the 25% fall in wages relative to the European core in one fell swoop. In optimal currency area theory, labour mobility and fiscal integration are supposed to make up for the rigidity of the interest and exchange rate structure. Krugman’s argument is that the sound fiscal policy and structural economic reform that were promised in 1999 were never going to able to do enough to make the Euro work – because of the massive capital movements after the creation of the Euro.
My own view, not an original or extraordinary claim but certainly not a unanimous one either, is that the policies of collective austerity pursued over the last two years, in creditor and debtor countries alike, have made the problems of EMU near insoluble. Far from addressing the root causes of the crisis, austerity has deepened them. We are in a balance sheet recession, with a private sector deleveraging at a rate of knots, and the contraction of government spending exacerbating sovereign debt concerns by killing off growth.
Austerity is lengthening the tunnel rather than bringing the light closer, by reducing growth and weakening the banking system, as private borrowers try to reduce leverage, collateral deteriorates and capital flees
There is a striking contrast here with the US experience. The payroll tax cut and Quantitative Easing has kept the economy ticking over, against very strong headwinds.
The Burden of Adjustment
So much for how we got here. How about where we go from here. The official story about the rescue of the Euro over the next year or two has three structural elements:
- The banking crisis addressed through a Banking Union, with supervision and resolution mechanisms.
- A fiscal union, in which support for debtors is conditional on agreement to centrally agreed terms and conditions of national budgeting.
- And a political union to match a monetary union, with closer cooperation among Eurozone members. It has to be said that this remains obscure and contested – notably in France, a country which receives remarkably little attention in discussions on the political viability of EMU, but which is key to its success. After all it was Francois Mitterrand who blocked political union in 1991, and French ire at the idea of Germans deciding their fiscal policy remains real and strong.
The ECB has bought time for this package with its recent commitment to intervene in the secondary bond market. But the justification for it was an admission that the Euro would otherwise come apart at the seams. The Governor of the ECB Mario Draghi was explicit in announcing the new bond buying package that scepticism about the durability of the Euro was creating severe distortions in government bond markets. He went as far as to say that the objective of his new policy instrument was to recreate a single currency area.
The problem ahead seems to me two fold.
First, economics. The governing policy mix is ‘austerity plus reform’, or ‘pro austerity pro reform’. But austerity has an impact now and the reform only in a matter of years; and when austerity drives up unemployment, especially youth unemployment, or drives people out of the country, or drives business to bankruptcy, there is a structural economic impact. Human capital is being destroyed by unemployment; capital formation is declining with the weakness of domestic banking. As growth weakens, so does total factor productivity – and the price is paid by all those in the middle and at the bottom of the income spectrum.
To my mind, this is a dead end. Western economies do need to follow Germany and embrace reform to address the structural economic and demographic/welfare challenges we face. Southern European economies do need to make labour markets work better, raise levels of innovation in public as well as private sectors, and fashion a social bargain that can cope with constrained tax revenues and rising needs arising from an ageing population.
But if they also embrace German approach to fiscal policy, the result is a pro-cyclical policy mix that is deadly. Something in the national income equation needs to point in the right direction – or the cure exacerbates the disease. We need to break the vicious circle of low demand and contraction of supply. So the right place to be is anti austerity/pro reform.
Second, politics. There are big challenges in creditor countries - to explain why adjustment in debtor countries needs to be subsidised, to justify transfers of sovereignty to European level. But to my mind the problems are greater in debtor countries.
Despite the bailouts, and the less well understood capital market support from creditor to debtor countries, the burden of adjustment is falling very heavily on the less well-off in debtor countries. Just look at Spanish levels of youth unemployment, now over 50 per cent.
To me, it is actually remarkable how little backlash there has been in debtor countries. But if the creditor countries want to the Euro to survive in its present form, the question is what breaks the vicious cycle of public sector cuts leading to unemployment, private sector deleveraging which freezes investment, and sovereign debt concerns which lead to capital flight. Austerity plus reform is not enough.
George Soros has provided one answer: Germany must ‘lead or leave’. I think he is right – and I want it to lead.
Germany has a remarkable consensus-based system of government, full of checks and balances. But it is capable of remarkable leaps of imagination – Erhard’s opening to Europe in the 1950s, Brandt’s Ostpolitik in the 1970s, Kohl’s reunification in the 1990s, and Schroeder’s welfare state reforms in the 200s. That is what is needed now.
Leading means addressing the core reasons for the rise in yield spreads over the last two years – and therefore addressing the economic and political gaps in the operation of the monetary union. It means more power at the centre; but also more solidarity between Euro members; and it requires addressing the growth part of the Bermuda triangle of growth, banking and sovereign debt that has trapped the Eurozone’s ship of state. It is a huge project. But it is necessary for a euro of 17 to survive.
Political Consequences
I don’t agree with David Cameron about much, but he is right on one thing: the Euro crisis is going to change the European Union in fundamental ways. If the Euro is saved, it will be because of a shift to more federal structures within the Eurozone. If it fractures, there will need to be serious redesign, in a federal direction, if what’s left of the Euro is to be saved. In either case, we will need to think about the way the European Union works.
For fifty years the EEC, and then the EU, has steered by the star of ‘ever closer union’. By any historical standard, it has been dramatically successful. The idea of a Europe whole and free has actually happened. What is more, Europe is more integrated and in many areas interdependent, than ever before. It was this interdependence, after all, that makes the internally generated shocks since 2008 so dangerous.
The political and institutional ambiguity of ever closer union yielded the idea of “two speed” Europe. The fiction was that opt outs, transitional arrangements and other legal innovations recognised different speeds of travel but not different destinations. That metaphor must now be given a decent burial. The issue is what is the alternative to a two speed vision?
One answer is to say that the future is a ‘two tier’ Europe. Joschka Fischer, former German Foreign Minister, describes a vanguard Euro group and a rearguard of the rest. David Owen, one of my predecessors as UK Foreign Secretary, argues for a top tier of countries who merge their governance arrangements into a “single government”. A second tier, including Norway and Turkey, would embrace a “restructured single market” (though note that there is no single market without a set of acquis associated with social and environmental policy). Iceland might be interested.
The Fischer/Owen plan founders on a number of points. One reason is practical: I don’t see other countries embracing this vision. A second is more substantive: deepening the divide between the Euro ins and outs, and squeezing the choice for countries between a minimalist European Economic Area and a fully integrated EU, is a recipe for decline not renewal.
The diversity of the EU’s membership, and the breadth of areas of policy cooperation, require flexibility not rigidity. If Britain pursues this two tier option, it will end up talking itself out of the EU altogether.
There is an alternative to two speed and two tier. In 1994 Wolfgang Schauble (the current German Finance Minister) and Karl Lamers, who were at the time leaders of the German CDU Bundestag caucus, produced a paper reiterating traditional German commitment to a federal state structure, but also embracing ‘elasticity and flexibility’. “Those countries which are willing and in a position to go further than others in their cooperation and integration should not be blocked by the vetoes of other Members” they wrote. In English, or at least diplomatic English, we call this “variable geometry”.
It means that the European Club has a group of founding rules – from the single market, which is decided by qualified majority voting, to foreign policy cooperation, where each nation has a veto. On that foundation, further integration is possible – on the Euro, on defence, on migration and the like.
This is what countries like Poland are pursuing at the moment. Her Foreign Minister signed the recent Future of Europe group report on foreign policy coordination, and is making himself part of the wider conversation about the future of Europe. As I will set out, this is where the UK should be.
There are two major objections to this vision. One is that the Euro is such a big exercise that its members will inevitably overrun the rest of the EU. But this falls on the critical point that important members of the Eurozone club, like Germany, will have more in common on for example single market issues with countries like Britain or Poland than with Euro members like Italy or even France. Membership of the Euro, or a Euro-zone hard core, is not the end game for all EU members. But it is not in the interest either of the Eurozone or the EU countries outside the Euro should have second class status in the EU.
The second objection is that it does not resolve the democratic deficit. That is true, but is an argument for developing more transparent political structures - whether formalising the role of national parliamentarians or directly electing the President of the Commission – rather than ditching the idea that the EU encourages coalitions of willing members to work together.
Time is now of the essence in this debate not just for Britain, but for countries like Sweden, Denmark and Poland. At the moment, the British Government’s stance has dealt us out of the game. But experience has shown that the EU is much stronger when its structures include rather than exclude Britain. For all our pragmatism, and sometimes because of it, we can add weight and value. The same is true for the other countries I mention.
At the same time, Britain’s debate about Europe is not pretty. On the pro European side, too much of the debate in Government was conducted on the basis of a negative argument – that we had sufficient defences against frightening or misguided European proposals, a kind of double negative. On the Euro-sceptic side, there is anger at the costs of the EU, but no recognition of the benefits. The focus on repatriation of powers – according to President of the Commission Barroso in an interview with me in July – has no supporters on the Continent, and so threatens further accusation of betrayal from those for whom the slipway to exit is the logical consequence of their worldview.
The Prime Minister attempted to ‘veto’ the Fiscal Pact last December on the grounds that he feared the political consequences for those not in the Euro. But the Treaty went ahead outside the EU framework, and ended up including 8 of the 10 non members of the Euro. So the veto weakened Britain and weakened Europe.
It is vital that we in Britain learn the right lesson: the rest of Europe will cut us some slack, but not if we are ambivalent about the success of the whole European enterprise. The UK Government is chronically weakened by its inability to empathise with any vision of the European project recognisable on the Continent. That cannot stop the rest of us. If we cannot make variable geometry work then we end up locking ourselves out of the EU altogether. So we need to argue for it with vigour and urgency.
Conclusion
Timothy Garton Ash has written of a ‘dysfunctional triangle’ of national politics that is enduringly strong, European policies that seem remote, and global markets that are demanding and fickle.
There is a fundamental point here. There is an argument that the modern world – the global village – renders regional associations redundant. It builds on the close interdependence of people and nations to argue for flexible networks of cooperation not bureaucratic multilateral alliances.
I take an alternative view: there is a global village, but the neighbourhood still matters. A country like Britain is stronger in the world if it is a strong player in a strong EU. Stronger in Washington, Beijing and Moscow because we are not on our own, but anchored and influential in our own region.
I also think the next decade is going to see closer regional cooperation around the world – in Africa, in Latin America, perhaps even in Asia. If your neighbour’s house is on fire, then your house is on fire, so it makes sense to work together to prevent fires in the first place.
That is a long and tortuous process. But it is noble and possible. And here is the key to success.
The last few years have seen economics and politics pulling in opposite directions. The economics calls for more international sharing of sovereignty; the politics argues for localisation. The economics calls for more labour mobility; the politics argues for the opposite. The economics calls for investment in the productive potential of the economy tomorrow; the politics is dominated by older voters for whom the prime issue is the debt we owe them for a life of work yesterday.
The result has been economics that carries on slipping; and politics that carries on sliding.
The key to the future of Europe is to align the political and economic stars. The centre-left has an important role to play in this. Out of government in the vast majority of European countries, but now led by M.Hollande, the centre-left has to think its way out of Oppositoin, and develop a governing mindset. This role provides my concluding point.
A lot of discussion of the future of Europe pits pro Europeans against sceptics, federalists against decentralisers, North against South, creditors against debtors. Very little confronts a centre-left vision of Europe against a centre-right vision. This has strengths – creatingstrong coalitions. But it also creates weaknesses – giving the impression of a political stitch up, and giving the impression that there is no choice.
There needs to be a centre-left vision for the future of Europe. In my book it would be anti austerity pro reform. It would recognise that Keynes has something to say, but also recognise that there are structural issues that need to be addressed. It means confronting some very difficult issues that divide people according to national interest – from the budget to energy and migration. It means thinking hard about what is essential European business, and what can be left to nations and regions. It means acknowledging the democratic deficit, but addressing as a matter of urgency the delivery deficit.
That is easier said than done. But it is essential.
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