Blog Post

British angst over Europe will continue

David Cameron’s speech on Europe was predominantly tactical. So, too, are the reactions from Berlin and Paris. But the British prime minister’s speech raises questions of broad significance for the whole of the EU. Should it be redefined as a permanently two-level edifice? And if so, how?

By: Date: January 25, 2013 Topic: Macroeconomic policy

David Cameron’s speech on Europe was predominantly tactical. So, too, are the reactions from Berlin and Paris. But the British prime minister’s speech raises questions of broad significance for the whole of the EU. Should it be redefined as a permanently two-level edifice? And if so, how?

These are not new questions. In fact they were raised two decades ago when Britain, and later Sweden, decided against joining the European Monetary Union. They were discussed later in the 1990s in the context of EU enlargement, until it became clear that eastern Europeans had no appetite for second-class citizenship. And they were put back on the agenda when it was realised that eurozone members had to integrate further, because a viable currency required more than a common central bank and a set of fiscal rules.

The EU’s response has so far been to act as if all members shared the same goal but were travelling at different speeds. So the euro is legally the currency of the whole EU, but some members benefit from “derogations” and can issue their national currency. In the same way, the prevention of excessive deficits applies in principle to all EU countries, but strong enforcement tools can only be used with eurozone members.

This unity has become a fiction. A set of rules, institutions and instruments is being built for the current and future participants in the euro. These involve a mutual assistance fund, revamped fiscal discipline rules, and a common supervision and resolution regime for banks. There are talks of a specific eurozone budget, or at least of a common “fiscal capacity”, and of financial support for reform efforts. Further steps could include joint external representation in international forums. This endeavour raises issues of political legitimacy, which will need to be solved one way or another.

So, an “EU-plus” is in the making.

But if an EU-plus is being built, why not an EU-minus, as Mr Cameron suggests? If the euro members strive to define how much integration they need to make their currency union effective and resilient, why not ask how much integration is needed to ensure the effectiveness and resilience of what Britain regards as the key reason for participating in the EU, namely the single market? If the goal is to stop there, why not strip out some EU rules or policies that are merely intended to pave the way to further steps of integration?

The question is what this could mean concretely. The PM’s speech is remarkably short of specifics. He refers to the treaty provision committing EU members to an “ever closer union”, suggesting that the UK should be freed from it. This would be of limited consequence: whoever thought that Britain was really bound by this commitment was the victim of a dangerous optical illusion.

So what could Mr Cameron hope to strip out? Labour regulations are repeatedly mentioned by British critics of the EU. But regulations on health and safety, equality in the workplace or working time are not there to pave the way for an ever closer union, rather because, together with product and environmental regulations, they are considered an integral part of the single market. So the question here is not whether to limit integration to what is needed for an effective single market. Rather, the dispute is what an effective single market must encompass. Britain’s partners have strong views in this respect and they are unlikely to concede to British demands.

Finally the UK government is concerned by EU financial services legislation. It is a very natural concern that stems from London’s status as the offshore financial centre of the eurozone. How to avoid mission creep in the operation of supervision and resolution at eurozone level and how to avoid the eurozone turning into a caucus that would command an automatic majority of financial regulation matters are real issues and both sides must agree on principles to deal with them. But again, the forming of an EU-minus union around the single market would not solve any of these problems.

Another prime candidate for reform would be the EU budget. The problem with the budget, however, is not that it is too big (it amounts to a little less than 1 per cent of EU gross domestic product) or too integrationist. It is that it is a relic of the late 20th century that does not correspond to today’s policy priorities. It is not a matter for dispute between pro-Europeans and eurosceptics, but between the advocates of change and those with a vested interest in the status quo.

So it is to be hoped that the predominance of tactics will not prevent discussion on the issues raised in Mr Cameron’s speech. But it is not certain that this will do much to alleviate British angst over Europe.

This article was first published in the Financial Times.


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