Foreign Affairs CommitteeWritten evidence from Open Europe

Open Europe is an independent think tank, with offices in London and Brussels, set up to contribute positive new thinking to the debate about the future direction of the European Union and Britain’s role within it.

THE UK MUST REVISE ITS EU MEMBERSHIP TO SAVE IT

Summary

The institutional and political status quo in Europe is not an option for the UK. The UK public and political class are growing more sceptical of the European Union at exactly the same point as the Eurozone is set for more integration: the final destination points for the UK and the Eurozone are inevitably different.

Without a revision of the UK’s EU membership terms and if the EU is left to become simply an extension of the euro, Britain may be forced to leave altogether.

Based on these changed circumstances, the UK should set out a new, firm and positive vision for its place in the EU, based on the following principles:

Powers can flow back from the EU—it should not be a one-way street;

Countries must be free to integrate with each other to different degrees;

No EU interference in areas that can be better—or equally well—handled locally or nationally;

A far greater role for national parliaments.

This agenda should be pursued with a concerted and thought-through drive by the UK government aimed at:

Formalising an EU structure based on different—but equally legitimate—circles of membership;

Seeking safeguards to counterbalance the risk that a more tightly knit Eurozone could dictate terms to non-euro members;

Starting a process of devolving powers back from the EU when the political and economic circumstances present themselves.

1. To what extent should the December 2011 European Council and its outcome be seen as a watershed in the UK’s EU policy and place in the Union?

1.1 The December veto was a reflection of the multi-tier Europe inherent in the creation of the euro, not the cause of it. It was a watershed moment in as much as it could signal the start of a new political settlement in Europe in the wake of the Eurozone crisis, a process which could last for a number of years—perhaps more than a decade. Furthermore, no matter what we think of the diplomatic efforts and the preparatory work that preceded the veto,1 so far there is no evidence that the UK has lost influence in Europe as a result of it—as some warned, in very stark language, following the December Council.2 On the crucial Capital Requirements Directive, for example, the UK managed to largely achieve its objectives, despite being in a minority position at the outset.

1.2 What is clear is that the status quo is not an option. The euro crisis will inevitably force EU member states to develop a more variable approach to European cooperation. Though not of the UK’s making, the rules of EU cooperation are changing—Britain’s role in Europe must change with it. This presents opportunities as well as challenges.

Challenges

1.3 If the EU becomes a political extension of the Eurozone, then the UK may well be forced to leave the EU: The December veto did remind us that the end points for the Eurozone and the UK are now, inevitably, different if the UK remains outside the euro. The British public and political class is becoming increasingly sceptical of the EU at exactly the same point that the Eurozone is set for further integration. Therefore, if the Eurozone continues to insist on more political integration, including those EU member states that are not euro members—such as was the case with the fiscal treaty—then the UK will become increasingly uncomfortable within the EU and could well slowly move towards the exit. The question is whether this is what the UK and the rest of the EU really wants and if it is inevitable (see “Opportunities” below)?

1.4 Eurozone caucusing: A well-documented risk is that Eurozone states start to act and vote as a “caucus”—not only in areas of direct concern to the running of the Eurozone but also, for example, in single market legislation, social policy or financial services regulation.3 It is hard to envision how “Eurobonds” or other forms of shared eurozone government borrowing could work without some sort of banking resolution fund at the eurozone level to underpin the financial system or potentially even a shared finance minister, as proposed by former ECB President Jean-Claude Trichet.4 This would clearly have major implications for the UK’s financial services industry.

1.5 So far, there has been limited evidence that Eurozone caucusing is taking place, but it remains a clear risk—this is particularly true if the EU grows more protectionist in services (including financial), on which the UK is heavily dependent.5

1.6 Future changes to qualified majority voting weight in the Council of Ministers (under the Lisbon Treaty) could potentially exacerbate this risk. In 2014 or 2017 (if a country requests it), Eurozone countries, if they vote as a bloc, will for the first time have a qualified majority in the Council of Ministers, meaning that they can outvote non-euro members on issues decided by QMV.

CHANGES TO QUALIFIED MAJORITY VOTING UNDER THE LISBON TREATY

1.7 The colonisation of the EU institutions: Linked to the above is the risk of the European institutions being used to pursue policies that are designed for the specific needs and concerns of the Eurozone as opposed to the EU as a whole. There is some, albeit limited, evidence that the EU institutions are already starting to act as facilitator of a Eurozone agenda. As has been widely noted, without the specific approval of the UK, and despite it not being incorporated in the EU treaties, the fiscal treaty makes some use of the EU institutions to enforce Eurozone budget rules (the ECJ is meant to police whether the new rule on “balanced budgets” is implemented into national law, but cannot impose penalties if a signatory country breaks the rule).6 Likewise, the European Commission has tabled a proposal for a financial transaction tax, following pressure from within the Eurozone (the proposal is protected by a veto so will not be adopted at the EU-level as long as the UK objects).7

1.8 These risks are linked to the possible “fragmentation” of the single market, ie the single market gets divided between those inside the euro and those outside, which would represent a step backwards for intra-EU trade. However, the UK could have allies in seeking to prevent this. The European Commission and smaller member states want to avoid it, as it would tip the balance of power further towards the Franco-German axis.

Opportunities

1.9 A new vision and model for European integration: The Eurozone crisis marks a clear setback to the original founding principle of “ever closer union”. First, the principle has led directly to financial and political turmoil; Greece should clearly not have joined the euro, but there was so much political momentum for closer union that it signed up, which is now threatening to cause major political and economic fallout in Europe.

1.10 Second, as noted, it cannot accommodate for the different end points for the UK and euro countries. It follows that the UK now has a unique opportunity to take the initiative, stating clearly and firmly an alternative principle of European cooperation, which allows for different circles of membership of the EU, and which would be based on the following principles:

Powers can flow back from the EU—it should not be a one-way street;

Countries must be free to integrate with each other to different degrees;

No EU interference in areas better—or equally well—handled locally or nationally (the current concept of “subsidiarity” is so vague that it can mean anything, elsewhere we have instead proposed a “European localism” agenda, ie taking the principle of localism endorsed at the national level and applying it to the European level);8

A far greater role for national parliaments.

1.11 The UK government has consistently suffered from a poverty of vision for its role in Europe, which has left it without an overall strategy.9 The euro crisis, and its potential aftermath, means this must change. The alternative vision it now has the opportunity to set out needs to be positive, stressing a new, economically flexible model, growth opportunities across the globe and the need to reconcile EU membership with national democracy. David Cameron came close to spelling out such a vision last year when he said that the EU should take on “the flexibility of a network, not the rigidity of a bloc—whose institutions help by connecting and strengthening its members to thrive in a vibrant world, rather than holding them back.”10 Having a clear vision of where the UK should be in Europe—and setting out an alternative vision for European cooperation—will also help to focus diplomatic efforts and make it easier for EU partners to know what, exactly, the UK wants to achieve (and therefore easier for them to lend support or at least reach a position of compromise based on mutual interests).

1.12 Pushing for redistribution of powers: As the Eurozone will continue to need the UK’s approval to pursue further integration via the EU institutions, and as Germany and other member states have a strong incentive to keep the UK inside the EU, the UK should accompany its drive for an alternative model for European integration which includes bringing specific powers back to the UK (see below).

1.13 Reorientation of the UK economy away from the eurozone: The EU will remain an important destination for UK trade but the short and long-term economic challenges Europe faces warrant a rethinking of the UK’s economic interests. Currently, only 1.4% of UK exports go to India forecasted to grow on average by 8.1% a year up to 2050 and only 2.35% to China forecast to grow at 5.9%.11 Although trade negotiation remains an exclusive EU competence, the UK retains the power to promote UK business and exports to non-EU countries, something which the current Government has correctly made a priority. This is an important exercise for two reasons. Firstly, boosting UK trade with emerging and fast-growing economies is clearly beneficial in its own right but, secondly, the less the UK depends on the EU/eurozone for trade, the stronger Britain’s negotiating position when it comes to arguing for reform.

2. Between now and 2020, what institutional architecture and membership should the UK seek for the EU? Should the UK embrace a formalised two (or more)-tier EU and start to develop ideas for multiple forms of EU membership?

2.1 Talk of a “multi-speed Europe”—implying that all EU member states are religiously heading in the same direction—must stop. Instead, the UK should fully embrace a formalised EU structure based on different modes of membership, based on the principles set out above and the understanding that Britain will not join the euro.

2.2 The notion that such a multi-facetted EU structure would leave the UK on the side-lines is misplaced: the UK is one of EU’s “big three” economies; it is a large export market; remains a genuine global player; a big net contributor to the EU budget; is home to Europe’s financial centre and a nuclear power. The rest of the EU will listen to the UK if it comes up with a constructive agenda. In the EU debate, “influence” is a term too often used—particularly by those who favour the status quo—in a rather lazy and undefined way. Those who worry about loss of influence must give concrete examples of where this is happening and, crucially, what the UK should be influencing.

2.3 In terms of an EU institutional framework, the UK has three basic options:

Status quo;

Changing the institutional framework from within, ie seeking new membership terms;

Seeking a new institutional arrangement with Europe altogether, which most likely would involve withdrawal.

2.4 We believe the status quo is not an option, while withdrawing from the EU altogether would raise more questions than it would answer (the alternative trading arrangements with Europe, ie the European Economic Area or a free trade agreement, would also require the “approval” of EU partners and therefore raise many of the same issues as renegotiation from within). Therefore, creating a new institutional arrangement from within is the UK’s best option. Concretely, the new institutional architecture that the UK should push for could include:

2.5 The devolution of powers from EU—at least for the UK: David Cameron has labelled the current crisis “An opportunity, in Britain’s case, for powers to ebb back instead of flow away and for the European Union to focus on what really matters.”12 This is the right thinking. Substantially reforming the institutional division of labour between the UK and the EU may be necessary to reconcile public opinion to EU membership. The pursuit of returning powers to the UK and further Eurozone integration is not mutually exclusive—on the contrary.

2.6 The priorities should be areas that have an everyday impact, for example:

Devolving EU regional spending to richer member states, including the UK, which would save Britain billions and allow it to run a far more effective regional policy (no treaty change);13

The UK should exercise its “block opt-out” from around 130 EU laws in justice and home affairs, which it could do unilaterally under the Lisbon Treaty (by 2014—no treaty change);14

As noted below, there needs to be a better balance between European market access and control over vital national economic interests, for example via a veto over disproportionate financial services law (treaty change);15

At least part of the CAP should be re-nationalised (no treaty change);16

A UK long-term objective should be to devolve social and employment law (treaty change). A short-term, intermediate objective should be to minimise the impact of the working time directive (no treaty change);17

EU environmental legislation should be far less prescriptive. A compromise may involve overall targets set at the EU-level but member states free to meet them in whatever way they deem the most cost-effective (no treaty change).

2.7 Far stronger roles for national parliaments: This should include far greater scrutiny powers for MPs (for example a mandate-based system based around the Danish model, which could be achieved unilaterally) and pushing for parliaments to be given a “red card” option which would enable them to veto Commission legislation if there was a significant majority opposed (requiring Treaty change).18

2.8 European cooperation must be a two-way street: As noted above, it simply has to be possible under the Treaties for powers to flow back to member states. There are a number of ways in which this could be formalised. For example, the Lisbon Treaty already allows for so-called “enhanced cooperation”, whereby a group of member states are free to pursue a policy separately if not all 27 are able to agree. This has already happened in areas such as family law and an EU patent. However, there is no reason why this cannot also work in reverse, with a group of countries deciding to repatriate powers or EU laws, even though it may not be politically possible for all 27 countries to do so.

3 Should the UK Government support the incorporation of the “fiscal compact” Treaty into the EU Treaties? If it should, what demands and safeguards, if any, should it make its condition for doing so?

3.1 Yes, subject to safeguards or powers back. These safeguards need to be better thought-through, prepared and communicated than the UK’s demands ahead of the December summit. The safeguards could include:

(1)Formal safeguards for the non-euro group. For example, “double QMV” to give the non-euro group a veto or a non-euro red card allowing non-euro members to block a Eurozone “caucus” in the Council.

(2)A new “single market protocol”, which could commit the EU to a pro-growth, outward looking and proportionate regulatory regime while safeguarding the UK from decisions taken solely by the eurozone for all 27 member states.19

(3)UK-specific, legally watertight safeguards that will ensure that the UK is not overruled on a vital financial measure and cement London’s ability to do business and compete in global markets. Though it will be resisted by EU partners, this could include a “double lock”, acknowledging the UK’s prominence in this sector and giving the Government the right to refer any disproportionate or discriminatory laws to the European Council, where it has an effective veto over regulatory proposals.20

3.2 We have recommended that the UK focus first and foremost on financial services as it is a policy area where we can already see the potential friction that can occur between Eurozone integration and UK interests (as a fiscal union could well spill over to financial supervision and regulation)—therefore options two and/or three are our preferred ones.

22 May 2012

Annex

POTENTIAL WORDING OF THE PROTOCOLS

WORDING OF A POTENTIAL SINGLE MARKET PROTOCOL

PROTOCOL ON THE SINGLE MARKET

THE HIGH CONTRACTING PARTIES,

RECOGNISING the importance of maintaining the single market for the prosperity of the Union;

DESIRING to reduce barriers to trade in areas such as the digital economy, services, telecoms and energy by 20XX;

DESIRING to allow for a competitive flexible and responsive labour market;

HAVE AGREED upon the following provision, which shall be annexed to the Treaty on European Union and to the Treaty on the Functioning of the European Union:

Article 1

So as to ensure that competition in the internal market is not distorted, all decisions relating to the internal market are to be decided by the Council of Ministers by the ordinary legislative procedure and that all decisions relating to the operation of the euro-area are compatible with the internal market of all member states.

Article 2

No provision will be introduced unless it has been subject to a rigorous impact assessment, is matched by the cancellation of a current measure, is proportional, consistent with the principle of subsidiarity and is demonstrably related to a known risk.

Article 3

No provision relating financial services will be introduced unless it is proportional, related to and seeks to remedy a known and demonstrated risk, and does not impose maximum standards on the sector, if a member state demonstrates the need to safeguard its own industry.

Article 4

That a Code on Better Regulation will be considered before any proposal is brought forward and an assessment made as to whether measures will improve growth and competitiveness of the Union economy.

WORDING OF A POTENTIAL UK PROTOCOL

PROTOCOL ON THE FINANCIAL SERVICES INDUSTRY IN THE UNITED KINGDOM

THE HIGH CONTRACTING PARTIES,

RECOGNISING the importance of the financial services industry to the United Kingdom;

DESIRING to allow the United Kingdom to maintain control over the regulation of its financial services industry;

WHILST wishing to allow the United Kingdom to retain the ability to participate in regulations and measures;

ACKNOWLEDGING the United Kingdom’s responsibility to act responsibly and preserve the Single Market;

HAVE AGREED upon the following provision, which shall be annexed to the Treaty on European Union and to the Treaty on the Functioning of the European Union:

Article 1

Notwithstanding the provisions of the Treaties, where the United Kingdom indicates to the Council that it believes that a proposed regulation or directive or an amendment to an existing regulation or directive is or would in its judgement adversely and disproportionately affect its financial services industry it may request that the proposal is referred back to the European Commission, that additional assessments are made of the proposal and that suggested amendments are considered.

Article 2

Notwithstanding the provisions of the Treaties, where the United Kingdom indicates to the Council that it believes that an existing directive or regulation, a proposed regulation or directive or an amendment to an existing regulation or directive is or would in its judgement adversely affect its financial services industry it may request that the proposal is suspended and referred back to the Council. In that case, the ordinary legislative procedure shall be suspended and the validity of such a request shall not be called into question whether by the ECJ or in any other way.