Foreign Affairs CommitteeWritten evidence from Nucleus

Summary of Submission

The events of the December 2011 European Council meeting were not so much a “watershed” as a missed opportunity, emblematic of the long-term approach of the UK to EU-level policy.

Whilst the UK has increasingly isolated itself from key EU decisions, there are plenty of reasons to be optimistic that the UK can still play a vital, and leading role in shaping the outcome of the eurozone crisis.

The UK’s current approach to EU-level policy-making has negative consequences for both the UK and the EU itself.

It is the approach, not the policy detail, of the UK Government, that has done most to isolate it from its European allies.

An informal two-tier EU already exists. This flexibility is part of its strength.

A formalised two-tier EU—with the eurozone 17 at the heart of decision making, with the 10 euro “outs” excluded—would dramatically alter the focus of the EU, and have disastrous consequences for the UK.

The euro is a key priority of the EU, and it is extremely unlikely that it would be allowed to fail.

Before the sovereign debt crisis in Greece and the burst of asset bubbles in Ireland and Spain the euro had reportedly become the most widely held currency and the de facto second reserve currency.

The US and China have continually shown their support for the euro, both verbally and practically.

The UK Government’s outright rejection of the fiscal compact was unwise, given its effect on those outside the common currency as well as within.

The uncertainty over ratification of the fiscal compact by its signatories may present an opportunity for the UK to re-involve itself in negotiations.

About the Submitter

Nucleus is a euro-realist campaign organisation that seeks to promote a positive and pragmatic approach by the UK towards membership of the EU, other European institutions and diplomatic relations with key member states. Nucleus brings together various euro-realist voices, and provides a platform for figures from business, media, academia and politics. Nucleus is an independent, private not-for-profit organisation. We are not affiliated with, nor do we receive any funding from, any Government, political party, or European institution. Our activities are funded entirely by donations from the private sector.

Our team includes senior figures from Westminster, think-tanks, media, and business.

Recommendations for action by the Government or others which the submitter would like the Committee to consider for inclusion in its report to the House:

The Eurozone crisis has brought fresh focus on the entire EU project and reopened questions about the role of national parliaments—indeed, the role of citizens—in European policy-making. These questions are, naturally, most urgent for countries like Italy and Greece. For Britain, however, the situation provides an opportunity to promote a new understanding of what the EU does, how Parliament can influence it and how Britain can enhance her role in the process.

The Conservative Party’s position is clear: we seek a changed relationship with a reformed EU, but at present we have an important and influential role inside the Union and wish to remain full-fledged members. However, such is the mistrust of “Brussels” and everything to do with the EU today, that there is little appetite amongst Tory MPs to fully understand how the EU actually works—and how to use parliamentary power to change it. Indeed few MPs seem even to be aware of the power Parliament now yields, following enactment of the Lisbon Treaty, in influencing or even blocking EU legislation particularly if it joins forces with just nine other EU countries. If we are honest, UK MPs are generally not interested in EU details. Few visit Brussels, few speak European languages well and few bother to exploit networking opportunities in other capital cities with like-minded politicians. Consequently we do our citizens a disservice by providing inadequate oversight and influence over what the EU does.

Consequently the party is not as good at changing EU policy upstream as it should be, but excels at complaining about the same policy when it becomes law. Such a “complain-but-don’t-change” policy is clearly not in Britain’s interests considering that around 10% of all UK law determined along with 50% of all business legislation is decided in Brussels.

A new approach is now needed. If we are to fully master all the EU mechanisms at our disposal then a clear strategy must be given, which allows Government Ministers, the civil service and Parliament to contribute towards shaping, tempering or indeed rejecting proposed EU legislation emanating from Brussels.

This means, firstly, improving the current (underpowered) system of EU scrutiny; and, secondly, a cultural shift towards engagement, which will assist in projecting Britain’s national interests in EU decision-making and encouraging other member states to support us in the process.

Essentially we must understand the (EU) beast in order to better tame it and improve its “democratic deficit”. MPs must be encouraged and rewarded for developing a specialism and building influence in European capitals. We must get away from reducing every debate on EU legislation to the broken record of quibbling about our fundamental relationship with the EU. This rhetoric undermines progress made by the Conservative-led government in enhancing our influence in Brussels through UKREP, the influence of British EU officials and ad hoc alliance building with other member states. It also overshadows the critical role we play as one of the three big players in the EU. Germany and France need us. In a whole variety of areas from security to climate change we are the “lead” nation. The Lisbon Treaty also fully recognizes the case for so called “European Localism”1 the antidote to centralization. But to date there has been no voice providing a constructive plan to maximize British interests and influence with the Europe we have today, not the Europe some might want to have in the future.

If we are in it—then we must be committed to deliver on our priorities and aims. If we are committed we can lead. If we lead we project influence. This paper considers how that enhanced commitment might start.

Questions

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?

The “veto” of December last year, ought not to be considered a “watershed”, as the outcome of the European Council was emblematic of the UK’s approach to European-level politics under this Government. Rather, this should be seen as a missed opportunity for the UK to exert its influence in any meaningful sense, and a dangerous step towards self-propelled isolation on the sidelines.

Prime Minister David Cameron issued a rallying cry for a “time for boldness”,2 then meekly retreated. Despite what the UK media overwhelmingly presented, the UK Government was not alone in its reservations; but what is striking is that when it could have indeed spoken for a large number of fellow member states, and provided leadership in an obvious vacuum, the government failed to rise to the occasion.

It was this approach, especially the failure to seek out and win allies in advance and during the negotiations and the last-minute nature of the UK’s demands, rather than the substance of the UK views, which cast Britain into self-imposed exile from the negotiating table.

However, whilst the UK has increasingly isolated itself from key EU decisions, there are plenty of reasons to be optimistic that the UK can still play a vital, and leading role in shaping the outcome of the eurozone crisis. There has been (often justified) criticism among its partners that the UK government is carping and lecturing from the sidelines but these partners remain anxious for Britain to offer its wisdom and expertise—in financial services above all—in a co-operative spirit. This was true, particularly of Berlin and other capitals, in the run-up to and even during the December 2011 “summit”. Since then too, there was the single market letter, signed by David Cameron and eleven fellow European Prime Ministers. However, so far, the UK’s approach to EU-level policy-making has had and continues to have negative consequences for both the UK and the EU itself. “Annoyance” has become the oft-repeated way to describe the feelings of our EU partners towards the UK.

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?

The FAC is correct to use the term “formalised”, as a two-tier—also referred to as a multi-speed—EU already exists in many senses. The most obvious example of this is the division between the 17 members of the eurozone and the 10 non-members or “outs.” But there are others such as membership of NATO or the Schengen “passport-free” area.

Bence Nemeth, of the Defence Planning Department of the Hungarian Ministry of Defence, has argued that the Anglo-French military co-operation treaty has created a “two-tier Europe” insofar as foreign and security policy is concerned.3 Tracing the development of a two-tier structure back further, Dr Michael J Geary, (lecturer in history of European integration at Maastricht University), and Kevin A Lees, (Associate, Latham and Watkins LLP in Washington, D.C), have written:

By the 1990s, a two-tier EU was already emerging, which became an enshrined reality by the early 2000s when it became clear that Britain had not only firmly opted out of not just the single currency, but also rejected the Schengen Agreement on the removal of border controls within the EU and had scoffed at a Europe-wide foreign policy.4

This might also be applied to other countries such as Denmark, Sweden in the case of the euro—or Ireland regarding NATO.

It is our opinion, however, that a two-speed EU, based around those embracing closer fiscal union, and those who do not, would formalise a two-tier structure. This would undoubtedly have strongly negative consequences for the UK—we would likely see the 17 eurozone countries driving decision-making, while the 10 euro “outs”, of which we are one, are not even in the room, let alone at the table. This is already happening to a large extent—much to the consternation of “outs” such as Poland, which are bound to join the EZ sooner or later.

The centre of gravity of the EU has—since the onset of the eurozone crisis—moved away from the leaders of the 27 member states in the European Council towards what are now known as the EZ-17. The agreement amongst those eurozone states over ten steps to formalise how the EZ should be run, and a decision that EZ summits will take place at least twice a year separately and not necessarily concurrently with European Council meetings, based on agendas encompassing key economic and financial policies, including on growth and competitiveness, has dramatically shifted the centre of power within the EU to an organ in which the UK has no place and no voice.

For an image of what this would be like, we need only look to history, and the founding of the European Free Trade Area (EFTA) as an alternative to membership of the then EEC. The UK quickly realised that influence and opportunity for growth were limited by being outside the core EU decision-making process, and began to pursue membership. Britain would be in danger of becoming “Greater Switzerland”: bound by the rules of the EU and, indeed, the EZ but having no influence over the latter and, increasingly, over even those of the former.

What is the relationship between the new “fiscal compact” Treaty and the EU’s acquis? What impact might the conclusion of the “fiscal compact” Treaty have on other aspects of the EU and its policies, such as the EU budget, enlargement, or the Common Foreign and Security Policy?

The “fiscal compact’s” effect is to politicise the single market. Clearly, the fiscal compact draws upon and enhances previous EU policies and treaty provisions such as the Maastricht criteria, the Stability & Growth Pact and the recently adopted “Six Pack” (already in the process of being amplified). The “European Semester” hands extensive powers to Brussels to oversee and influence the budget process in member states. These powers are even more extensive in the case of Greece and other Member States subject to the “bailout/rescue” programmes, including those of the EFSF and soon-to-be ESM.

Arguably, they prefigure a fully-fledged EU federal state. The EU—including many of the current “outs”, future members and actual or potential applicants who are all treaty-bound to join—is engaged in a process of monetary integration which might soon be coupled with fiscal and political union. No matter what the immediate and short term problems of the eurozone (and its institutional architecture) are, the EZ and its single currency are so systemically important for the EU (and global) economy that it is a matter of when rather than whether the zone will sort itself out and continue its path towards becoming a global reserve currency. (More than a quarter of reserves are already in euro-denominated assets.)

Before the sovereign debt crisis in Greece and the burst of asset bubbles in Ireland and Spain the euro had reportedly become the most widely held currency and the de facto second reserve currency. It has maintained that status throughout the financial and debt crisis of 2008 and 2010 and it has also kept its value, while global powers like the US and China have verbally and practically shown their confidence in the euro.

As a result we will soon find ourselves in a world where the global economy will be dominated by two, maybe three, currencies: the US dollar, the euro and the Chinese renminbi/yuan. This would be a situation that could contribute to the re-balancing of the global economy, away from the current uni-polar and destabilising system towards a more sustainable multi-polar system.

The question is what happens to relatively declining economies like Britain’s, with a freely floating currency, when they get caught up in the headwinds of those three global reserve currencies and the enormous economies that underpin them.5

Lord Hannay of Chiswick has written:

The global financial and economic crisis which engulfed the world in 2008 would have tested the European Union severely whether or not the single currency had by that time been established. So it makes no sense to blame the euro for everything that has happened. Nor can any of the European Union’s 27 governments afford to neglect that it is in our collective interest that the Eurozone should survive and prosper and avoid a chaotic collapse which would damage all of us. The hard fact nevertheless remains that, for the foreseeable future, the European Union is going to consist of member states within the Eurozone and member states outside it; and, since it is unlikely that the errors of premature admission to the Eurozone will be repeated, that foreseeable future could be a long time indeed, so we had better get used to that and learn to live with it to our mutual benefit, minimising the differences between the two groups. In that context the British coalition government’s decision to reject the fiscal union treaty was unwise, given that the different obligations on the two groups are clearly spelled out in it. And we do all share the view that fiscal austerity, which is proving every bit as painful in this country as elsewhere in Europe, must not be regarded as an end in itself but rather as part of a concerted growth strategy.6

There remains some uncertainty over the fiscal compact. Germany has sought a delay on a vote, and cannot now say when it will ratify—possibly in June, maybe July. The new French President has clearly signalled his intention to amend or, at least, amplify the treaty; the ratification process is incomplete. A compact will be agreed though, whether in its current form or otherwise. Any delay presents an opportunity for the UK to return to the negotiating table and, this time, help shape the outcome in a more constructive manner.

However, it is also clear that the closer union of those signed up to the fiscal compact will have a growing influence on the future direction of the EU’s organs and policy-making. The budget will largely be decided within its framework, future enlargement will require new member states to meet stricter financial criteria from the very beginning, even long before entry, and, by its very nature, this “inner club” will begin to dominate all areas of EU policy and decision-making. The question then arises whether the UK should actively support and participate in this integration process or, as in the last 40 years, with exceptions such as the Single European Act, continue to “sit it out”.

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?

Nucleus firmly believes that the UK should play a positive but not uncritical role within the current—and future—EU. This requires a substantial shift from the position adopted at 8–9 December 2011 “summit”: Britain should now support the inclusion of the compact within the existing treaty framework. The compact’s provisions will provide greater stability to the EZ and that, as the Prime Minister and Chancellor constantly remind us, is in the UK’s vital interests.

However, certain safeguards—notably over parliamentary control over the budget process—must be retained. In the absence of a full fiscal and indeed political union the old adage of no taxation without representation applies to no small degree. We do not share the view that—in a multipolar, highly complex globalised world—national sovereignty is an absolute. But the British legislature and executive must retain control over the national budgetary process and influence monetary policy while we remain outside the EZ/euro. There can be no question of the European Commission holding a veto on that process. The same holds true, obviously, for the decision to go to war or engage in peace-keeping operations with partners.

29 May 2012