Wednesday, November 26, 2014

Britain’s European Destiny

LONDON –The toughest challenge in politics right now is resolving the tension between the best long-term policy and the best short-term politics. Nowhere is this tension clearer than in Britain’s debate over Europe.

Europe has disturbed and divided British politics for years. But this time is different. Now mainstream politicians from the governing party are openly making the case for Britain leaving the European Union, or at least radically changing its relationship with it – which may amount to the same thing – with the sympathy of some of our nation’s leaders and far wider support among the public.

The reason for this resurgent skepticism and hostility toward the EU is not hard to fathom. Europe is in crisis. The euro’s design flaw – an economic union motivated by politics but expressed in economics – has become manifest. Structural changes to economies that experienced a sharp fall in interest rates when they joined a Germany-dominated currency bloc now must be made quickly, in crisis, and without the luxury of devaluation.

The pain that this policy is causing has been revealed in protests across the continent and in the bitter impact on many struggling families, the young, and the elderly. The foundation of the pro-Europe case was partly the promise of ever upward prosperity. At present that promise is severely in question.

So Europe’s flagship policy is listing dangerously. To save it, I believe, requires a kind of “Grand Bargain” approach, rather than incremental steps, with Germany agreeing, effectively, to some form of mutualization of debt, while the debtor countries carry out profound structural reforms, and the ECB stands fully behind the bargain. There are some signs that this may happen. Even if it does, Europe will suffer for some time to come.

The truth is that much of the criticism leveled at Europe is justified and is shown to be justified now.

So the public’s attitude toward Europe is explicable and understandable. Add to this the fight over the EU budget. While such rows are, frankly, absolutely routine – and inevitable in Europe’s current economic circumstances, in which all countries, including Britain, will vigorously defend their interests – they nonetheless reinforce the sense of European malaise.

The short-term politics is clear: being anti-Europe is today popular. But leadership is not about conceding to short-terms politics. It is about managing short-term politics in the pursuit of the right long-term policy.

“Europe is in crisis, therefore leave” may win a majority in an opinion poll. But, in the leap to “therefore” lies a chasm of error. I believe that such a policy would be politically debilitating, economically damaging, and hugely destructive for Britain’s true long-term interests. Our country faces a real and present danger by edging toward exit. The correct policy is to engage with Europe, to make it clear that Britain intends to be a strong participant in debates about Europe’s future, to build alliances, and to shape an outcome that is consistent with the right way forward, not just for Britain but for Europe as a whole.

In fact, the rationale for Europe today is stronger, not weaker, than it was 66 years ago, when the project began. But it is different. Back then, the rationale was peace; today, it is power. Back then, it was about a continent ravaged by a war in which Germany was the aggressor and Britain the victor; today, it is about a world in which global geo-politics is undergoing its most profound change in centuries.

Power is shifting from West to East. China has a population that is three times larger than that of the EU and an economy that will eventually be the world’s largest. India has more than a billion people. Indonesia’s population is three times that of the largest European country, and a host of countries – including Russia, Brazil, Mexico, Vietnam, the Philippines, and Egypt – have more people today than any EU member state.

This is crucial, because, as technology and capital become globally mobile, a realignment of GDP and population will occur: the larger a country’s population, the bigger its economy. The United States remains extraordinarily strong, with its military easily the world’s largest and best equipped, but its status as the world’s only superpower will become untenable.

That is the big picture. The case for the EU today is that member countries, including Britain, need its heft in order to leverage power in economics, trade, defense, and foreign policy, as well as to address global challenges like climate change. The EU gives Britain a weight collectively that it lacks on its own.

It really is that simple. I admire the idealism of Europe’s early founders, but the rationale for Europe today has nothing to do with idealism. It is brutal Realpolitik. In a world in which China and India both have populations 20 times that of the United Kingdom, Britain needs the EU in order to pursue its national interest effectively. With it, we count for more; without it, we count for less.

So the real question should not be whether the EU, but what type of EU. And here there is no doubt that Europe needs fundamental, far-reaching reform. Many of these reforms – for example, that of the social model – are precisely what the UK has been arguing for. Some, it should be pointed out, are being made. Spain’s labor costs have declined substantially since the crisis began. Italy has grasped crucially important reforms in areas like pensions. Greece has cut spending by a larger amount, relative to GDP, than any country in Europe since World War II.

Other reforms – especially political reforms – will be hotly contested. The UK takes a more nation-state view of the EU; others defend a federalist concept.

Some reforms are now certain to follow from the euro crisis, like enhanced fiscal cooperation among the eurozone members and a banking union.

Thus, over the next 2-3 years, there is bound to be a vast, churning debate about Europe’s future, irrespective of what happens to the euro. If it survives, big changes will happen; if it breaks up – and I hope it does not – the consequences for Europe and its institutions will be dramatic.

This is not a one-way debate. It never is. It doesn’t take a political genius to work out that, as strong as Europe’s Franco-German motor is, it is not always sparking in synch. Europe embodies differences between north and south; large and small; and those who favor a more conservative fiscal approach and those who favor a more lax one. Differences also abound on a range of topics from defense to labor market reform. As Britain has just discovered in the EU budget debate, it can make powerful allies.

Indeed, when it comes to the future shape of Europe – economically, socially, and politically – there is not a pre-destined consensus. There is, instead, a tumult of debate, discussion, and dissension.

This is the worst conceivable moment for Britain to start talking about leaving. That would mean quitting the field just as the game starts, and marginalizing ourselves at the very moment when we should be at the center of things.

Instead, Britain should be building alliances and, more than that, originating ideas, not just responding to them. The truth about Europe’s public opinion is that when Britain argues its case about Europe in Europe, its proposals turn out to be far more popular than those advanced by many others. But when Britain makes a case against Europe, it deprives itself of the credibility to win the arguments that matter.

The essential concept of a balance between integration and the nation-state is widely shared. Most people in Europe would support an approach by the EU’s leaders that focuses on clear outcomes in specific areas, along with changes to the eurozone. This agenda would include completion of the single market to create jobs; a common defense policy in an era in which national budgets cannot meet global ambitions; energy and the environment, where the gains, financial and otherwise, of cooperation could be enormous; the fight against illegal immigration and organized crime; and art, culture, and higher education, where Europe is struggling to match the US.

An approach that asks first what we want Europe to do, and then lets us design mechanisms to do it, would draw support across the continent. Right now, when most EU institutions and member states are rightly concerned with the euro crisis, the field is wide open for the UK to seize the initiative, rather than waiting passively to consider an agenda set by others.

It is in Europe’s interest that the proposals for the single supervisory mechanism for banks, the integrated financial and fiscal framework, and the integrated economic framework are correct. But it is also in Britain’s interest. Considering what might happen next year, let alone in the next 50 years, is it not in Britain’s interest to influence this debate too?

If the strategic rationale for Europe remains strong, then it cannot be in Britain’s interest to be marginal to the debate about its future or indifferent to the outcome.

But if we British want to participate, we do so not just as Brits, but also as Europeans. That, of course, depends on Britain recognizing not just the strategic rationale for Europe, but Britain’s strategic interest in being part of it.

Here it is no longer good enough for us pro-Europeans to claim that only atavistic Little Englanders make the case for leaving, or to pretend that, outside the EU, Britain would collapse or disintegrate.

Britain could have a future outside of Europe. The question is whether it should – whether leaving would be sensible in terms of Britain’s long-term interests. Nor should we exaggerate the economic impact of leaving. I can imagine how Britain could create an economy that operates effectively in the global market. But, just as we should not exaggerate the consequences of a British exit, so those in favor of this course should not understate them.

Let us first demolish one delusion, namely that Britain could be like Norway or Switzerland. Norway has a population of around 4.9 million and a GDP of $485.8 billion. It also has a sovereign wealth fund currently valued at over $600 billion and set to rise to $1 trillion by 2020, owing to vast reserves of oil and gas. If the United Kingdom, with a GDP of $2.4 trillion, had a wealth fund of roughly $3 trillion, all of the arguments would change. But it doesn’t. And no serious case can be made that Britain could become like Switzerland, a unique case politically and economically.

That is not to say that Britain could not develop its own unique brand. But Europe accounts for 50% of British trade, and Britain’s social systems, though different in detail, still broadly similar in principle to those in Europe. Given this, those who say that Britain should have its own unique position outside of Europe should at least spell out the economic and social policies that would need to be implemented to create such a future.

Britain outside the EU would face three major disadvantages. First, it would lose its global leadership role. There should be no illusions about this. Britain’s EU membership affects how it is seen by the world in general and its allies in particular. Any US President I know would regard Britain’s exit as folly. The idea that it would then seek new relationships with the likes of China and India is fanciful. Of course, the bilateral relationship with both is strong, offering great trading opportunities. But neither country would ever subordinate its relationship with Europe to a relationship with a non-European Britain. British trade with India depends hugely on Europe negotiating the free-trade agreement – Germany currently exports more than twice what Britain does to India and China, and France (and even Italy) exports more to India.

Second, despite Britain’s close economic links to Europe, leaving the EU would exclude it from the decision-making process determining the rules of the single market. British companies know this; so do global companies that use the UK as a European base. When we in government looked closely at the risks to London as a financial center from being outside the euro, we concluded that there was no compelling case that it could damage us. But we were never in any doubt that being out of Europe altogether was a completely different matter.

Yes, special arrangements can be negotiated, but each must be negotiated individually. And, for the record, Norway is a major net contributor to the EU budget – the price of its negotiation, despite not being a member. I doubt that other European countries would allow Britain to operate like some offshore center at the edge of Europe, free from Europe’s responsibilities but participating fully in its opportunities. Any country within Europe could say no, and no would therefore be the likely answer. We should think long and hard before we put ourselves in that position.

Finally, Britain would lose the opportunity for cooperation and added strength on issues that it cares about: climate change and the environment; trade negotiations; foreign policy, where sometimes it suits us to have European and not just US support; and bilateral disputes, where, as was seen recently with Argentina, Europe’s solidarity counts. Britain would cut itself out of future developments in Europe at a time when countries around the world are seizing the opportunities offered by regional integration. From the Association of Southeast Asian Nations – now with roughly 600 million people and looking to get a single market underway – to the African Union and South America’s MERCOSUR and UNASUR, countries everywhere are coming together in regional blocs. Will Britain drift away from the one on its doorstep?

The reason this case has to be made now is integral to understanding how political decision-making works. Sometimes decisions are taken at a moment in time, expressly and obviously. But political decisions can also be taken by a process of effluxion that begins with an attitude, turns into a series of tactical steps driven by the attitude, and then results in a decision that is strategic in effect but almost imperceptible at any one moment. That is the risk now.

Let us be very clear, too, about “renegotiating the terms of membership,” the refuge of those who want to leave but want to persuade people that it really is just an adjustment of the relationship. When, in the course of the “adjustment,” the going gets very rough (as it will), they will say, “Well, it’s a pity, but now it seems that adjustment is not enough.”

If Britain focuses over the next few years not on how it can help Europe recover and prosper, but rather on how it can change its own relationship with Europe, there should be no doubt about the temper and frame of mind that our current partners will bring to that negotiation. There will be varying degrees of politeness. But they will not thank us and will not accommodate us. So Britain must not go down this path unless it is prepared to follow it all the way to the exit.

There is a lesson from history. In 1946, when Europe was debating its first tentative steps toward integration, Winston Churchill gave his famous speech calling for a United States of Europe. But it is important to note that he was passionately in favor of France and Germany coming together to found this new Europe, which he believed was the route to peace after the horrors of war. He wished the enterprise well; but he did not intend that Britain would be part of it. So it wasn’t.

But Britain spent the next two decades and more trying to join it; and when, eventually, it did, many of the rules and much of the institutional infrastructure were already set in stone. I have no doubt that if we could have foreseen the future in 1946, we would have wanted to be in Europe from the beginning.

Europe’s current turmoil will produce a new settlement probably as momentous as any since that moment 66 years ago. Britain should not make the same mistake twice. This time, whatever the challenges, we should put our shoulders to the wheel and be part of the collective effort to make Europe strong and effective once more.

Europe is a destiny that Britain will never embrace easily. But doing so is essential to remaining a world power, politically and economically. It would be a monumental error of statesmanship to turn our back on Europe and abandon a crucial position of power and influence in the twenty-first century.

This article is adapted from a speech on Europe and the United Kingdom.

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    1. CommentedCelt Darnell

      This isn't the Prime Minster who promised us a referendum on the EU Constitution (i.e. Lisbon Treaty) and then broke his word is it?
      This isn't the same Prime Minister who lied about weapons of mass destruction being in Iraq is it?
      This isn't the Prime Minister whom half the world regards as a war criminal is it?
      Who's next? Dr. Josef Goebbels?

    2. CommentedDeborah krupp

      So Europe’s flagship policy is listing dangerously. To save it, I believe, requires a kind of “Grand Bargain” approach, rather than incremental steps, with Germany agreeing, effectively, to some form of mutualization of debt, while the debtor countries carry out profound structural reforms, and the ECB stands fully behind the bargain. There are some signs that this may happen. Even if it does, Europe will suffer for some time to come.
      This paragraph is the one we helped to create by cheaper goods and labor. We can not isolate ourselves but we need to come to some type of global base where we all play fair with goods and labor. Ok, I am dreaming!...But it is a good dream!

    3. CommentedAntónio Correia

      The Maastricht Treaty was announced as a "great leap FORWARD". Since then, only "FORWARD moves" have been allowed in the Maastricht-born "European Union" - mainly the creation of the "single currency" and the birth of a Eurozone with more and more states involved, according to their will and their capability of meeting the doubtful set of "Maastricht criteria" when joining the "single" currency area. Any move which may be seen as a "backward move" has been strictly forbidden, even if nobody can take for granted that this disunited "European Union" is moving forward to something that looks like the promised land. In fact, it is increasingly clear that this road is a "road to nowhere", besides being increasingly painful for more and more member states to go ahead, under the approach which has been adopted to "keep the markets calm" and "save the Euro" - while avoiding the appropriate fiscal transfers and resorting to lending under AUSTERITY constraints. In these days, the European Union is repeatedly following the recommendation: "Keep moving FORWARD, either slowly or rapidly, either jointly or at several speeds!".

      Yes, as Paul Krugman recently said, "The Euro is a shaky construction". Besides ignoring the macroeconomic imbalances within the EU, in the "Maastricht criteria" for Eurozone membership as well as in the subsequent "stability" pacts, the Euro has been designed and confirmed – by Delors et al and followers – as a "single currency" instead of a (much more realistic) "common currency". Now, it is very clear that this was a very bad choice, namely because other components of Delors's dream are missing - such as a European budget amounting, at least, to some "3% [!] of the European GDP".

      Two decades after the Maastricht Treaty, a COMPLETELY NOVEL EU TREATY is mandatory - not a mere set of "positive" , incremental amendments -, so as to avoid a sad situation, in the near future, where the foreseen "European common home" becomes replaced by a true "European house of correction". We need to build a true European Union through a cooperative European disunion, where the Euro survives as a "common", parallel currency - INCLUDING FOR THE UNITED KINGDOM and the other nine "non-Euro states" - but no longer as the "single currency" for a fraction of the EU (currently 17 out of 27 member states)

      [ ]:

      ” – The Euro should be a COMMON currency within the future EU – including the EU27 members outside the current ‘Euro Area’ – but not necessarily the SINGLE currency.
      - In this context, the coexistence of TWO parallel currencies should be allowed in each EU member state (under certain conditions, established in a novel European Treaty), within the framework of an appropriate “Cooperative European Disunion” .
      - Besides the “Common Euro”, the complementary currency in each member state could be either a “national currency” (…) or a completely new currency, shared by that member state and some other “compatible” EU member states, taking into account both the relevant macroeconomic issues and appropriate geographic, historic and cultural issues.”

    4. CommentedKaleem Alam

      Dear TB, Britain never whole heartedly entered the European project. The media skeptics always portrayed themselves (British) different from mainland Europe rather close to Canada and US. The EU project could have been different if UK was in the project whole heartedly. And secondly if EU would have stood on its principles (idealism) it would have been different, but instead over the period it became a “Christian club”. Giving preferential treatment to Greece to become a member knowing the published books are wrong, while keeping Turkey at bay, was indeed its greatest mistake and it is paying for it today. You are right it was “Realpolitik”.

      It is in UK’s hand, it has the opportunity to give a sense of direction and exert its diplomacy and bring the warring factions diplomatic and financial situation into a united union. On the other hand it has full right to walk away; similarly the EU would have full right to take decision which may not be that friendly or neutral to UK.

      But Mr. Tony, Is it possible for Europe as union along with UK & US to forgo the pending interests of each other and to have interest-free aid (loan)? Perhaps this benevolent act may kick start the western economy, an act of generosity from usurers? If it does I am very certain the Europe would witness tremendous growth soon. I am a great admirer of EU project, it is indeed great and unique.

    5. CommentedPatrick Lietz

      I agree wholeheartedly with the arguments developed in this article.

      There is just a monumental chasm between these thoughts and the views expressed in newspapers and the British populace in general.

      Most British wish to leave, because "splendid isolation" is a reminder of the good old days, when everything was better and the economy was running more smoothly.

      I am convinced that the anti-European sentiments are only going to grow stronger and that Britain will ultimately leave the EU. My assumption is that feelings of disenfranchisement because of economic hardship and a lack of democratic participation with regards to the EU bureaucracy will leave Cameron no choice but to call for a referendum as a means to win the elections and to hold UKIP at bay.

      Such an outcome would be disastrous, particularly for Britain. But the described scenario is not as unlikely as it seems. I personally would give it a 25% chance for it to occur.

    6. CommentedAlexander Stingl

      Europe, a disturbance of the force. Indeed, this is precisely how many British politicians, lobbyists, interest groups, and a large number of the British public seem to view Europe. In Britain, unlike its Continental European counterparts, the political-business elite does not merely cater to media and voters in this regard but actually does believe in the same values, just like the American Republicans believe in the fetish of 'less government' and mean no government (oblivious to the fact that spells a special brand of either anarchy or authoritarianism) - at least. It is because of that, and the subsequent politics of obstructionism by British politicians in the European processes of governance that the actual question is not whether or not the British should decide to remain in the EU, but it is for the rest of Europe to decide that, actually, we do not need the British and that it is the British obstructionism in European affairs and not the European disturbance of British affairs that has for quite some time and is also currently keeping us from creating governance solutions for the problems of the present and the future.

    7. CommentedKim Eakin

      My goodness what a pretty load of nonsense. Typical Tony Blair I must say.

      "So Europe’s flagship policy is listing dangerously. To save it, I believe, requires a kind of “Grand Bargain” approach, rather than incremental steps, with Germany agreeing, effectively, to some form of mutualization of debt, while the debtor countries carry out profound structural reforms, and the ECB stands fully behind the bargain."

      I am not sure what dimension Tony lives in, But in the one I occupy, known as REALITY, there is effectively ZERO chance that will happen. So, the rest of the tripe laden article is pretty words. Go back to Palestine Tony, they were real impressed with your pretty words weren't they.

    8. CommentedCarol Maczinsky

      Let's face it, when Britain leaves the EU the fragmentations in British society break up: Scottish secession. Immigration. Social struggles.

    9. CommentedCarol Maczinsky

      Of course, but the precondition is an ordoliberal shift of Europe, to get all the sanctions and governance structures into place so that past abuses won't continue.

    10. CommentedProcyon Mukherjee

      There is absolutely no reason for U.K. to leave the EU, when the benefits outweigh the costs, if one computes the strategic advantages of trade alone and ‘what if’ that had to be done through painful negotiations and adjustments; there is more to be derived from the common market if there could be more alliances that foster trade rather than limiting it. Broader vision in terms of benefits for one common market is still stinted in the advocacy for lower transaction costs and is yet to move to other areas that could improve efficiency and productivity.

      The case in point however moves to the broader alignment that is consistently missing as Britain instead of leading continues to shift the problem back to the center, as if fiscal responsibility of the compact could be transferred to a central planning body which does not have any authority on fiscal matters.

      The Maastricht Treaty itself is rather loosely arranged on matters related to exit, but definitely if costs outweigh benefits, there should be a case in favor of such an eventual denouement.

      Procyon Mukherjee

        CommentedCelt Darnell

        Except only 15-18% of Britons feel any cultural or political affinity with Europe.

        "the European project of integration is not some form of mathematical equation which measures only 'costs'."

        It is for us -- and it's too expensive. We're leaving.

        Commenteddalai guevara

        'If costs outweigh benefits'

        the European project of integration is not some form of mathematical equation which measures only 'costs'. For some young democracies, this format allowed the permanent and sustainable relief from the likes of Franco, Jaruzelski, and soon the Westminster Bubble (for the Scots in 2014).

        You cannot put a value on that - it's that plain and simple.

    11. CommentedJohn Brian Shannon

      Hi Tony,

      While agreeing almost completely with your thoughts expressed here, I wonder if you will address the following points in a later post.

      1) This idea of mutualized debt is a great idea to solve the economic problems of the Eurozone, but what's in it for Germany?

      To empty the pockets of Germany (and it would take all of that and perhaps more) to prop up those nations which were failing economically both BEFORE joining the Eurozone AND afterwards, seems unfair.

      What must it seem like to German taxpayers?

      So far, Germany has paid more and received less than any of the other Eurozone partners -- not only that, some southern European hooligans burned German flags in the streets -- after German citizens had bailed out their economies, not once, but twice.

      I suggest if that scenario continues to play out, it would be in Germany's best interest to run, not walk away from that so-called deal.

      2) If there is to be a truly prosperous Europe, then we should keep in mind the quote, 'a manifold cord is not easily broken'.

      Debt mutualization should be a pan-European solution, one where all contribute to the levelization of all of Europe's economies -- as opposed to the destruction of the Germany economy in order to support the failed economic choices of other Eurozone member states.

      Pan-European debt mutualization would help to put an end to the last vestiges of feudalism in Europe and usher in an era of European common purpose and direction.

      Europe has a choice to become a strong, unified and cosmopolitan nation with a strong sense of common purpose, or to continue, half united and half divided.

      As of today, the combined nations of Europe represent something quite wonderful and unique in the world. The sum total is truly greater than the disparate parts. Look at all the Europeans have accomplished since the beginning of the industrial revolution. No other country or region can wear those shoes.

      But as great as it is today, if Europe continues to fire on only 4 out of its possible 8 cylinders, then it has hit the top of the bell curve and is enjoying a short plateau (which might last 25 years) before the long and inexorable descent, vis-à-vis the world's other nations.

      Unless soon united in common cause and direction, unless interdependent and complementary within its boundaries, Europe has seen its best days and never did fulfill its full potential.

      And not only would that be a shame in itself, it would be seen by future historians as a Europe shirking from the true greatness it was, and is, destined for.

      3) A rising tide floats all boats. It is impossible to try to raise only your own part of the lake, to float just your own boat. That should be evident.

      So then, why are the nations of Europe trying to do just that?

      Common monetary and fiscal policy and a European Fed would do much to stabilize and strengthen Europe, bring common purpose and clarity, and drive Europeans together, instead of driving them apart.

      Not that Europe should become the United States, but that it should choose self-strengthening and interdependent economic policy and regulation over the present, often internecine economics.

      Europe soon faces a profound choice, a Hydra at the plateau -- or an Orpheus at the beginning of his great calling.

      Best regards, JBS