We are in a time of war, war not in Europe itself, but close enough to Europe to have led to massive outflows of refugees across borders and into Europe. I heard this described at the EPP Congress in Madrid as the “most serious crisis for the European Union since its creation”. This is not an exaggeration.
This refugee crisis is on a scale unprecedented since the Second World War and the Spanish Civil war, because this is a war, in Syria and Iraq, of a ferocity and intensity not seen since then 300,000 people have been killed in the Syrian War.
Most of these people are not coming to Europe for economic reasons, or because they are on a mission of any kind, but because they are in fear of their lives. They are seeking refuge. They are the human embodiment of the price of war.
Their plight is a human manifestation of what the voluntary European Union was created to avoid in Europe itself …war.
UNITY OF SOME KIND IN EUROPE HAS BEEN THE RULE, NOT THE EXCEPTION OVER THE PAST 2500 YEARS
If the EU is facing its most serious crisis ever, it is important that we keep a sense of historical perspective. Only thus can we realise how much is at stake.
Over the past 2500 years, Europe has tried various methods to create internal security on this continent. The idea of European political unity of some kind is not something new.
It was achieved, initially by force, in the form of the original Roman Empire. Because it was created by force, its unity also had to be maintained, from time to time, by force.
When it came to an end there was a dramatic collapse in living conditions, because Roman money, as a continent wide means of exchange, and access to silver to make it, was lost. Living standards in Britain, for example, fell dramatically in the 5th Century AD. There are lessons in this story for the 21st century.
Later, from the Middle Ages up to the Reformation, there was a form of unity in Europe when, apart from his religious role, the Pope exercised, without the use of military sanctions, a role of arbiter between European states, analogous to that of the European Court of Justice, combined with elements of that of the United Nations.
Even after the Reformation and the Thirty Years War, a form of unity in part of central Europe persisted in the continuance of the Holy Roman Empire, until, after 100 years, that was dissolved by Napoleon, who attempted to impose his own form of secular European unity by force of arms.
THE SHORT, AND BLOODY, ERA OF NATIONAL SOVEREIGNTY
When Napoleon failed at Waterloo in 1815, Europe entered the era on nation states, supposedly based on absolute national sovereignty, and the balance of power. That era ended, after a mere 150 years, in the holocaust of two world wars, the last of which was preceded by an economic crash and the collapse of democracy across the continent.
THE RETURN TO UNITY AS THE GOAL
In response to that failure, something entirely new was attempted, a union of European states held together not by military force, or even by religious sanction, but by a free and voluntary pooling of sovereignty, based on freely agreed rules. That in the European Union of today.
There is much to criticise about the EU, and I will voice some myself this morning, but we should not lose sight of the bigger picture.
The Union has attracted a stream of new member states, starting with 6, it is now has 28. Other Federal Unions and Confederations, in other parts of the world, have not had that experience.
It has created a single market of 500 million consumers, although some barriers still remain.
ANOTHER ECONOMIC CRISIS…BUT NO RETURN TO PROTECTIONISM, DICTATORSHIP OR WAR AS IN THE 1930’S
The EU has come through an economic collapse in Europe, similar to the one that occurred in the 1930’s, but , in contrast to the 1930’s democracy has been preserved in Europe, protectionism and competitive devaluation have been avoided, and, most importantly, European states are still at peace with one another.
AN UNPRECEDENTED, AND UNEXPECTED, REFUGEE CRISIS
Now, just as it has begun to put in place a banking union to underpin its currency, and fiscal rules to ensure that this generation does not rob the next by excess borrowing, it now faces a challenge for which it seems quite unprepared, a flood of refugees fleeing war in their own countries– Syria, Iraq, Afghanistan and Eritrea— and impossible living conditions in the countries in which they originally sought refuge—-Lebanon, Jordan and Turkey—-who have so many refugees they cannot cope with them. 70% of Turks say the 20 million Syrians in their midst should go home
In an ideal world, one would say that this refugee crisis is a global one and all the countries of the world should come together to receive them on a shared basis. But this is not going to happen. They are heading for Europe.
Controls on the movement of people across Europe’s external borders, notably between Greece and Turkey, have broken down. As a result of that failure, barriers are now being re erected between countries within the EU, undermining one of the freedoms on which the EU is based, freedom of movement of people.
If this persists, one could see it leading to interference with the freedom to move goods across Europe too. This is an existential challenge.
But a pooling of sovereignty can only work if states are able and willing to exercise the sovereign powers they have, one of which is controlling their portion of the EU,’s external border. So the next step will be a major EU border force, and EU reception centres where those who qualify as refugees can be separated from those who do not and the latter sent home.
Those who are refugees will need to be shared among all 28 EU states, which will not be easy as living standards vary within the EU and refugees themselves will all want to go to the more prosperous states. That said, I believe a majority of them will want to go home to their own countries if peace can be restored.
TOO SLOW APPLYING THE LESSONS OF THE FINANCIAL CRISIS
Meanwhile the EU is moving too slowly in applying the lessons of the financial crisis. Most money in use is not coins or notes, but bank credit of one kind or another. So a currency union without a banking union never made sense.
We have some elements of a banking union now, a single supervisor for most European Bank and a common EU rule for winding up banks. But these have not been tested yet. That test will come when the EU has to close down a bank in a member state, imposing losses on shareholders bond holders and even customers. Will the EU authorities have the political capital to do that?
It will be particularly hard to do because Germany has resisted the idea of a common euro are wide deposit insurance system which would spread the losses. The burden will fall solely on the country in which the bank is being closed down. That is not politically viable….an EU institution closing down a bank, which it had supervised, in a state and that state alone bearing the depositor insurance costs.
There also may be problems with the Fiscal Rules designed to reduce the debt levels of EU states. These debts are just about bearable now, but if interest rates returned to normal levels, what would happen. For example, the proposed Italian budget for next year, which should be reducing the deficit, is actually increasing it. That may make sense in the context of Italian politics, but it undermines the rules, in the same way that France and Germany undermined the rules 10 years ago.
Europe does not need to create a complete political or economic union to solve these problems. That is politically impossible. But the European Union does needs to come to a shared pragmatic understanding on all of these problems, and think out a long term plan that serves the interests of a very diverse group of countries in a fair and speedy way.
MEANWHILE THE EU MUST DEAL WITH THE UK PROBLEM
At a time when the EU is grappling with its own existential issues, it has the deal with one member state which wants to reconsider whether it should be in the EU at all or not. I will not say much about the details of the UK case, and will just make a few brief points.
At a time when Polish and Baltic state populations are being asked to accept refugees to relieve the pressure on Italy, Greece and Germany, it will not be easy to persuade them that their citizens should have less in work social benefits in Britain, when Britain is exempt from taking any refugees
If Britain wants to be exempt from paying any of the costs of future EU banking failures, it is hard to grant it a veto over rules that might be designed to prevent such failures.
On the other hand, British demands for a speedy conclusion of the TTIP agreement with the US, and for a completion of, the long delayed, EU single Digital and Services markets, are a big opportunity for Europe. They should be grasped with both hands.
Residents of Northern Ireland will have a vote sometime next year on one of the most important issues to affect these islands, and indeed all the nations of Europe, namely whether the United Kingdom is to remain a member of the European Union, or leave.
A BIG DECISION…BUT TORY PARTY REMAINS NEUTRAL
As I speak tonight, the UK government has yet even to put in writing what it wants changed in the EU.
Yet, regardless of what it seeks or what it gets, the Conservative party, which forms the government, has surprisingly said it will remain neutral in the referendum anyway. In other word, it is asking individual voters to study, and decide upon, an issue in which their party itself is unable, or unwilling to make a decision.
This is an example of the weakening ability of political parties in western democracies generally to lead, inform and mobilise public opinion. Rather than lead opinion, political parties react to it, a trend that is dangerous for the future.
A TIGHT TIMETABLE, AN EXTREMELY COMPLEX ISSUE…AND A VERY SHORT CAMPAIGN
I expect the UK will make a presentation of its requests at the October EU Summit, and aim to wrap up an agreement at the December Summit.
Only after December, will any positive case for continuing UK membership of the EU be made to the public, in what, given the inevitable complexities, hypotheses, and uncertainties to be explored and explained, will be a very short referendum campaign. Examples in Ireland show how unpredictable referenda can be, and how difficult it can be to adequately inform voters on issues which are, of their very nature, complex, hypothetical, contingent on the reaction of others, and uncertain.
And, even if the UK referendum decision is to remain in, will that satisfy today’s Euro sceptics?
Will the UK always remain, psychologically, on the sidelines of the EU?
After all, no other country in the EU has so far demanded new terms for itself, as a price for staying in the EU. Could the EU exist for long if every EU state adopted the UK approach?
WHY THE EU IS WORTH PRESERVING
The European Union has evolved and developed over the past 70 years.
But its goal from the outset has been, and remains, to cultivate so much mutual dependence between European states, that they could never go to war with one another again, as they did with such disastrous consequence in 1914-18 and 1939-45.
More than any other part of this island, Ulster has suffered when European peace was shattered ….the losses on the Somme, and the repeated bombing of Belfast come to mind.
A decision by the electors of the UK to withdraw from the EU would be a huge blow to the EU. That is where the debate should start…what sort of Europe to we want? What sort of Europe will be feel safe in?
A precedent has already been set by the decision of the UK to demand new terms for itself, under the shadow of an in/out referendum.
Let us look down the road and see where it is leading, and if that is really somewhere we want to go.
UK WITHDRAWAL THREAT HAS ALREADY DAMAGED THE EU
The precedent of a major European country, an EU member of 40 years standing which already decided by referendum in 1975 to stay in the EU, deciding for a second time to seek special terms for itself, with a threat of withdrawal is damaging already.
But what of the further precedent that may yet be set.
That precedent would be of a major country withdrawing altogether from the European Union, because its voters felt the special terms it got, were not good enough?
The consequences of that for the cohesion of the EU itself are unknowable, but probably would be quite dramatic. It would most certainly weaken the EU.
Some may shrug their shoulders at that, but should they?
The UK precedent could be immediately seized upon by Madame le Pen in France who would seek a renegotiation of the French terms of membership.
Geert Wilders in the Netherlands would not be far behind in saying that anything the UK can do, the Netherlands can do too.
EU HELPS EUROPE DEFEND ITS INTERESTS IN THE WORLD
The EU, as a force that can protect and unify European interests in trade, intellectual property, environmental standards, that has already been weakened, by the uncertainty around a the UK renegotiation and a referendum, would be weakened further.
All over the world, those who do business with the EU would begin to wonder….is the EU going to break up? Are others going to follow the UK out the door?
In a world in which Europe is becoming a smaller force, economically, politically and in population, a weakened EU would probably not be in the interests of Europeans, whether they live in Belfast or Bratislava, in Downpatrick or in Dubrovnik.
A disunited Europe, of 28 or more separate countries, pursuing their own agendas would become a playground for outsiders seeking advantage and playing one off against the other.
Vladimir Putin would be happy.
So would Europe’s small number of potentially monopolistic energy suppliers, who could then more easily play one European customer off against the other.
Europe’s borders could again become barriers behind which criminals could hide.
So I would ask you, you who will be deciding this question…to consider not only how the decision will affect yourselves, or affect your local or national community, but also to consider how it will affect Europe as a whole, and its place in the world.
EU EXIT WOULD CHANGE THE UK ITSELF AND WEAKEN ITS ECONOMY
Northern Ireland voters also ought to take some account of the effect of a UK exit in your more immediate neighbourhood.
A study by the Centre for European Reform said that UK EU membership boosted UK goods exports by 55% over what they would be if the UK was outside the EU.
That is a boost of £130 billion, which is three times as much as total UK exports to China.
The UK’s National Institute for Economic Research estimated that leaving the EU would subtract 2.25% from the UK GDP.
The losses would not be evenly spread. Regions in the UK which rely on services exports would lose least because the EU does not impose tariffs on services imports. But regions where manufacturing is important would be hit the hardest.
The Centre for European Reform in London has calculated that, if the UK leaves the EU and if existing EU tariffs were then to be imposed on UK exports, the North East of England, with its big manufacturing base, would lose the most, the equivalent of 0.4% of its private sector output each year.
Northern Ireland and the East Midlands would lose 0.35% per tear of their private sector output, but London, with its big tariff free service sector, would lose only 0.1% . Northern Ireland would lose almost twice as much as Wales would.
Some might argue that this will not happen because they assume that, even if the UK left the EU, it would be able to keep full free access to the EU market. Maybe, maybe not.
UK COULD ONLY KEEP ACCESS TO EU MARKETS IF IT MEETS EU TERMS
Switzerland has indeed negotiated tariff and duty free access to the EU market for its exports, but, in return it has had to accept immigration from the EU, contribute to EU funds for poorer regions, and has had to accept EU standards, in which it has no say.
Given that these are precisely the sorts of thing that the UK objects too now, as a member of the EU, it will be difficult for UK to agree to pay that price for access to the EU Single market as a non member.
Remember the negotiation of the UK’s exit terms, after a referendum decision, will be a time limited negotiation where others can play brinkmanship too.
And bear in mind that an EU/UK trade negotiation will not be a negotiation of equals.
The EU sends only 7% of its exports to the UK, whereas the UK sends 45% of its exports to the EU. One must ask if other EU states would want to create a precedent of giving terms to the UK that it has refused to Norway and Switzerland, as non member.
If the UK exit terms are too generous, the precedent might encourage other states to leave, which of course they too are perfectly entitled to do.
If the UK leaves the EU, the world will not stand still.
At the moment, UK exporters benefit from any present or future trade and investment deal made by the EU, for example the mega trade and investment deal in prospect with the US. UK negotiators have an input to the terms. Outside the EU, they would have no say.
As a Union of 500 million, relatively prosperous, consumers, the EU has clout in such negotiations.
Without the UK, the EU would have less clout.
But the UK on its own will have even less clout than a diminished EU. Both of us would lose. And our competitors in Asia, the Americas, and elsewhere will gain.
UK EXIT WOULD WEAKEN PUSH TO COMPLETE SINGLE MARKET
On the positive side, UK membership is vital if the EU is to complete its Single Market, particularly in services, especially digital services. Without the UK in the EU, protectionist forces would hold greater sway, and that would be a loss for UK exporters to Europe.
The organisation “British Influence” has estimated that completing the EU Single Market could add 1.8% to the overall EU GDP, but it has gone on to estimate that completing the EU Single Market it could add 7% to the UK GDP (assuming the UK is still in the EU)!
Without the UK, support for moving towards a full EU Single Market will be much less.
Ironically one of the reported UK renegotiating goals, a veto on EU laws for a minority of national Parliaments, would most likely be used by others to block the completion of the Single Market, from which the UK has so much to gain.
Referring to the North East of England, The CER noted that “ironically regions that have most to lose from leaving the EU tend to be the most Euro sceptic”.
So it may be impossible, in a short referendum campaign, to convey all of these complex facts and risks to the electorate, given that there is so little knowledge of the value of the EU market, and the message will have to be conveyed through the medium of a press, much of which is viscerally anti Europe anyway.
IMPACT OF BREXIT ON NORTHERN IRELAND WORSE THAN ON MOST OTHER PARTS OF UK
Coming closer to home, what might be the impact on Northern Ireland itself of the UK leaving the EU, and presumably taking Northern Ireland with it?
Unless the UK can negotiate a special trade deal, like Switzerland and Norway have, and I have already indicated the difficulties with that, customs posts would have to be erected along the border again.
That would disrupt lives, and it would disrupt business.
Many firms process raw materials originating in the Republic here, and vice versa. All that would have to be subject to customs inspection, a costly and intrusive process.
If the UK wanted to restrict EU immigration from across the land border, it would have to institute passport controls within Ireland…..something that never happened in history before.
Smuggling would undergo a revival, with endless profit making opportunities would be opened up for subversives and organised criminals.
I have attended a number of debates in London of the possibility of Brexit, and have been surprised by how little notice is taken of the implications for Northern Ireland. Similarly little notice seems to be given to the effect of the UK leaving the EU on Scotland, or to the consequent effect on the Union itself, a matter of concern to a significant section of the population in Northern Ireland.
Given the difficulties that exist, as things stand, in applying UK budget limits to Northern Ireland, one must also wonder where funds will be found to replace the EU Single Farm Payment for Northern Ireland farmers, the EU rural development funds coming here, as well as the EU Regional Fund monies.
The report prepared for the Northern Ireland Assembly by the Open University Business School, which I commend, says that between 2007 and 2013, a total of £2.42billion in EU funds came to Northern Ireland, of which £1.2billion was Single Farm Payments.
Will the UK be able or willing to replace that, especially if it still has to contribute to the EU budget as a non member, to get access to the EU Single Market?
I have focussed, so far, on the problems that might face the UK if it leaves.
REPUBLIC WOULD SUFFER TOO
But my former constituents in Meath would not be unaffected.
We would lose a friend in Europe if the UK leaves.
We would lose the common EU framework for the whole island that has contributed so much to peace, and is specifically acknowledged in the Belfast Agreement.
Our tourist industry would suffer if barriers have to be placed on the border again.
But, we, south of the border, will have little say in the decision. You will.
As I said at the outset, I hope you will think of what will be best for yourselves, but also what will be good for Europe as a whole, for the rest of the UK, and, I hope, for the rest of this small island on which we all live.
The Conservative plan, as set out in David Cameron’s speech, is to try to renegotiate the terms of UK membership in the EU, if it wins the next general Election, and put the terms to a referendum.
The risk is that Labour may feel under pressure to adopt a similar policy, so as to prevent a leakage of its votes to UKIP.
It is very unlikely that the results of any such renegotiation, whether conducted by Labour or the Conservatives, will satisfy British popular expectations. And if that is the case, the UK electorate may choose in a referendum to leave the EU.
This renegotiation is likely to be a disappointment because the expectations in Britain are vague and unrealistic. David Cameron did not offer any clear negotiating objectives in his speech.
SINGLE MARKET IS NOT A FREESTANDING ENTITY
He seemed to think that the EU Single Market was some sort of freestanding entity separate from common EU policies on regulation, working time, transport, and education. But for other EU nations, it was in return for policies on these things, that they opened their markets to the rest of the EU, in the first place. The Single Market is a delicate political construct that cannot be easily unpicked.
And while accepting that the EU needed to resolve the euro crisis, he wanted “contrition” to be expressed by those who created the euro, notwithstanding that Economic and Monetary Union was on the EU agenda before a previous Conservative Prime Minister negotiated the UK’s entry terms!
He also wanted the goal of “ever closer union” dropped from the EU Treaties, even though that too was part of the Treaty before the UK joined.
He is 40 years late with these ideas
RENEGOTIATION WILL BE WITH 26 OTHER GOVERNMENTS
The UK renegotiation will not be with bureaucrats in “Brussels”. It will be with the Governments of every one of the other twenty-six states in the EU. Britain may want to pay less, but other countries may want it to pay more. Many other EU countries see the very things British negotiators would most like to be rid of – like the working time directive – as part of what they gained, in return for their opening up to the Single Market in the first place.
Concessions on these issues will, in particular, be anathema to left leaning Governments, of which there are an increasing number.
Exempting Britain from the Common Agricultural Policy (CAP), another possible British demand, will get nowhere.
Repatriating regional policy will not go down well with countries who have recently joined the EU, and whose incomes per head are much lower than those in Britain
ALL EU RULES HAVE BEEN MADE WITH BRITISH INVOLVEMENT
British popular opinion has been constantly led to believe that the EU is a foreign entity, with which Britain has a sort of treaty, and not as what it actually is – a Union of which the UK has a participating member with a vote on every decision.
The role of British MEPs, British ministers, and a British Commissioner in EU decisions has been systematically ignored in the UK media and all decisions inaccurately presented as emanating from an “unelected” bureaucracy.
If possible results of a renegotiation are hyped up in the next British General election, and lots of “red lines” promised, the actual results of the renegotiation will prove to be paltry by comparison. That could lead to UK exit.
IMPACT ON NORTHERN IRELAND PEACE
I am particularly worried about the effect of Britain leaving the EU on the fragile situation in Northern Ireland.
Northern Ireland, and its reversible peace process, is being ignored in the debate taking place in Britain. It is also being ignored in the rest of Europe, where the impatience with the British is palpable.
Obviously if the UK leaves the EU, it will negotiate a new relationship with the EU.
But what sort of relationship will it be?
One of the big drivers of anti-EU sentiment in Britain is immigration of EU citizens from central and eastern European countries, like Romania, Bulgaria, and the Baltics. Gordon Brown famously encountered this sentiment during the last British General Election.
IMMIGRATION CONTROLS AT NEWRY?
If the UK leaves the EU, it would be free to restrict immigration from some EU countries. But, as a continuing member of the EU, the Republic of Ireland could not do so. So if the UK wanted to prevent these EU citizens entering the UK through the Republic, it would have to introduce passport controls at Newry, Aughnacloy, Strabane and on all other roads by which such EU immigrants could cross the border from the Republic into the UK.
CUSTOMS POSTS AT STRABANE?
If the UK is outside the EU, tariffs would have to be collected on UK exports entering the Republic and vice versa. Average EU tariffs are quite low, but some tariffs, on things like dairy products and clothing, are quite high. Customs posts would have to be placed on all roads leading across the border to ensure collection of these tariffs. Smuggling, with all its potential as a funding source for other forms of illegality, would become very profitable again.
But the human and political cost in border counties would be the worst aspect of it. Nationalist communities would again feel cut off from the Republic by the inconvenience of passport controls, and of customs posts
Since Northern Ireland came into being as a separate entity in 1920, the large nationalist minority there has retained a very strong sense of identification with the rest of the island.
The possible reintroduction of customs posts, and of immigration controls, would undermine the efforts that have been made , in the Good Friday Agreement, to reduce the divisions between North and South and between Ireland and the UK.
Given that UK Prime Ministers have had to devote so much time to the so called “Irish Question” for the last 150 years, it is amazing that the current UK debate on EU membership is being conducted as if Ireland did not exist, or the UK had no interest in it.
Some might say that fears of the UK having customs posts and passport controls on the Irish border are exaggerated because they think the UK outside the EU could easily negotiate a free trade and free movement deal with the EU
UK CANNOT BE BOTH IN, AND OUT, OF THE EU AT THE SAME TIME
There is a big snag here.
To enjoy continued free access to EU markets for its goods and services, Britain would have to continue to apply EU rules, as now, but WITHOUT having had any say at all in them – something the UK does have as an EU member.
David Cameron had a point yesterday when he argued that the nature of the EU is changing in response to the euro crisis, and as a non euro member the UK’s relationship with the EU will change anyway.
But there was absolutely no need for him to promise an in or out referendum, which places him in a straight jacket.
I have attended a number of conferences in the past few weeks where the future of the European Union has been discussed. Where previously the EU’s continuance was complacently taken for granted, now there is much more uncertainty, but also much more interest.
The European Union has been a remarkably successful institution building project. It is the first ever voluntary coming together of sovereign states, pooling some of their sovereignty, so that they could do more together, than they could separately.
Almost every other political unification or state building in history has involved the use of force, including the creation of the UK and the maintenance of the USA. The EU came together peacefully and voluntarily.
Some might argue that the EU was necessary only in order to cement a post war reconciliation of Germany and France and that, now that that is achieved, it has done its job and needs no further development.
This is wrong for two reasons.
WHY THE EU IS STILL AN ASSET
1 . AN ASSURANCE OF MUTUAL SECURITY,
Firstly, the fact that there is a queue of states still lining up to join the EU shows that the EU still provides a necessary political and economic umbrella under which reconciliation and mutual security between states can beassured in the twenty first century.
This was why the Baltic states, Poland and other central European states joined, and it is the reason several Balkan states, and even Georgia and Ukraine might like to do so. It is also the reason why Greece, much to the surprise of many, has favoured Turkish membership. While the United States of America is remarkably successful in many ways, there is no queue of other American states lining up to join. Even Puerto Rico has not done so after more than 100 years of Washington rule
2. A WAY TO MANAGE GLOBALISATION DEMOCRATICALLY
Secondly, the EU is the most advanced effort in the world providing a measure of democratic supervision into globalisation. Unlike other efforts to supervise globalisation, like the United Nations and the World Trade Organisation, the EU has a directly elected Parliament which co legislates for the EU alongside the 27 Governments, who often decide issues by majority. Other international organisations operate on a purely intergovernmental basis, which means that there has to be unanimity to get a decision, and democratic involvement only arises when a deal already negotiated in private, has to be ratified in national parliamentwithout possibility of further negotiation or amendment.
As a result, other organisations, like and the WTO and the UN, can do much less, and have to do much more of what they do behind closed doors, than is the case with the EU.
My view is that the EU provides a unique model for democratic rule making, at supra national level, something which will become more, not less, necessary as we proceed into the 21st century.
Indeed the failure of the world to deal with climate change is a good example of the weaknesses of present intergovernmental models of global governance. If the different regions of the world had Unions, like the EU, which could negotiate seriously, and with genuine political legitimacy, as the EU can, the failures of Copenhagen and other climate change summits would not have happened.
If the EU were to break up, either because of the collapse of the euro or because a major country like the UK feels it has to exercise its right to leave the EU, and either event were to set off a breakdown of the trust that keeps the EU itself together, we would have lost a unique instrument for security building in Europe, and for problem solving in the wider world.
I would now like to analyse those two potentially existential threats to the EU, the euro crisis, and the UKs possible desire to leave.
Of these, a break upthe euro is undoubtedlyby far themore serious existential threat to the EU, because the scale of the economic losses is potentially much greater, and themeans of controllingthose losses, are much less.
THE EURO CRISIS IS NOT SOLVED
The euro crisis has become slightly less acute in recent weeks. The announcement of a new bond buying policy by the European Central Bank has calmed the markets. But there is no doubt that the markets will test the ECB’s will power at some stage.
Meanwhile the link between the solvency of European banks and the solvency of European states has not been removed.
A default by any EU state would wreck the banks of that state, because each state’s banks tend to be big purchasers of the bonds of that state.
Similarly a potential collapse of a bank in a state would force that state to inject capital into banks, if it did not want a run on banks generally to take place, and contagion to other countries. Theconfidence loss caused by a major bank getting into difficulty could lead to a dramatic collapse in state revenues, leaving it with a much increased budget deficit, at the very time it was also having to find the money to recapitalize the bank.
FOUR THINGS THAT MUST BE DONE TO SOLVE IT
If these problems are to be resolved, four things will have to happen, more or less at the same time.
1. Greek Government debt will have to be forgiven.
2. The ESM will have to be seen to be big enough to stand behind Spain and other countries that might get into difficulty, on a contingency basis,
3. The new mechanisms to supervise, and if necessary rationalize, Europe’s banks will have to be put in place.
4. The already agreed reforms to reduce deficits, and to promote growth by opening up the job and service markets to competition will have to be demonstrated to be being fully implemented, in letter and spirit, to show creditors that, if one forgives debt or creates enlarged the ESM, one is not throwing good money after bad.
At the moment, the Greek debt issue is not being tackled, and seems to have been postponed until after the German election in September. The delay may not be the worst thing in the world, if it allows time for Greek reforms to begin to establish credibility. It also allows time to educate public opinion in creditor countries like Germany, and in countries sitting complacently on the sidelines, of the true consequences for themselves of a euro break up. Greece also need immediate help to finance itself to the end of 2013, and that bridging finance cannot await elections in Germany or anywhere else.
The EU has already enacted a raft of legislation, including the Fiscal Compact Treaty, to ensure that countries reduce their deficits, and liberalise their labour and service markets. . One of the reasons growth potential has been low in Greece, Italy, and Spain is lack of competition or flexibility in key sectors
But Germany is not yet satisfied. It wants to have an EU Commissioner with the power to veto state budgets, and enforceable contracts on reforms between states and the EU.But not enough attention is being paid to the fact that Germany, France and other core countries could also be doing a lot more themselves, to open up their own digital, financial, energy, retail and professional service markets. While Germany has set a good example in labour market and pension reform, there are other reforms it could initiate, that would help other EU countries to sell more goods and services into the German market, and thereby trade their way out of their problems.
There is understandable political resistance in Germany to any further debt forgiveness for Greece. But debt forgiveness within the euro is one thing. Greek exit from the euro is an entirely different matter. It would be far more dangerous, and that needs to be explained to German public opinion.
WHAT WOULD HAPPEN IF THE EURO ZONE BROKE UP?
Even a disorderly default by a country within the euro, no matter how severe its consequences for its own people and for its creditors, would have far less severe consequences for the euro, and for the EU itself, than an exit of a country from the euro would have.
I have heard a view from some Northern Europeans that an orderly exit of Greece from the euro could be contemplated, if it was accompanied by building up a huge fund, much bigger than the existing ESM, to stand behind all the other euro area states, so as to prevent a Greek exit leading to a loss of confidence in the financial position of the rest of the euro zone.
I believe this view, that Greek exit from the euro can be managed, is profoundly mistaken.
The whole edifice of the EU rests on law. The EU has no police force to enforce its will. It relies on member states freely respecting the interpretation of EU law by the European Court of Justice, and implementing the Court’s decision, however unpleasant that may be. The exit of a country from the euro is, quite simply, a breach of their Treaty obligations, and treaty obligations have the force of law.
The euro was established on the basis that it was irreversible. A Greek exit, particularly if it was condoned or encouraged by other members, would say loudly that the euro is not irreversible.
That would lead to constant speculation in the markets as to who would be next. And as speculation increased, so too would the size of the funds or guarantees needed to check it, increase. That in turn would then lead heightened risk that some of creditor countries, who would have to provide these funds and guarantees, might decide that they themselves should exit the euro, and re-establish their own currencies. That would be the end of the euro.
Breakups of currency unions have happened before, in Austro Hungary after the First World War, and in Eastern Europe in the 1990s when the rouble zone broke up. As described in a recent article by Anders Aslund of the Peterson Institute of International Economics, the consequences of this were disastrous.
A SCENARIO THAT MIGHT LEAD TO THE END OF THE EU ITSELF
New currencies would have to be established. The relative value of these currencies would be unknown and unknowable. Some would lose value very quickly and others would shoot up in value.
Exports would become dramatically uncompetitive in some cases, and in others they would becomeso cheap that there would beaccusations of dumping, currency manipulation, and calls forimmediate reintroduction ofimport duties to level the playing field. Such duties, if imposed, wouldend the Single Market. And that would be tantamount to the break up of the European Union itself. Open markets, the assumption on which Ireland built it entire economy over the last 50 years, would be gone.
In some countries the banking system would break down, and people would have no access to credit for even the most basic transactions.
In others, people would cease to trust the value of their own money, and money, after all, is based on a promise and if people can no longer trust the states standing behind the promise that underlies their money, the basis for money itself is gone.
This is not fiction. It is what happened when the rouble zone broke up in the 1990s and explains why incomes fell by 50% in the former rouble zone countries. And the exporter nations within the rouble zone, like the Russian Federation, suffered just as much hardship as the importer nations, like Latvia and Estonia.
The political stresses that this scenario for the 500 million people of the EU, and their Governments, would be such that trust between European nations would easily break down completely.
We see signs of that happening already, but it is being held in check by the hope that problems can still be resolved on a collective basis. A break up of the euro would show that that was impossible to resolve matters on a collective basis, and it would then be a case of every nation for itself, with particularly severe consequences for smaller countries, like Ireland.
…………AND MEANWHILE IN THE UNITED KINGDOM
As if Europe did not have enough problems, one important EU country, the United Kingdom of Great Britain and Northern Ireland, is preparing to renegotiate the terms of its own membership of the EU, and hold a referendum on the outcome, which would potentially decide whether the UK would stay in the EU or leave.
The first thing to say is that the UK is entirely free to do this. Unlike other Unions, like the United States or the United Kingdom itself, the European Union is a Union which states are free to leave, so long as they fulfil their normal obligations under international law, which arise when any country withdraws from any international treaty.
The UK has been an uneasy member of the EU from the outset. While Churchill envisaged a United States of Europe, he did not envisage the UK, which still had a global Empire at the time, being part of it. The UK did not attend the 1955 conference in Messina which led to the Treaty of Rome. When it eventually joined the Common Market, a decision endorsed by a referendum, the idea was sold to the electorate as an economic arrangement, whereas even the most cursory reading of the Treaty of Rome would have shown it to be much more than that.
A THREAT TO VETO THE EU BUDGET
The United Kingdom is now threatening to veto the entire EU budget, something it is legally entitled to do, unless there is an absolute freeze on the size of the budget. The difficulty with this stance is not legal, it is political.
The EU Single market, which guarantees free movement of people, goods and services, was created as a political deal.
Weaker economies opened up their markets to stronger ones, and removed protection from local businesses, on the basis of a promise that they would qualify for structural funds to modernise their economies. These funds are what the EU budget provides. (Some of the EU budget also goes on agriculture, but that has fallen from almost 80% of the total originally, to only 30% today.)
The political difficulty with the UK stance is that of fairness.
In the past, when countries like Ireland, Spain, Greece, Portugal, and even the UK itself, joined the EU, we all qualified for very substantial EU structural funds, in the form of aid for agricultural modernisation, general infrastructure, training, communications etc.
Now, when the EU has taken in 12 central European countries who are almost all relatively far poorer by comparison with the rest of the EU, than we were when wejoined, these 12 are to be told, if the freeze the UKwants is to go into effect, that they are not to get even a fraction of the help Ireland, Spain, regions of the UK and others qualified for as of right after we joined. This is causing resentment.
I heard an Estonian Minister complain recently that, under the existing EU budget which is already an unfair compromise, his farmers have to compete in the same EU market with west European farmers who are getting three times the subsidies. Unless there are to be drastic cuts, this sort of anomaly can only be put right by an increase in the EU budget.
The problem is that the UK Government has made the size of the budget a red line issue without getting into any informed debate about what the money is actually spent on, or about what sort of EU budget is necessary to ensure that theEU Single Market, to which the UK itself is very much attached, works fairly and is preserved.
The UK wants access to the single market, but is not prepared to pay any entry fee.
AND A DEMAND TO RENEGOTIATE THE ENTIRE BASIS OF UK MEMBERSHIP OF THE EU
The same problem arises in the renegotiation of the terms of UK membership for which the currentUK Government wants. In preparation for this renegotiation, the UK Government is now doing a comprehensive audit of all EU laws, to identify areas of activity that could be taken back from the EU to be administered exclusively under UK law instead. There may be some good ideas emerging from this, on which all other members could agree, but there may also be a lot of problems.
The difficulty is that the UK wants to take back, yet to be specified, powers, but also to retain full and unfettered access for all its goods and service exports to the EU Single market. 50% of UK exports go to the euro zone, whereas only 15% if euro zone exports go to the UK, so this is important to the UK.
The difficulty is that the EU Single Market, like any market, is a product of common rules, regulations and conventions. A market is a political construct. Without common rules or understandings nobody could rely on what they were buying.
That is why, for example, there have to be common EU quality standards to construct a common EU market. Otherwise one country could impose peculiar quality standards, designed to exclude competitors from its market and to enable its own producers to make monopoly profits at the expense of its consumers. Any rulemaking power that could be abused in this way, cannot be handed back to national level without endangering the Single Market. That is the problem that the proposed UK renegotiation ofits EU membership terms will encounter.
And the competition in any market also has to be fair, and someone has to regulate that. If competitors have different environmental, or product liability standards, or if some firms are operating monopolies or cartels, the competition will not be fair. These matters cannot be handed back to be decided by national authorities without also endangering the Single Market.
If the UK were to draw up a list of EU rules it would like to make in Westminster rather than Brussels, the other 26 could also do the same, but they might come up with a very different list. The process could become bogged down in serial reopening of compromises, made years ago, on issues that have little relevance to the urgent existential threat the EU faces today.
One gets the impression that many in the UK do not really care about that.
The EU is still regarded by many in the UK as a foreign country, not a Union of which the UK itself has been an integral part for the past 40 years. Membership of the EU is seen as a convenience rather than as a commitment. If the price of satisfying UK voters is to cause more problems for the “foreigners”, in “Europe”, that is not seen by some UK political leaders as such a bad thing.
The difficulty is that the “foreigners” in Europe may not see it like that.
With so many genuinely urgent things to do, such as safeguarding the very existence of the EU itself, the other 26 member states may just not be inclined to devote time to a painstaking case by case analysis of a series of requests for new UK opt outs from some bits of some rulemaking authority, with UK opt ins to others, and to a judicious analysis of whether each one of these decisions might affect the integrity of the Single Market, either now or at some time in the future.
And the European Court of Justice would certainly have difficulty interpreting the consistency of a special EU menu for one country with the basic freedoms for all on which the EU is based.
There is also the old question of whether UK Ministers and MEPs should continue to have voting rights on things they are opting out of. As it is, one has to say that it is distinctly odd that the present Chairman of the Committee of the European Parliament that deals with euro currency matters, represents a constituency in the UK, which has no intention of joining the euro.
If, as is likely at the end of its proposed renegotiation, the UK is dissatisfied with the result, because not enough powers are being handed back to Westminster, it will have little option but to recommend that the UK withdraws from the EU.
It is setting itself up now, to find itself in exactly that position, in 2016.
THE UK’S OPTIONS OUTSIDE THE EU
This will require careful handling because 50% of UK exports go to the EU, and London is Europe’s main financial centre, for the time being anyway.
How is the UK to protect these interests if it is outside the EU?
One possibility is to join Norway, Iceland and Liechtenstein in the European Economic Area, which would guarantee full access for UK goods and services to the EU market. But the price for that would be having to implement all EU legislation that was relevant to the Single Market, and contribute to the EU budget, but without having any say in EU decisions.
That would be worse from a Euro sceptic point of view than the UK’s present position, even though it would guarantee continued access for the UK to the EU market for both goods and services.
The other possibility is to follow Switzerland and negotiate a series of bilateral trade deals with the EU. The UK would not be entering such negotiations from a position of strength, because it relies more on the EU market, than the EU relies on the UK market.
Switzerland has negotiated full access to the EU market for goods, but not for services. Services are the UK’s key export sector, so a Swiss style deal would not be attractive.
If Britain negotiated a Customs Union with the EU, like that of Turkey, it would find its trade policies with the rest of the world were still being determined in Brussels, but with less input from London than at present. Again it would also only have a guarantee of access for goods exports but not for services.
Finally, the UK might simply leave the EU, without negotiating any special deal. That would leave it paying tariffs on its exports to EU member states, including Ireland, and would necessitate the reintroduction of customs posts on the border in Ireland. It would undermine years of peacemaking by successive Irish and UK Governments, and would cost thousands of jobs in export firms in both the UK and Ireland.
My sense is that the pressures that cause fracture in the EU derive from a lack of understanding among the general public of the extent to which their livelihoodsdepend on economic developments in othercountries and of how unrealistic, in modern conditions, is an “ourselves alone” policy.
Political leaders make littleeffort to explain this, because to do so would undermine thenationalist myths which brought most states into being in the first place, and also because it is often convenient to blame the EU forthe effects of decisions that were necessary but are unpalatable. For these reasons, little effort is made to forge any form of patriotic pride in the EU or its achievements.
No venue has been created in which an EU wide public opinion might be formed.
This must be done, if sufficient mutual understanding and support is to be created to allow the EU to create the degree of burden sharing and mutual supervision that is necessary to guarantee the long term robustness of the euro, and thus of the EU itself. In a word, the EU needs more democratic cement to hold itself together.
European Parliament elections are not truly European. They are 27 different elections, in 27 different countries, in which national issues predominate.
The European Parliament itself has refused to contemplate the election of some of its members from EU wide party lists, which would begin the process of creating an EU wide debate because it would necessitate an EU wide political campaign on behalf of the rival EU wide lists of candidates.
The President of the European Commission, and the President of the European Council, are selected in private meetings of heads of government. They do not have to win the votes of EU citizens, and consequently EU citizens do not have the feeling that they can vote the government of the EU out of office, in the same way that they can vote their national government out of office.
Thus the EU does not enjoy democratic legitimacy in quite the same way that national governments do.
As a member of the Convention that drafted what eventually became the Lisbon Treaty, I urged unsuccessfully that the EU should have a Presidential election on these lines. I suggested that the President of the European Commission should be selected in a multi candidate election in which every EU citizen would vote, rather than be selected, as at present, by 27 heads of Government, meeting in private, to be approved in a single candidate vote in the European Parliament.
This proposal received almost no support at the time, although it has since been adopted as policy by the German CDU. If that had happened when it was proposed, the EU would now be in a much stronger democratic position to devise a more coherent response to the euro crisis, and to find a solution to the UK’s difficulties. The UK press would not be able to argue that EU leaders were “unelected”. The Commission, headed by a President with a full EU wide democratic mandate, would have more authority to propose solutions. The council of 27 heads of government would still play a vital role, but the EU would be less constrained by the electoral timetables of individual countries, as is the case with the German election of 2013.