The European Question

27/06/2014 at 6:37 pm

Europe has been much in the news again lately. David Cameron expressed a preference for the Presidency of the European Commission to go to an unknown arch-federalist other than the one seemingly favoured by his fellow leaders. This is exciting enough. But a wiretapping scandal in Poland, which initially passed unnoticed when as a purely local matter it threatened only to unseat the governor of the Polish central bank and plunge the ruling party there into crisis, is more exciting still. According a magazine report, foreign minister Radosław Sikorski – who to top things off was once a member of the Bullingdon Club – has, in the even-handed vocabulary of the BBC, “criticised UK Prime Minister David Cameron’s handling of EU affairs”:

He goes on to say, using expletive-laden terms, that Mr Cameron messed up the 2011 EU fiscal compact on budget discipline, which the UK tried to block. “Because he’s not interested, because he doesn’t get it, because he believes in this stupid propaganda, he stupidly tries to manipulate the system,” Mr Sikorski was quoted as saying.

Readers might well have forgotten that the fiscal compact of which Mr Sikorski speaks began life as a putative new EU treaty, which Britain vetoed in December 2011. It subsequently took off as a “compact” between every EU member state except the UK and the Czech Republic – though the Czechs are due to sign up any minute now if their new leader has his way. Once again, Britain looks destined to stand alone, etc.

Whether or not we forget about it, however, Europe marches on. While it has not received any attention, the fiscal compact has been making and is set to make further advances. The budget rules and submission timeline agreed back in 2011/12 have already swung into action: last October saw the first occasion on which every nation signatory to the compact had to present its annual budget to the Commission for scrutiny. And from 1 November this year, prudential supervision of financial institutions in all signatory countries – not just eurozone members – will become the prerogative of the ECB.

It is traditional to interpret the plenipotence of Brussels from a position of coyness. For example, the fiscal compact sets the Commission up with the same sort of mandate as the OBR here in Britain: a dispassionate and final compiler of economic data for national budgets. Yet EU member states still possess every freedom to come up with their own data (in some areas, for now). This is why Spain was able to dismiss the EU’s concerns over its budget this year as “a mere difference in growth forecasts”, and proudly plead that deficit targets would, nonetheless, be met. For Italy, facing similar concerns, the answer was even simpler. By the time this year’s budget had received Commission feedback the country had already decided – quite independently – to privatise a few more state assets, thereby meeting its solvency targets while not bowing to usurpation of fiscal policy at all.

It is at times like these that one can become grateful for England’s generous allocation under the Common Humour Policy. But for those taking a medium term view of European affairs and Britain’s continued involvement with them there are three very serious points to take on board.

  1. The sovereign debt crisis for Europe in particular was / is a defining moment in its history: the goal of “ever closer union” became not just a political ideal but an imperative of economic survival.
  2. The United Kingdom benefited throughout the crisis – however irrationally – from having decided to remain outside the euro.
  3. The UK view on the necessity of “ever closer union” has thus diverged ever more markedly from the views of other EU states, and those of the euro countries especially.

So what comes next?

Most obviously, point (3) will persist. ECB supervision of Britain’s banking system is not seen as necessary, will not happen this November – uniquely, perhaps, in the EU – nor will it happen in the foreseeable future. British budgets will not be subject to Commission scrutiny. Indeed, compliance with the fiscal compact rules in that regard would require us to change our tax year to match the calendar year, as it does elsewhere: the financial equivalent of metrication and likely to be just as welcome.

More broadly, Britain’s position in the EU has never been quite as comfortable as it has been for other, equally proud sovereign nations such as Luxembourg. That level of comfort seems ever more unlikely to improve. This blog quoted one expert observer on the subject back in November 2011, after that month’s emergency summit but before the UK veto had been exercised:

A rival treaty organisation, predicated on common economic government, would become de facto the new forum for integration. One by one, political powers would pass from the EU to the eurozone until the EU became a shell, an amplified free trade area, a kind of EFTA-plus. Which, of course, would suit Britain very well indeed

Two and a half years ago, a two-speed EU looked like a dramatic idea. Today it is getting closer to being policy, on all sides. In another two and a half years’ time the UK could be on the brink of a decision as to whether or not to remain a member of the EU at all.

When it comes to the gathering European question of Brexit we should apply the same quality of analysis as we do to markets. Forget about the fluff – who said what on which tape, which faceless figurehead gets to be Chief Bureaucrat for the next six months, or what precise party postures are adopted to squeeze votes out of people that electoral cycle. The years we have just lived through represent exactly the sort of tectonic movement that causes major earthquakes. Whether we like it, or want to believe it, or not: these years have widened the English Channel, and undercurrents which were always there have grown more powerful.

It’s possible, if not a little hopeful, to see how Britain’s increasingly likely exit from the EU as the relationship now stands might benefit all involved. Of course it might also be a disaster. As a pair of alternatives that at least speaks to volatility. And over the medium term, we should be prepared.

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