Realpolitik and the European Union. Chapter 9. More Europe, less UK.

More Model Deutschland for Europe.

What concerned Kohl most was the crisis in western Europe, related to the Euro-the kernel of his strategic deal with Mitterrand at Maastricht. German policy under Merkel had become a version of the famous quotation attributed to Charles Erwin Wilson, CEO of GM, that what is good for GM is good for America. Paraphrased, it runs: what Europe needs is more, not less Modell Deutschland. This, in synthesis became Berlin’s policy for the EU. But it also had for long been France’s rhetorical preference, for fear of the alternative “Anglo-Saxon” variety. [1] On this, both Berlin and Paris could agree.  But they were not agreed on the best model for Europe.

Successive French governments have sought to learn from German experience, but they have also repeatedly made proposals for a large Keynesian budget in the hands of an EU Finance Ministry. This, for Germany and its allies, is French for Transferunion. It also meant that Germany take Europe more seriously. To raise an unfortunate analogy, it meant all EU member states should finally start to march in step. This  should not have been interpreted as good news for a UK government ready to risk a referendum on a platform of Remain/Leave.

As the southern European countries entered their prolonged depression, the opposing strategies of France, Italy and Germany converged on a programme of “more Europe”. As Chancellor Merkel never tired of pointing out , Europe had 7% of the world population, 25% of the world gdp, and 50 % of its welfare spending. It could not carry on in this way and remain competitive in global markets.

The strategy has two prongs. Prong one holds that there could be no going backwards to national currencies. That meant: keep Greece in the Euro; ensure the European banking system, especially those banks involved in lending to Greece; impose austerity on Greece, with conditions for bailouts attached; “do what it takes” to secure the future of the Euro; impose fiscal virtue on all through the EU’s Fiscal Compact; move to an EU federation;[2] and a programme for financial, fiscal, and political union in the Euro area by 2017, and full union by 2025.[3]In October 2015, President Hollande and Chancellor Merkel both addressed the European Parliament in a show of solidarity for “more Europe”.[4] “If (you) don’t want a stronger Europe,” Hollande said in reference to the UK, “the only possible path is simply to leave Europe.”

Prong two involved fudge. To keep the Euro show on the road: Euroland banks were not subject to rigorous stress tests; Brussels turned blind eyes to repeated infringements of the Euro membership conditions on public deficits and debts; labour markets in the Eurozone remained national and rigid; the German, Dutch and Finnish governments repeatedly made noises that they oppose a Transferunion, but the ECB broke the terms of its own statutes via disguised mutualisation in its TARGET 2 mechanism, whereby the countries in large external surplus (Germany and The Netherlands) build up huge credits  to other Eurozone national central banks from countries running external deficits.[5] Recycling in other words continued, but it ran through official channels.

None of this subterfuge escaped the attention of Thomas Mayer, former chief economist at the Deutsche Bank, who has written, tongue in cheek, that surely the ECB’s TARGET mechanism was not designed so that weak countries would have unlimited market access to unconditional loans to fund their balance of payments deficits, once private banks after 2008 were no longer read to lend to the peripheral countries? [6] The answer he rhetorically invites, is that whether or not so designed, it has been deployed to shore up the system. In early 2017, Spain, Greece and Italy debts to the ECB were fast approaching E1 trillion in TARGET2, due both to continued current account deficits and capital movements out of southern countries to banks in the German zone of influence. [7]

These figures have given rise to speculation that there is no way that these debts can be repaid. German and Dutch exports, this line of argument runs,  have been for free, and the corporations which have exported hold funny money. It is only a matter of time before the artifice is discovered. Debtor default in the Eurozone is imminent.

In mitigation, the argument has been advanced that the ECB can always offset losses by printing money, without fiscal transfers from taxpayers.[8] It has also been argued that in the event of a Euro-break up, TARGET2 assets and liabilities would lead to losses, but these would be much less than implied by the raw net imbalances.[9]

Whether or not the Euro breaks up, the facts of the matter are mass unemployment in southern European countries; the rise of “populist” parties to challenge the status quo; the structural current account surplus and deficits; and the low esteem in which European élites are held. These were the unpropitious conditions in which the UK headed for the EU exists.

The UK heads for the exits.

The Maastricht Treaty was the point when the UK began to drift apart from the EU project. For the coming fifteen years, there was never a majority in the UK for monetary or political union-the two flagship policies of the Franco-German policy tandem. Cameron had won the Conservative leadership by promising his Eurosceptic wing that he would hold a referendum on the  Constitutional treaty. This, he promised, was a “cast iron” guarantee. Blair had been tempted to hold one, and then realized he would lose it. By the time, the Constitution had been re-jigged as Lisbon, Blair had stepped down, and the decision of what to do was left to his successor, Brown. Brown decided to leave the decision to parliament, and in December 2007, signed the treaty in Lisbon. The Labour-led government defeated a Conservative proposal to hold a popular vote on the Lisbon Treaty by 311 votes to 248 in the House of Commons on March 5. The vote allowed Cameron to cite international law as an excuse for ditching his guarantee. The guarantee proved to be Cameron’s last chance of holding a referendum on a specific subject-the Lisbon Treaty. He would now have to place a much bigger wager on Remain or Leave.

This proved a major mistake: a popular vote would likely have ditched the Treaty, and the UK would have stayed in to carry on negotiations about whether the EU was going to be a centralized USE or an alliance of sovereign states. Having ditched the guarantee, and renegued on a referendum on a specific topic-pro or con Lisbon-Cameron went in for gestures. He withdrew the British Conservatives from the centre right Christian Democrat grouping in the European Parliament, much to Chancellor Merkel’s displeasure.  His Chancellor Osborne, rescinded Gordon Brown’s commitment to help Greece.  Cameron failed to block former Prime Minister of Luxemburg, Jean Claude Juncker’s nomination as Commission President; Chancellor Merkel opposed Tony Blair’s candidature for the post of EU President; the occasions when the UK was voted into a minority on the Council of Ministers rose sharply in the years  2009-15.[10][

The Conservative party leader, David Cameron then promised that: “If we win the next election, we will amend the European Communities Act 1972 to prohibit, by law, the transfer of power to the EU without a referendum. And that will cover not just any future treaties like Lisbon, but any future attempt to take Britain into the euro.”[11] The promise was made good when the Conservative led coalition government passed the European Union Act 2011,  requiring the government to call a referendum if any further powers were to be conceded to the EU.

Cameron did so because the Conservatives began to feel the heat from an insurgent United Kingdom Independence Party (UKIP). UKIP won 13 seats in the European Parliament elections of 2009, recorded impressive results in local elections in 2012 and 2013, and in the 2014 European Parliament elections, received more seats than any other party in the UK. Its programme was crystal clear: Leave the EU. Cameron’s 2011 Act was a pale Eurosceptic imitation. It in no away amended the 1972 Act, whereby EU laws took direct effect in the UK. It in no way amended the terms of the annex in the Lisbon Treaty,-discussed below- recognising the EU convention that the ECJ was supreme. It ignored the point that the ECJ could deploy the new competences outlined in the Lisbon treaty expansively. But it did go along with a commitment that if the Tories won an election, they would renegotiate Britain’s relationship with the EU. The gap between the UK’s official commitment to a supranational EU and public opinion could scarcely be concealed.

In his Bloomberg speech of January 2013, Cameron spelt out five principles to guide renegotiation: a leaner, less bureaucratic EU , relentlessly focused on helping its member countries to compete; a flexible EU “of free member states who share treaties and institutions and pursue together the ideal of co-operation” rather than one marching to ever greater centralisation; a return of powers to the member states, on the grounds that countries are different, and that not everything should be harmonised; a larger role to national parliaments, which “are, and will remain, the true source of real democratic legitimacy and accountability in the European Union”; and the UK’s continued championing of the single market,  as the Eurozone crisis starts to rewrite the rules on fiscal coordination and banking union.

Given the convergence of views on the continent around a German led “more Europe” programme, the writing was on Cameron’s wall that the UK’s leverage to move the EU towards the reforms defined in his Bloomberg speech was minimal. The UK was voted into a minority on the Fiscal Compact; Cameron failed to block former Prime Minister of Luxemburg, Jean Claude Juncker’s nomination as Commission President; the occasions when the UK was voted into a minority on the Council of Ministers rose sharply in the years  2009-15.[12]  One reason for this was the very different interpretation in Brussels, Berlin and Paris on the origins of the crisis: the fault lay with abstract, Anglo-Saxon free market thinking. In the UK, the fault was identified as lying with major imbalances in the world economy, particularly, the German and Chinese mega-trade surpluses had much to do with the crash. A near uniform German response to this was also: Nein. It was not, the argument ran, Germany’s fault to be selling high quality products that consumers were ready to buy. The fault lay with lax fiscal policy, and inadequate financial market regulation.

Cameron’s advisers proposed that he go for minimal changes acceptable to the EU, in other words to Germany and France, rather than to consider what he could reasonably hope to sell to a Eurosceptic British electorate.  The key issue was movement of people: France insisted that free movement was a founding principle of the EU, and that there would be no à la carte menu for the UK, nor for anyone else. Merkel’s phrase for this was “no cherry picking”.

Cameron’s team came home with four baskets, whose legal force, the agreement concluded, “is controversial”:[13]

  1. Economic governance: member states not participating in further deepening of the EMU would not create obstacles to that process; conversely, respect for rights and competences of non- participating member states would be guaranteed.
  2. Competitiveness The EU recognises the need to increase efforts to enhance its    competitiveness to generate more growth and jobs.
  3. Sovereignty: The UK is not committed to further integration into the EU. If 16 national parliaments object to a draft EU legislative act, the other member states in the Council may discontinue it.
  4. Social benefits and free movement– the benefits of free movement of workers could be limited: for instance, the export of child benefits to a member state other than that in which the worker resides; a member state could pout a break on access to in-work benefits system; an alert could be used if workers flowed into a member state in ‘exceptional magnitude’ over a long period of time; some restrictions on non-contributory in-work benefits to Union workers newly entering its labour market .

When Cameron presented the deal in the House of Commons, the mass circulation daily, The Sun, headlined “Who do you think EU are kidding?”[14] On February 19, 2016, Cameron announced he would campaign for Remain.

Two leading figures in the Tory party broke with Cameron-Boris Johnson, the mayor of London, and Michael Gove, whose stepfather, a Scottish fisherman, had been driven out of business by the Common Fisheries Policy(CFP). Both were formidable debaters. As Johnson said in a speech in Manchester: “We (the UK) are locked in the back of a minicab with a wonky satnav driven by a driver who does not have perfect  command of English and going in a direction, frankly, we don’t want to go. ”[15]

The Prime Minister then launched “Project Fear” to reinforce voters’ preference for the status quo as the least risky option. But the electorate did not appreciate  threatening statements by the US and French Presidents, made in the presence of a smiling Cameron; ridiculed Remain’s claims that Leave would trigger World War III, and binned Chancellor George Osborne’s assertion that Brexit would cost each household £4,300 by 2030. Nonetheless, until the last few weeks, opinion polls recorded a small but steady Remain lead.

Three longer term trends.

When Dominic Cummings–one of the prime backroom architects of Brexit–began to research opinion in 2014/5, it was clear to him that, compared to the years of the campaign against the UK joining the Euro in 1999 to 2002, the EU’s reputation as a force for progress had been seriously undermined the.[16] A number of longer term factors underlay this observation.

The first factor was the longer term weakening of the Labour party’s industrial working class base. At the time of the Conservative party victory in the April 1979 election, the manufacturing sector represented 28% gdp, and accounted for an overwhelming share of foreign exchange earnings.  By 2015, manufacturing , at 10% of gdp, sent 47% of output to EU markets, down from 60% in 2000. London ranked as the world’s prime financial market location; the UK had a thriving entrepreneurial culture; it ranked among the world’s top ten most business friendly territories. Given the EU’s continued reluctance to liberalise financial services, only one third of the City’s earnings came from the EU. The main source of income was global. The UK, too, hosted about 1.24 trillion Euros of inward direct investment, about half from other members of the EU.[17]

The  flip side of London’s global success has been that the rest of the UK languished. By 2016, the South East of England had per capita income 160-180% above the EU average, and was home to 27% of the UK population.[18] By contrast, citizens in the rest of the UK had per capita income well below the EU average.

The Blair government had sought to address the problem of regional development by  across-the-board devolution. But the referendum in November 2004 for an assembly of North East England was rejected in a massive  78% to 22%  vote. Here was a clear warning to  Labour that it could not take its traditional working class bastions for granted. The party then lost the London mayoralty in 2008. Labour held 56 Scottish seats in Westminster in 1997, but returned only one MP to the 56 for the Scottish Nationalists in 2015. The  June 23, 2016  vote saw Labour split between a pro Remain parliamentary party, and a working class base that was overwhelmingly Leave. A poll taken on June 23 showed that the poorer you were, the more you tended to vote Leave.[19]

The second and related factor was immigration. The Blair government espoused a radical ideology to convert the UK into a multi-racial country.[20]  Between 1998 and 2016, non EU net migration exceeded net migration from the EU in every single year. Over the whole period, non EU net immigration stood at 3.7 million, with net EU immigration at 1.5 million. By 2015, the foreign born population stood at 8 million, and accounted for 85% of the net population growth. The most notable change was in London, where the “white British” population was down to 45% in the 2011 census, from 60% in 2001. This trend interpreted into the sharp rise in the fortunes of the anti-open doors and anti-EU UKIP.

By 2015, the electorate’s top concern was immigration.  Seventy five per cent of those interviewed considered that immigrants should embrace the British way of life; 79% thought that Muslims should make a special effort to state their allegiance to the country. [21] Sir Trevor Philips, the son of West Indian parents and former chairman of the Commission for Racial Equality, reported in 2016, that Islam was becoming a “nation within a nation”. [22]

Nigel Farage, the UKIP leader, knew what he was doing when he gave priority to  immigration as a catch-all strategem that conflated European immigration, wage competition, pressure on public services and Islam. So did Cummings. His slogan for the campaign -“Turkey/the NHS/£350 million a week,”-signalled that the decision was not London’s to make. It also signalled that the vote, as far as immigration was concerned, was a vote both about Islam and the EU. His other slogan – “we want our country back”-was even more clear. The Leave campaign stood for self-government of the UK, by the UK, for the UK.

The premise on which the Leave campaign placed immigration front, left and centre was borne out in the June 23 vote: the first reason for voting Leave was to “take back control”; the second was to control immigration. White voters and Christians voted 53 and 58% respectively to Leave; Asians, Black voters and Muslims voted 67%, 73%,  and 70% respectively to remain. [23] Race, religion and culture were definitely  ingredients of the result.

Third, the global financial crash of 2008 slammed the reputation of élites. These were the “masters of the universe”, who had preached free markets, but had rushed to be bailed out at taxpayer’s expense at the first sign of trouble. Self-proclaimed “experts” had botched regulation, and made rubbish predictions. Among their patrons were the Big Beasts of British politics, who had backed EU membership for the past forty years. Over that period, there had been dramatic swings in popular opinion. The depths of EEC/EU popularity came in the early 1970s, and then again in the early 1980s, but from 1986 to 1992, the EU has never been more popular. with low points in the early 1970s, and 1980s. But then in the mid-1990s, the EU banned British beef. Since then, opinion yo-yoed with the news cycle, neither enthusiastic nor ready to leave. Hard core Euroscepticism remained a fringe activity until the years 2007-08, when clouds gathered over the global financial system, and Giscard d’Estaing finessed the Constitution into the Lisbon Treaty.

Then came the Euro crash in 2010, the fall out between Germany and France on how to proceed, Euroland’s seven year  recession, sky high unemployment, the rise of “populisms”, and the revival of national antagonisms, the very opposite to the EU’s intent.

Defending the virtues of EU membership in these circumstances proved an uphill struggle. There was much to criticise, and less to celebrate about the organization.. “Brussels” forever spoke of “the rule of law”, but the EU’s own rules were permanently being bent over budget deficits, and the permitted size of current account surpluses.  For decades, the EU’s own budget had not been signed off by the organization’s Court of Auditors. The EU had engineered the defenestration of Prime Ministers, and kicked Greece when it was down. Not least, Europe stagnated while the world boomed.

At different times on the day of the referendum, both sides thought they had won. [24] Yet in February, when Cameron launched the campaign, he had good reason to believe that he could win.[25]  Remain enjoyed a 60:40 lead in the polls. He had won two  general elections, and the referendum of 2014 on Scottish independence. At his disposal was the Downing Street machine, Whitehall, the Cabinet and junior ministers. Most of the Tory party were either Remain or lukewarm about Leave. Remain enjoyed the backing of the EU, the Confederation of British Industries (CBI), senior civil servants and the heads of foreign governments. The Remain camp had access to vast amounts of electoral data, plenty of funding and top class PR. The economy was humming.

The result of the June 23, 2016 referendum as to whether the UK should remain in or leave the EU seemed final enough. On a 72% voter turnout, 52% voted for Leave and 48% for Remain.  Yet the vote also showed a disunited Kingdom that rediscovered its four-hundred year old constitutional settlement. London, Scotland and Northern Ireland voted heavily to remain. The rest of the UK voted solidly against.

After the vote of June 23,  Remainers kept repeating that Leave had woven a tissue of lies. There was little appreciation that for years the main political parties had refused to listen and act upon real popular concerns regarding mass immigration. Nor was there any grounds to believe that voters were “irrational”: what the many who turned out from the council estates were expressing was that immigration drove down their wages. All three main parties were barely distinguishable in their soft pro EU stand. They were definitely not in tune with key concerns of their own voters: immigration, the EU, the conduct of the economy, sovereignty. Not least, Whitehall and the leaders of the country’s political parties had hidden for years the extent to which they had signed away the keys of policy to Brussels. What had changed was that it had become increasingly difficult to conceal.

The fundamental reason for June 23, 2016 is that Heath, the architect of the UK’s entry to the EU, believed that the days of nation states were past. The vote showed clearly that this view was not shared by the British public. As   Samuel Huntington, the American political scientist, the global élites who promote such ideas “have little need for national loyalty, view national boundaries as obstacles that thankfully are vanishing, and see national governments as residues from the past whose only useful function is to facilitate the élite’s global operations”. [26]The American élites, Huntington wrote, have forgotten the mystic chords of memory. The American people have not. Nor had the British people.

[1] Alain Fabre, The German model: a strategy for Europe, Fondation Robert Schuman, Aopril 23, 2012.

[2] José Manuel Durao Barroso, President of the European Commission, State of the Union Address, European Commission Press Release Database, September 12, 2012.

[3] https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf

[4] http://www.europarl.europa.eu/news/en/news-room/20150929IPR94921/françois-hollande-and-angela-merkel-face-meps

[5] Hans-Werner Sinn, Target Losses in Case of a Euro Break-up, CESIFO Working Paper No.3968 Category 1: Public Finance October 2012. Interpreting TARGET2 balances. Stephen G Cecchetti, Robert N McCauley and Patrick M McGuire, Interpreting TARGET2 balances,  BIS Working Papers No 393 by Stephen G Monetary and Economic Department December 2012.

[6] Thomas Meyer, Europe’s Unfinished Currency: The Political Economics of the Euro, London, Anthem Press, 2012. Chapter Six, “ A Hidden” Blalance of Payments Crisis”.

[7] Marcello Minenna, “Italy: Country Updates”, Mediobanca Securities, 19 January 2017. Ambrose Evans-Pritchard, “Unpayable debts and an existential EU financial crisis – are eurozone central banks still solvent?” The Daily Telegraph, February 23, 2017.

[8] Karl Whelan, “TARGET2: Not why Germans should fear a euro breakup”, VoxEU.org, 29 2012; and Whelan, Karl  “Sovereign default and the euro”, Oxford Review of Economic Policy, 29(3), 2013, 478-501

[9] Péter Szécsanji, Nature of TARGET2 imbalances, Finance Quarterly, 2015/3;pp.342-356.

[10] Simon Hix, Sarah Hagemann, “Is the EU a winner or a loser in the EU Council?” The Guardian, November 2, 2015.

[11] “David Cameron admits Lisbon treaty referendum camp is over”, The Guardian, November 4, 2009.

[12] Simon Hix, Sarah Hagemann,, « Is the UK a winner or loser in the EU Council », The Guardian, November 2, 2015.

[13] My précis taken from « The UK’s « new settlement » in the EU : renegotiation and referendum, EPRS, February 2016-PE 577.983.

[14] “Who do EU think you are kidding Mr Cameron? The Sun, February 3, 2016.

[15] Tim Shipman, All Out War : The Full Story of How Brexit Sank Britain’s Political Class, London, William Collins, 2016.p.225 .

[16] [16] Dominic Cummings blog,  ““On the referendum #21: Branching histories of the 2016 referendum and ‘the frogs before the storm’”

[17] CEP BREXIT ANALYSIS No. 3 The impact of Brexit on foreign investment in the UK, April 2016.

[18] Simon Tilford, Brexit Britain: the poor man of Western Europe? Centre for European Reform, 2016.

[19] Lord Ashcroft, How the United Kingdom voted on Thursday, Friday 24 June, 2016.

[20]Labour wanted mass immigration to make UK more multicultural”, Daily Telegraph, October 23, 2009; “Don’t listen to the whingers-London needs immigrants”, The Evening Standard, October 23, 2009.

[21]Britain UnCovered Survey results: the attitudes and beliefs of Britons in 2015,” The Guardian, April 19, 2015.

[22] Trevor Philips, What British Muslims Really Think, Channel 4.com

[23] Lord Ashcroft, How the United Kingdom voted on Thursday, Friday 24 June, 2016.

[24] Harry Mount, Summer Madness: How Brexit split the Tories, Destroyed Labour and Divided the Country,London,  Biteback, 2017.

[25] Dominic Cummings blog,  ““On the referendum #21: Branching histories of the 2016 referendum and ‘the frogs before the storm’” Also,  Tim Shipman, The Full Story of How Brexit Sank Britain’s Political Class, London, William Collins, 2016.

[26] Samuel Huntington, « Dead Souls : The Denationalization of the American Elite », The National Interest, Spring 2004.pp. 5-18.

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About Jonathan Story, Professor Emeritus, INSEAD

Jonathan Story is Emeritus Professor of International Political Economy at INSEAD. Prior to joining INSEAD in 1974, he worked in Brussels and Washington, where he obtained his PhD from Johns Hopkins School of Advanced International Studies. He has held the Marusi Chair of Global Business at Rensselaer Polytechnic Institute, and is currently Distinguished Visiting Professor at the Graduate Schoold of Business, Fordham University, New York. He is preparing a monograph on China’s impact on the world political economy, and another on a proposal for a contextual approach to business studies. He has a chapter forthcoming on the Euro crisis. His latest book is China UnCovered: What you need to know to do business in China, (FT/ Pearson’s, 2010) (www.chinauncovered.net) His previous books include “China: The Race to Market” (FT/Pearsons, 2003), The Frontiers of Fortune, (Pitman’s, 1999); and The Political Economy of Financial Integration in Europe : The Battle of the Systems,(MIT Press, 1998) on monetary union and financial markets in the EU, and co-authored with Ingo Walter of NYU. His books have been translated into French, Italian, German, Spanish, Chinese, Korean and Arabic. He is also a co-author in the Oxford Handbook on Business and Government(2010), and has contributed numerous chapters in books and articles in professional journals. He is a regular contributor to newspapers, and has been four times winner of the European Case Clearing House “Best Case of the Year” award. His latest cases detail hotel investments in Egypt and Argentina, as well as a women’s garment manufacturer in Sri Lanka and a Chinese auto parts producer. He teaches courses on international business and the global political economy. At the INSEAD campus, in Fontainebleau and Singapore, he has taught European and world politics, markets, and business in the MBA, and PhD programs. He has taught on INSEAD’s flagship Advanced Management Programme for the last three decades, as well as on other Executive Development and Company Specific courses. Jonathan Story works with governments, international organisations and multinational corporations. He is married with four children, and, now, thirteen grandchildren. Besides English, he is fluent in French, German, Spanish, Italian, reads Portuguese and is learning Russian. He has a bass voice, and gives concerts, including Afro-American spirituals, Russian folk, classical opera and oratorio.
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