Britain, Europe and the City of London: Can the triangle be managed?

Britain, Europe and the City of London

Britain, Europe and the City of London: Can the triangle be managed?

Written by Philip Whyte, 20 July 2012

What Central Europe thinks of Britain and why

What Central Europe thinks of Britain and why

What Central Europe thinks of Britain and why

Written by Tomas Valasek, 16 July 2012

Britain's Conservative Party is committed to repatriating powers from the EU. On July 12th, Foreign Secretary William Hague launched a review of the EU's competences. This would, he told Parliament, be an "audit of…where competence lies, how the EU's competences, whether exclusive, shared or supporting, are used, and what that means for our national interest." Many Conservatives expect this audit to prepare the ground for a manifesto commitment to renegotiate the terms of Britain's EU membership. They hope that Britain can obtain opt-outs in areas such as financial services, judicial co-operation, employment, migration, regional policy or fisheries. They argue that Britain's partners will wish to change the EU treaties to cope with the eurozone crisis, and that Britain can trade off the repatriation of powers in return for its signature.

However, any British opt-out would require the unanimous agreement of every other member-state. Conversations with diplomats from Central Europe suggest that there is very little goodwill towards London, even among its formerly stalwart allies.

The Central Europeans see the UK as an important partner. When David Cameron circulated a letter in February 2012 outlining single market reforms that would revive the European economy, five of the eleven co-signatories came from Central Europe, with Germany and France the notable absentees. The new member-states sided with London against Paris and Berlin over the Iraq war, and the UK shares their desire to bring more Balkan countries into the EU – again, against much scepticism from many continental countries.

And yet the UK cannot count on all Central Europeans to support its demand for opt-outs from EU legislation. This is for two reasons: Germany has become the central focus of the region’s foreign policies, and Britain has come to be seen by other member-states as taking advantage of the common currency's existential troubles to defend its narrow interests.

Germany is by far the largest investor in Central Europe, and its economy is deeply embedded in the wider region. When I asked a former finance minister from Central Europe to predict his country's growth rate, he replied "take Germany’s number and add one percentage point". Most Central European governments also assume that there is a possibility of the eurozone fracturing and losing some of its member-states. If and when it happens, they want to remain a part of the Berlin-led economic core. London will be of little help in such a crisis – it is too far away, has too few investments in Central Europe, and wants to have less and less to do with the EU in general. So the new member-states (and others in similar situations such as Denmark or the Netherlands) will have few reasons for wanting to spend political capital on supporting UK demands for exemptions from EU legislation, especially if Germany opposes them (and senior officials in Berlin take a hard line in opposing British attempts to repatriate powers).


Furthermore, the UK offers nothing in return (it is not contributing to the eurozone bailout fund) and Britain’s exemptions may adversely affect other countries’ economies. They fear, for example, that if the UK relaxes social protection for workers (a key Conservative demand), businesses elsewhere in Europe will migrate to the UK. "London is engaging in 'beggar-thy-neighbour' tactics", one official from Central Europe told me (though France and others say the same of the new member-states' low corporate tax rate). In December 2011 Britain threatened to veto the proposed ‘fiscal compact’ to secure an opt-out from rules governing financial services. But the tactic misfired – the rest of the EU minus the Czech Republic agreed to form the compact anyway; they did so outside existing EU treaties and without Britain. Any future banking or fiscal union will almost certainly be organised in a similar way, a Baltic diplomat told me, because the UK and the Czech Republic – and possibly others – do not want closer integration. This leaves London without any good means to pressure others to secure its opt-outs. "The rest of the EU now knows that it is possible to isolate Britain, and they are more willing than ever to do so. It is not clear that Britain realises that", the official said.

Nothing has hurt Britain's image elsewhere in Europe more than the perception that London is failing to help to end the crisis and – worse – that the UK is taking advantage of others' woes. A Polish official told me that during the December 2011 negotiations London lobbied Warsaw to stay out of the fiscal compact. Its creation is a key part of the member-states’ efforts to stop the run on their sovereign debt. The fact that Britain not only decided against joining it but sought to discourage other non-euro countries from doing so – presumably to avoid being isolated – has been seen by many as an act of remarkable ill will. According to a senior Baltic official "Britain is a nuisance; it imposes an additional burden on us of having to go around it, complicating negotiations". This is not entirely fair: British proposals on how to stimulate economic growth, which many Central European governments signed, are among the most thoughtful of such contributions. But European diplomats think that London puts a lot more energy into demanding special deals for itself than solving the crisis.

The Central European officials I interviewed sounded genuinely regretful of Britain's growing estrangement from the EU – there was no sense of 'good riddance' or gloating. But Britain’s likely demands for opt-outs from EU policies will have very little support from them (with the possible exception of the Czech Republic). A dangerous situation has emerged. Even though the government in London seems likely to attempt to unpick some of its ties, rather than sever them all, it risks rejection. And would a bruised UK want to remain in the EU? The Central Europeans fear that Britain may drop out in anger, in effect leaving the EU by accident rather than by design. But, as one Polish official acknowledged "as long as the eurozone is a mess, Britain will not want to be shackled to a sinking ship. We need to sort out our banks and economies first, thus giving London the reason to stay".

Tomas Valasek is director of foreign policy and defence at the Centre for European Reform.

Comments

Added on 18 Oct 2012 at 00:38 by xxx

We are all European. World-level investors see Europe as one so we better stick together rather than follow old-fashioned us-and-we demagogy, especially challenged by other economic blocks, or even individual countries.

It's quite nice to invest in Central Europe (I wouldn't really use Central and Eastern, since the centre of the continent is in eastern Lithuania), so new markets and customers may become available to the rest in the nearest future.

Child allowance- perhaps some,
Free dentistry - not really - every single visit is paid at least £12, while in most EU countries, including Central Europe, it is absolutely free.
Free NHS - well, Britain isn't the only country to have universal healthcare. In fact it was one of the last ones to have it. It is only thanks to Atlee that Britain's poor don't die like in the US.
Education - well, PISA results in Central Europe demonstrate that even without EU funding the Education in Central Europe is generally one of the best in the world.
Housing - it's again a European thing - a standard rather than something distinctive to the UK.

I wonder if you travel at all.

I also wonder why Britain is not taking its advantage in the EU. It is a big country that could seek for alliance, like Germany, create its bloc, perhaps with conservatives in other EU countries, like Spain, perhaps the Czech Republic and Hungary...

Added on 19 Jul 2012 at 10:20 by Sue

You won't need our £50 million a day contribution then? Much of which has supported modernisation of your countries' infrastructure (as ours falls to pieces).

Presumably, the citizens of central & eastern europe, of which there are well over a million working in the UK will be happy to return to their homelands?

I won't even mention those that are receiving the UK's generous benefits including child allowance, free dentistry, free NHS and education and housing.

All the UK government is asking for is a little more control over our governance. You are fortunate that our leaders are pro-EU, if it were up to the electorate, we'd have been out years ago.

Added on 18 Jul 2012 at 20:56 by EUtopia

The UK's reputation has lately been severely damaged by its refusal to cooperate with the financial transaction tax. Anyway, important post, because no one talks about Central Europe these days.

Hollande visit fraught with friction

Hollande visit fraught with friction

Hollande visit fraught with friction

By Charles Grant, 09 July 2012
From Financial Times

The Socialist, the Tory, and the queen: Hollande visits UK

The Socialist, the Tory, and the queen: Hollande visits UK

The Socialist, the Tory, and the queen: Hollande visits UK

By Philip Whyte, 10 July 2012
From The Christian Science Monitor

Link to press quote:
http://www.csmonitor.com/World/Europe/2012/0710/The-Socialist-the-Tory-and-the-queen-Hollande-visits-UK

Le débat sur la sortie de l'UE s'amplifie au Royaume-Uni

Le débat sur la sortie de l'UE s'amplifie au Royaume-Uni

Le débat sur la sortie de l'UE s'amplifie au Royaume-Uni

05 July 2012
From Le Monde

Vote to impeach president adds to turmoil in Romania

Vote to impeach president adds to turmoil in Romania

Vote to impeach president adds to turmoil in Romania

By Hugo Brady, 06 July 2012
From The New York Times

Link to press quote:
http://www.nytimes.com/2012/07/07/world/europe/romania-parliament-votes-to-impeach-traian-basescu.html?_r=1

What now after 'seismic shift'?

What now after 'seismic shift'?

What now after 'seismic shift'?

Written by Hugo Brady, 01 July 2012
From The Sunday Business Post


Download: hb_businesspost_1july12.pdf
 

Britain should not go Swiss

Britain should not go Swiss

Britain should not go Swiss

Written by John Springford, 10 July 2012

British eurosceptics want to renegotiate the UK’s relationship with the EU. They divide into two camps. There are those who want Britain to stay in the EU, but win opt-outs from social and employment legislation and from justice and home affairs policy. This includes most Conservative government ministers. A second group, which includes many Conservative backbenchers, wants a looser relationship still. This camp seeks a British withdrawal from the EU.

The second group is vaguer about the terms on which the UK would carry on its trade with continental Europe after withdrawal. Some speak of a Norwegian arrangement, which would involve the UK joining the European Economic Area (EEA). Alternatively, the UK could sign a bilateral free trade agreement, under which Britain would be free to regulate its own markets as it sees fit. For most people in this camp, EU membership burdens the UK with too many regulations. If the UK left the EU, British products would still be in high demand, and the UK could carry on trading, but free of the EU’s supposedly constraining rules. And without those rules, the UK could concentrate on chasing growing demand in Brazil, China and the rest. The UK could become Norway or Switzerland – that is, in Europe but not in the EU, and freer and more prosperous as a result.

There are three flaws in this analysis, which arise from confusion about the nature of the single market, a failure to be hard-headed about its costs and benefits, and a lazy assumption that the UK can become Norway or Switzerland.

To take the last point first: Norway and Switzerland have a semi-detached relationship with the EU. But they are more attached than some eurosceptics imagine. As a member of the European Economic Area, Norway (along with Iceland and Liechtenstein) has access to the EU’s single market, and Norwegian citizens have the right to travel and work in the EU. Norway, moreover, has opt-outs from EU policies it does not like – like the EU’s common fisheries policy. But Norway’s special arrangements come at a price: the country must implement the EU’s single market legislation – including the social policies so disliked in Britain – but is excluded from decision-making on the rules. Norway must also contribute to the EU budget for structural funds and regional development.

If Britain withdrew from the EU and joined the EEA, it would be able to opt out of the common agricultural and fisheries policies. This would save a modest amount (around £1.1 billion a year, or 0.07 per cent of GDP) because Britain pays more into these programmes than it gets out. But Westminster would still have to sign all single market legislation into law, including social and employment policies.

What about Switzerland’s arrangements with the EU? Switzerland is not in the EEA, but has negotiated a series of bilateral agreements to get access to some areas of the single market. Switzerland must largely accept EU legislation pertaining to the markets it wants access to.

But is this not precisely the relationship the eurosceptics want? Could the UK, like Switzerland, have its fondue (the ability to sell to the rest of Europe) and eat it (avoiding those Brussels directives it dislikes)? Unfortunately, the answer is no. Switzerland signed up to the EU’s customs union in 1972, which abolished subsidy and tariff barriers. Since then, it has also decided to sign up to the majority of the single market: it is a full member of the single market for goods, a signatory to the Schengen agreement, and it has signed up to most of the single market for capital. In many areas, therefore, Switzerland is effectively a member of the single market. But like Norway, it does not have the ability to affect the rules that govern it.

Swiss firms are asking for further integration, too. Switzerland decided not to sign up to a range of financial services legislation in the 2000s, and was frozen out of some EU markets as a result. Swiss fund managers were prevented from offering asset management across the EU. Swiss banks are now starting to put pressure on the government to sign up to the EU’s post-crash financial rules.

All of which brings us to what the single market is, and why the UK needs it. Among developed countries, the biggest remaining obstacles to trade are non-tariff barriers like different national regulatory regimes. Eliminating tariffs and subsidies will only get you so far: if drugs have not been licensed for sale in another country, they cannot be exported. The single market aims to eliminate non-tariff barriers to trade by establishing common minimum standards, then forcing member-states to open their markets to foreign firms.
Yes, the EU’s approach to this has created some economic costs in the form of regulation (partly to soothe workers’ fears of competition run amok). But it is hard to argue that they are particularly large: under the working time directive, people have the right not to work more than 48 hours, and if they want to work more they are allowed to do so. Meanwhile, the benefits of single market membership are enormous. In principle, British firms have access to a huge market for their products, without 27 different sets of national barriers getting in the way. And foreign firms can enter our markets, forcing domestic companies to improve their performance.

It is difficult to imagine that the rest of the EU would cheerily say goodbye to Britain, but then let it have access to the single market without keeping the rules it has already signed up to, and agreeing to sign future rules into national law. And unlike Norway, the UK is a big and diverse trader. It does not specialise in oil: the UK is a big trader in many services, including telecoms, business consultancy, software and computing, law, financial services, publishing, design and much else. It also exports many high-technology goods, especially pharmaceuticals, chemicals and photographic equipment. Common regulations in each of these sectors allow UK firms to export without adapting their products and services to meet the rules of every country. This is not to suggest that foreign imports are not also good for the UK economy. British firms that cater for domestic markets are challenged by other European firms, forcing them to be more productive and innovative. Therefore, if it left the EU, it would still be in the UK’s interest to sign up to many of the EU’s rules.

In any event, it is almost certain that Britain’s eurosceptics will not get what they want: access to the single market without having to respect the common rules that make it work, or the policing of those rules by the Commission and the Court of Justice. Britain’s partners do accept its opting out of the single currency and some justice and home affairs policy. But they will not let Britain have something for nothing.

John Springford is a research fellow at the Centre for European Reform


Comments

Added on 11 Jul 2012 at 20:01 by Jacqueline

A strong point the article makes is certainly that the EU would not tolerate just to say goodbye to Britain and then let it renegotiate access to the single market. It is simply not realistic for the UK to negotiate a relationship similar to that of Switzerland, after having been a member of the EU for nearly 40 years. After all, Switzerland's bilateral relationship with the EU developed over a period of several decades and resulted in as many as 20 main- and 100 side-treaties. One of the reasons why the extremely complicated relationship between the EU and Switzerland works, is that it is an exception. The EU simply could not manage such a relationship with several of its neighbors, and might even regret having accepted it for Switzerland.

It should also not be forgotten that the EU-Swiss relationship has a range of disadvantages. Just to name two:
1. Although Switzerland is in most ways effectively a member of the single market, its decision-making power is more limited than that of the EU and the EFTA states.
2. Every time Switzerland wants access to a new area of the single market, a new treaty has to be negotiated. In the energy sector for example, Switzerland (and the EU) is clearly interested in a new bilateral treaty. Negotiations are however in a stalemate, because underlying institutional questions have not been clarified. Until these have been solved, no further bilateral treaties will be negotiated.

In short, although the Swiss case has some interesting aspects, it is neither desirable to copy it, nor is it in any way realistic.

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