Dr Liam Fox MP: Britain, the Euro and the European Union
Jul 2012 02

Speaking to the TaxPayers’ Alliance at the St. Stephen’s Club, Westminster, on 2nd July 2012, Rt Hon Dr Liam Fox MP said:

British Conservatives are often caricatured both at home and abroad for having a political obsession with the European Union. Yet, anyone who watched the recent G 20 Summit would have realised that not only had the “obsession” gone global but that there was a very good reason for doing so. The failure inside the European Union to deal with the crisis in the Eurozone is now posing a real threat to the well-being of the whole global economy.

I will return to the economic tragedy that is the euro later, but let me begin by setting out the political-and emotional- reasons why the European project has found it harder to take root in the UK than on the Continent.

BRITAIN’S DOUBTS
On the 6th of June 1975, 31 years after D-day, it was announced that 67% of British voters had decided to stay in the EEC in the referendum held a day earlier. I remember that day well- one of my earliest political memories. It is particularly vivid as my parents had campaigned on opposite sides.

It was a microcosm of the national debate. On one side, the argument that we must do everything possible to avoid future conflict in Europe and that closer economic cooperation made sense in the light of this. On the other was the suspicion that Britain’s national sovereignty, which had been defended at such a high price only three decades earlier, was being quietly sold out by the back door.
It is a debate that has important resonances today for the following reason. Most of those who voted yes did so on the basis that their assent was for trade and economic purposes alone- it was, after all, the European Economic Community – the Common Market.

The debate did not focus on the very first line of the Treaty of Rome that “determined to lay the foundations of an ever closer union among the peoples of Europe”. However it was this Treaty provision that was used to justify subsequent progression to the EC and then the EU via a range of so called “final” treaties. Consequently there remains a strong seam of resentment running through a large part of the British people that they voted for one thing and were delivered into another. Worse, there is a suspicion that those who persuaded them to do so were all too aware of this deception. Not only were they sold a pup but they were intentionally sold a pup.

I say all this because to fail to understand this simmering resentment leads to a failure to understand British attitudes to the whole Euro-project. It is a resentment that has been fuelled by a lack of clear choice at subsequent British General Elections because of the major Parties’ consensus on the subject and by the lack of the option for a second referendum.

FRUSTRATION
This feeling,that we agree to one thing only to be delivered another has been a recurrent theme in our relationship with the EU. Let me give you one clear example.

The single market was one of the most important aims of the European Union project.

Margaret Thatcher is sometimes accused of having herself promoted the concept of “ever closer union” by signing the Single European Act in 1986. Nothing could be further from the truth. As she has explained, this Act was key to the creation of the single market, the concept to which most people in the UK subscribed i.e. the common market. As Prime Minister she had specifically sought reassurance from her officials that qualified majority voting would be strictly limited to the sphere of the economic free trade issues– and she was given those assurances.

However, overnight, the “acquis communautaire”, the commission and the ECJ quickly sought to extend their competence to employment and social security law as well as health and safety. It was that development, the fact that she had been so seriously mis-advised that caused her to articulate her hostility to the whole project leading ultimately to her famous “ no, no, no”.

Successive British Governments have entered office to discover that their ability to shape domestic events is consistently curtailed by dictat from Brussels.

EU: “NOT FOREIGN ENOUGH”
If there has been a flaw in the European debate inside the British Conservative party it is that we have allowed it to be characterised as the “little Englanders” response- in other words that we dislike the European Union because “it is too foreign”.

We must turn that perception on its head because quite the reverse is true. Most of us believe the problem with the European Union –  in an interdependent and sensitive global economy –  is that “it is not foreign enough”.

By this I mean that too often European leaders behave as though they are still at the centre of the global economy. Too many have maps behind their desks with the Greenwich meridian in the middle of the world when it should be the international dateline, the real economic and political centre. Too often the debates among European leaders are introspective and retrospective with too much EU navel gazing at a time when vision is needed that is outward looking and forward-looking.

In Britain, too much of the debate has focused on the UK/EU interface. Important though that relationship undoubtedly is, the more important interface is the one between the EU and the global marketplace. That is where the real failure of analysis and leadership lies.

The EU may have provided a useful single voice in previous trade talks, though some dispute even this, but there are growing fears that in a global context the EU is not only increasingly uncompetitive but potentially anti-competitive. The labour and social costs which were seen as improving the quality of life of workers might have been workable in an era when Europe was a dominant global economic force but to continue with unaltered, or even extended, rights and benefits at a time when the European economy has come to be pitied rather than admired is simply delusional.

What was originally seen, particularly on the political left, as an advance for European workers has turned sour as the unwillingness to change in the light of circumstances has consigned millions — particularly the young — to unemployment as the so-called “emerging economies” have disappeared over the economic horizon leaving Europe behind.

On trade we are told that we are inextricably bound to the EU because of our export relationships. Yet the European Union countries export more to Britain than we export to them and, since the time that we joined, WTO rules have increasingly meant that the free trade arrangements that we have with our European partners are guaranteed by international law and not simply by virtue of our EU membership.

Perhaps the most telling statistic set out by those who argue that Britain could not manage economically outside the current structures is that Britain exports more to the Republic of Ireland than to China and Russia combined.

I would turn this argument on its head. What does it tell us about our horizons that we still export more to a country with a population of 4.6 million than we do to Russia with a population of 139 million or China with a population over 1000 million, one of the world’s fastest-growing consumer markets.

It only re-emphasises that our lack of focus on the growing global markets, especially in Asia-Pacific, has caused us to be more economically affected by the woes of Europe than the rapid growth in global wealth beyond the continent.

THE EURO
All of this has been brought into sharp focus by the crisis in the Eurozone.

The euro was always a flawed project.

Intellectually, it was never clear whether it was a political or economic entity.

In its execution, rules were regularly ignored building new fault lines into its already inherently flawed architecture. Such was the rush to entry that woefully scant regard was given to considerations on how to manage and choreograph the exit of a member.

The consequence is that no one has any idea how to get out in a crisis. Off the euro sailed, lauded as unsinkable as once the Titanic was, and still no one worried about the lifeboats.

There were, in effect, two intellectually defensible models for the euro.

The first was to say that this was such an important element of ever closer union that everything possible would have to be done to make it succeed. Some saw this as analogous to the United States after the civil war. Then, with the abolition of the Confederate currency, there was a consolidation of state debt into the federal debt for the first time and the ability to have free fiscal transfers between the federal and state governments if required. This has not happen in Europe because of the huge disparity between debt levels and the unwillingness of sovereign states to bail out other sovereign states.

The second possible model was a purely economic one. Optimal Currency Area theory was used to justify the possibility of a currency union. The theory envisages that a currency union is possible for countries within a fiscal union or with similar economies or prepared to adopt measures to converge differing economies.
In the end, neither model was followed. Instead, we got an unstable and unworkable hybrid.

Not only were countries who failed to meet the convergence criteria allowed to join the euro but a lack of fiscal discipline subsequently meant that many countries, including at times France and Germany, broke through the barriers that were supposed to keep the currency on the rails. Little wonder that some countries operated in the apparent belief that whatever they did a financial solution would be found for them from outside.

Germany more than any other country must decide whether this contaminated hybrid will be allowed to continue or not.

In effect its Government says that the euro is an indispensable landmark on the road to ever closer union but that Germany will not make the fiscal transfers necessary to make it happen- at least not yet.
Worse, the view from Berlin has been interpreted to mean that Germany is willing to tolerate any level of austerity in any other country apart from Germany in order to make the project succeed.

This is a recipe for instability and the rise of nationalist sentiment in Europe. It potentially makes the stability pact a suicide pact. The idea of austerity being forced upon smaller nations by Berlin has too much historical resonance to succeed without fostering potentially dangerous political backlashes on both left and right. David Cameron was absolutely right to use the British veto when he did.

The mistakes that have been made- allowing the wrong candidates to join at the start, the lack of fiscal discipline across the eurozone and the political paralysis that has resulted in every summit being behind the curve-will have an unavoidable price tag. If funds are not made available from the richer nations for stabilisation of the poorer ones then default in the face of politically undeliverable austerity could result in debts being transferred via banking failures to the same sovereign governments who currently want to avoid paying the bill.

It is here I feel some sympathy with the position of Chancellor Merkel. She is undoubtedly right that austerity measures, living within your means with a smaller state are an absolute requirement for long term, stable recovery. But it is a message that was delayed too long in its delivery and that delay will have a financial cost.

And that cost will largely have to be carried by Germany whose own strong economic performance, especially in exports, has been helped by the weakness of the euro. Like it or not it is in Berlin where the future of the entire single currency project will largely be decided, whatever new order M. Hollande believes he has created.

Of course, whether the German taxpayers are keen to pay the bill for what the euro-enthusiasts in Brussels call “ever more Europe” is another matter.

It is not enough to say things should not have been allowed to get to this point – they have – and the consequences of years of contributory negligence must be faced by those who were willing to look the other way while fiscal chaos reigned across the continent.

THE SUMMIT
And so we came last week to yet another summit to save the euro , the latest in a long, and increasingly tedious instalments, of euro “Groundhog Day”.

The surge in global stock markets after the underwriting of eurozone banks from the European Financial Stability Fund might lead the uninformed observer to believe that the crisis is on the way to being solved.

What really happened was that fiscally incontinent banks, and nations, sought to avoid their responsibilities and kick the problems, yet again, into the long grass.

Yet the bad news for taxpayers, especially German taxpayers, is that this is, at best, buying time to deal with the underlying problems and contradictions in the whole project.

For this is not simply a fiscal problem- it is also an economic and cultural one. The measures taken will not solve the systemic problem because the fundamental analysis of the Euro Leaders is flawed. It is the persistent divergence of the member economies and the virtually irreconcilable cultures of some member nations that produce the fault lines.

You can throw as much good money after bad as you fancy and apply all the fiscal discipline you like but Thessalonika will not transform into Dusseldorf any time soon.

And so that the Greeks don’t feel scapegoated, the policy of the new French government to reduce the pension age shows just how bizarre and disconnected from global economic reality are the would be problem solvers around the table.

RENEGOTIATION AND REFERENDUM
We are no clearer about how the eurozone will ultimately be constituted.

But whatever model is ultimately chosen to deal with the eurozone crisis it will have profound consequences for the UK and its relationship with the EU.

Whether there is a large central core of 17 states or a smaller central core of 10 moving towards greater fiscal, and therefore political union, the dynamic of the EU will be so fundamentally changed that it will be impossible to persuade the British people that this is the Europe they voted to join and we should not seek to do so.

I want to be very clear on the central point here.

I do not believe that Britain’s national interest is served by its current relationship with the EU.

This becomes even more so with the shifting dynamic unfolding before us. It is not we in Britain who have brought about the fundamental change in the nature of the EU- we stayed outside a single currency project whose flaws have turned out to be exactly as we envisaged. But such is the new reality in which we find ourselves that to either ignore or deny this would continue the policy of half-truths and deception which has gone on for far too long.

There are those, including a growing number of my Parliamentary colleagues, who call for a simple “in or out” referendum to be held in Britain soon. I too believe that a referendum will be vital but I believe that having one now would be a huge error with enormous tactical risks. It is not a coincidence that some convinced euro-enthusiasts support such referendum calls, confident that a scare campaign based on false fears of political and economic isolation would win the day.

Instead, I would like to see Britain negotiate a new relationship with the EU based on economic rather than political considerations and set out in clear and unambiguous language. If we succeed a referendum should be held and formal acceptance advocated. If, on the other hand, this approach is rejected outright or falls short of necessary “red lines”, then we would have no alternative but to recommend rejection and consider departure from the EU.

For my own part, life outside the EU holds no terror as I believe globalisation will increasingly force countries to cooperate more closely on the basis of functional commonality rather than geographical proximity. It would, though, given our economic interdependence be to the advantage of all to create a more stable and mutually agreed compromise.

We have not moved the goalposts. But they have been moved nonetheless. We must now respond.

For 20 years, since I entered Parliament, we have been told that we are winning the arguments on Europe and that it is coming in our direction. It is not true.

We must free ourselves from the dogma of “ever closer union” that has been a handicap on every government since the 1970s.

It is a dogma that has led to failure to adapt to a changing world and has thrown millions of young Europeans into high and structural unemployment.

There will be those who say that this is the wrong time and that it is politically difficult or even impossible. These are the perpetual arguments for inertia.

It is the British public who must be the final arbiters and their voice has been ignored for too long. Politicians of all parties must show that they are able and willing to put the National interest ahead of narrow electoral interests.

We should not wait for EU leaders to recognise the failure of the ill-conceived euro before we set out what we want for the British people.

Britain’s destiny is not a debating issue for leaders on the continent. It must be made in Britain.

This is the time for us to rise to the challenge.

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