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John O'Sullivan: The possible consequences of the British veto that never was

JohnosullivanJohn O'Sullivan is Editor-at-Large of National Review.

In his memoir of the Thatcher administration, Nigel Lawson, her Finance Minister, gives a droll explanation of the Foreign Office’s reasoning on the proper use of the veto in European Union deliberations. The survival of the veto was a vital British interest, ran the F.O. line. So whenever any other country used the veto, the F.O thought that Britain should support it irrespective of the merits of any particular case. On the other hand, Britain should never cast a veto in its own cause because that might put the veto at risk. Hardly surprisingly, David Cameron’s decision on the 10th of December to veto the establishment of a new fiscal union of seventeen Euro-land countries within the EU treaty structure was the first occasion when a British leader has actually cast a veto to defend vital British interests.

If he actually did so, that is. For almost everything we thought had happened on the morrow of that European “summit” turns out to be either false or trivial. The headline story is that Cameron sought to insert a broad exemption of Britain’s financial services from European regulation into a treaty that was urgently needed to save the Euro from collapse and, when he failed, vetoed the treaty favoured by everyone else only to find that he and Britain were deservedly “isolated.” Here is Wolfgang Kaden’s relatively restrained version of this view in Der Spiegel:

“The result of Thursday night -- the 17 euro-zone countries joined by nine others pending parliamentary approval in three of the non-euro-zone capitals -- is a success. A success for the majority of Europeans and for efforts to find a solution to the euro crisis. Any deal with the obstreperous British would have been a weak compromise, and one that would have allowed questionable economic practices to continue.”

Kaden’s interpretation was echoed, often in more hostile tones, throughout the West European media - not least in the BBC, those parts of the British media sympathetic to the European version of supra-nationalism, and as Lawson might have predicted, the British Foreign Office.

At the very least, however, this account provokes what should have been obvious questions. If this treaty is urgently needed to save the Euro, why was any serious action on it postponed until March of next year or even later? Why did the Franco-German proposal for it contain neither sufficient funds nor the kind of common financial instruments (i.e. Eurobonds) that would enable Greece and others to avoid default and remain inside the Euro? And why did France and Germany firmly reject an almost timid British compromise to join the treaty provided that the seventeen Euro-land countries were effectively barred from determining policy about the vital interests of all twenty-seven EU member-states such as the UK’s financial services industry?

Once the Franco-German rejection was clear - with its implication of a wider underlying hostility to Britain - Cameron was bound to resist. He did not, of course, veto the treaty since there was no treaty on the table. He merely indicated that Britain would not join a treaty on such terms when March 2012 finally came around. He knew that he was blocking nothing at all, let alone something urgent, since France and Germany had warned they would sign an identical treaty outside the EU framework if necessary. And if he rushed to judgment that night rather than waiting for later discussions, so did the other 26 leaders. Finally, Cameron is not even “isolated” today since other leaders must consult their parliaments before final signature. And, as we shall see, much may happen before then.

As Tallulah Bankhead said of “Waiting for Godot,” so it might be said of this controversy: there is less here than meets the eye. The bond market has confirmed this cautious judgment by reacting far less excitedly to it than the politicians and the media on both sides of the English Channel.

Yet there is also more than meets the eye here. It is almost as if the French and German governments had some kind of ulterior motive in their diplomacy. What could that possibly be? One interpretation, supported by a reading of the West European press as described above, is that France and Germany want to push Britain out of the EU by degrees. This was merely the first step. Those who favour such a gradual expulsion of Britain echo the more extreme British Eurosceptics when they suggest that the United Kingdom is not a naturally European country, but as De Gaulle said, a nation that will always prefer the open seas. Wolfgang Kaden again:

“[T]o to this day, the UK feels much closer to America than it does to the frogs and the krauts on the other side of the English Channel . . . Great Britain is an EU member that never truly wanted to be part of the club. It was more of an observer than a contributor and it always had one eye on Washington.”  

This interpretation is not wholly false. The British do feel less comfortable than most other Europeans in a European Union that was designed to suit countries with less liberal and more corporatist economic, political and legal traditions. They represent, it might be said, a certain idea of Europe that brings them into occasional, maybe regular, conflict with countries shaped by more statist and centralized histories. They are more likely to favour free markets inside Europe and free trade between the EU and the rest of the world than either Paris or Berlin. Their exclusion would therefore change the balance of the argument on such matters in future. On this occasion, however, nothing remotely that important was at issue.

So another interpretation suggests itself: maybe this exaggerated tale of British intransigence, as well as being enjoyable, was designed to distract the attention of other member-states from the nature and likely results of the fiscal union that is being proposed in the treaty. By creating a crisis mentality (without actually dealing with the crisis), France and Germany have also created a sense of irresistible momentum towards adopting a new fiscal system for most of the EU - and, as they assuredly hope, for all member-states in the long run.

If that is the strategy, it seems to be working quite well. That should not be surprising. The same strategy worked quite well in the run-up to the foundation of the Euro when any sceptical questions about it were treated as a combination of stupidity, near-fascism, and blindness to the plain instructions of history. The result was, as even Jacques Delors admits in a somewhat self-serving way, that the Euro is bedeviled by, inter alia, a currency misalignment of about one-third between northern Europe and Mediterranean countries. What unsuspected problems are inherent in the very sketchy plans for a new fiscal union linking the countries already suffering from those of the Euro? No one really knows.

Among other EU states, therefore, Hungary might want to use the three months before any final such commitment to scrutinize the fiscal union proposals more critically than the Maastricht conference examined the proposal for a common currency.  

The first such question should be: how do we deal with the immediate crisis of the Euro? The fiscal union is a proposal not to repeat the mistakes that led to the current crisis. Whether those solutions are workable we will discuss in a moment. But we still have the current crisis. As pointed out above, the fiscal union treaty proposes neither sufficient funds nor new financial instruments to enable the Mediterranean countries to continue financing their debts at reasonable rates of interest inside the Euro. These countries will be going to the bond market next year to raise substantial capital sums. How will they cope if the funds are available only at “vulture” (i.e. realistic) rates?

The proposed solution whereby the European Central Bank would bail them out with otherwise illegal funds that have been legally cleansed by diverting them through the International Monetary Fund is already running into difficulties. The Bundesbank is opposed to it, and non-European countries within the IMF are raising questions too. The IMF is not supposed to be a wholly-owned subsidiary of the Quai d’Orsay. Its funds belong to all its members worldwide. The poorer ones may well object to a rich continent grabbing such a large share of common international property. Again, however, we shall see.

Suppose, however, that some such arrangement survives scrutiny. Even then the most it could achieve would be to stabilise, not end, the Euro crisis. While they remain locked into the vertiginous exchange rate represented by the Euro, the Mediterranean countries in the EU will be locked into economic austerity without end - and northern Europe will be locked into paying an endless flow of subsidies to them. The result would be to transform Greece, Italy, Spain, and Portugal into one large Mezzogiorno or East Germany for decades. Reconstructing the Euro so as to have these countries outside it - and thus able to adjust their economies by allowing their currency to fall - would be painful too. But it would be bearable pain with a time-limit. As the Mezzogiorno has shown, the time limit for ending the pain of restructuring these economies within the Euro is - appropriately enough - the Greek Kalends.

And for what purpose? Not prosperity or economic welfare. This would represent an enormous loss and waste of wealth to people at both ends of the transfer. Its only purpose can be a political one - “to build Europe” or, more precisely, never to retreat from a previous advance towards “ever close union” in order to sustain the myth of its inevitability. One might have thought that Central and Eastern Europe had already suffered quite enough from the politics of “inevitablism.” As an old-fashioned Anglo-Saxon empiricist, I find this exchange of real wealth for the fool’s gold of political prestige simply silly. But my teachers always said that I lacked idealism.

Supposing (again), however, that the Euro-land 17 find this trade worthwhile, how would it mesh with their democratic systems of government? The longer-term remedies embodied in the fiscal union essentially boil down to two: first, promises to keep their structural deficits within agreed limits; second, a regulation that they submit their budgets for approval to a Brussels committee before presenting them to Parliament. The first is a re-run of the misnamed Growth and Stability Pact that came in with the Euro; the second is both an acknowledgment that the pact was circumvented last time and an attempt to ensure that any such finagling is discovered in time and stopped next time.

This financial repentance is very creditable, of course, but it comes at a heavy price of another kind. If the Hungarian budget is presented to Brussels and passes with distinction - a nice thought-experiment - not a great deal happens. It is then presented to the Hungarian Parliament, as now, though there will perhaps be a sense that MPs can’t seriously amend a budget that Brussels has already approved. If the budget is disallowed by a Brussels committee, however, will Parliament be able to accept it even if it wishes to do so? Will the government feel they cannot proceed even if they retain a residual right to do so? What if the budget reflects a wider set of government priorities that has just been endorsed by the voters in a general election? In all these events the EU has intervened through this regulation, perhaps decisively, in Hungarian domestic politics.

That creates a simple choice: if the Hungarian budget does not need to be approved by Brussels, then the fiscal union rests on the same shaky foundations as the Growth and Stability Pact. If it does, then the EU is the sovereign political power- and Hungary has ceased to be governed democratically in fiscal matters (which, as it happens, are ninety per cent of politics.) That is altered not one whit by the fact that Hungary might be represented on the Brussels committee or that it would be sharing in “pooled sovereignty.” How much sovereign power was Britain able to exercise even outside the constraints of the fiscal union? How much more will Hungary or Estonia, or now Croatia be able to exercise because they are better “Europeans”?

But perhaps the point is best explained metaphorically: A bachelor is a sovereign power; a married man enjoys the benefits of pooled sovereignty.

Of course, a married man might sometimes break his marriage vows - and Hungary or some less responsible country might refuse to submit its budget to Brussels or ignore its criticisms. That is the weakness of the fiscal union treaty from the joint standpoint of Brussels, Paris, and Berlin. As long as the fiscal union remains just that, lacking a European demos to give its collective budgetary decisions some democratic legitimacy, then the prospect of a government defying Brussels or - more plausibly, in the case of Greece- a government endorsing a Brussels decision but finding itself unable to implement it in the face of popular opposition remains a distinct possibility. What then? Sending in the troops, expelling the recalcitrant people (along with their compliant government) from the EU, imposing a heavy fine—these solutions seem unlikely to be effective. A fine, for instance, would have to be heavier than the cost of the original fiscal offense to be even remotely so. Until there is a democratic European nation-state - the Greek Kalends again?- then democratic government responsive to its citizens will remain the constant threat to the successful working of fiscal union.

To make assurance doubly sure, Brussels, Berlin, and Paris - especially the latter - are likely to seek the most ambitious interpretation of the fiscal union’s powers. Tax harmonization will soon be on the agenda. How long will Ireland’s low rate of corporate tax survive? Indeed, the promotion of such uniformity may be one element in the willingness to see Britain outside such institutions. Britain, after all, represents the free market rather than the social market, free rather than managed trade, and competition over tax and regulations rather than bureaucratic harmonization of them. It represents a competing agenda within the European Union. Without Britain as the “spanner in the works,” in Wolfgang Kaden’s words, an agenda of corporate and statist uniformity is likely to make progress throughout both the fiscal and European Unions. It will be justified by constant references to the international financial crisis allegedly caused by the uncivilized free market; but it will be brought to you by those wonderful experts who gave you the Euro crisis.

Time, surely, to read the fine print.


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