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Why do market liberals in continental Europe and Britain tend to take contrasting attitudes towards the European Union? Samuel Brittan: Fulvio Guerrini Lecture, Turin 23/03/05 Historical background To understand the differing attitudes to European Union in different parts of the continent we need to go back a little into historical origins. There is no limit to how far we could go: the Greek city states, the Roman Republic and Empire, Charlemagne, the so-called Holy Roman Empire, the Congress system established after the Napoleonic Wars, Gladstone’s abortive Concert of Europe and many other episodes. But the modern European movement may be said to have begun around the time of World War I. One of its leading spirits was Giovanni Agnelli, the founder of Fiat. His main motive was political, stating that nothing short of a European Federation could prevent the Continent from degenerating into war again. He regarded the League of Nations as woefully inadequate for this purpose. He did add a powerful plea for a single European market to promote specialisation and longer production runs, rightly believing that it was ridiculous for all the many independent countries established under the Versailles Treaty to attempt to cover individually the entire industrial range. These ideas did not get very far when Mussolini took control in Italy; and it would be tactful to pass over in silence Agnelli’s later political activities. The torch then passed to the French statesman Aristide Briand, who was Foreign Minister for a record period and also often Prime Minister, and who proposed in 1930 in a memorandum to 26 countries a European union aimed to eliminate the danger of war. But he lost office in 1932 and died the same year. On the economic side statesmen and central bankers in all countries were mainly concerned in the 1930s to fight the Great depression and, some of them willingly, and others reluctantly, raised tariffs and other economic barriers as a beggar-my-neighbour means to achieving this. The main internationalist endeavour came unfortunately from Nazi Germany which traded freer entry into German markets for some of the Balkan countries in return for various economic and political favours, a system that became known as Schachtian economics. The modern movement towards European unity really began in World War II, again with the emphasis on avoiding future conflicts. The role call of honour is too long to list, but I cannot omit Altiero Spinelli, who started off as a Communist but became converted to a European federation as the indispensable guarantee of peace on the continent. As a Brussels commissioner and in other capacities, Spinelli had to make practical compromises; but he was always insistent that nothing short of a full federation would do. It was at this point that misunderstandings with Britain began. Winston Churchill had offered France common citizenship in 1940, in a vain attempt to get that country to continue the fight against Nazi Germany. But this was a one-off gesture. Churchill and other prominent Conservatives, then in opposition, called for a United States of Europe, but they did not make it clear whether or not Britain should be part of such a union; and after they returned to office in late 1951 it became clear that they only meant to cheer on the movement from the outside. The British only began to take a serious interest in the European Community in the late 1950s and early 1960s when it became apparent that a European Common Market was emerging which could place barriers against the export of British goods. After the failure of an early attempt to form a wider European free trade area, of which the Common Market would be part, the British government applied in 1961 to join the Community only to be rebuffed by General De Gaulle who famously remarked that Britain was an island. From the beginning the enterprise was sold to the British public under false pretences. The then prime minister Harold Macmillan knew quite well that the Community was a political enterprise; the real impetus to his decision came when the Kennedy Administration in the USA made it clear that Britain would have more influence on US policy as part of a continental grouping. But, despite various statements in very small print, the whole enterprise was still sold to the British public as a glorified free trade area with a few institutional details added. This was still true when Britain eventually joined under Edward Heath in 1973. Since then many additional elements seem to have taken British governments by surprise: the expansion of the Common Agricultural Policy, the development first of the Exchange Rate Mechanism and then of the euro, the EU social charter and now the proposed constitution. Market Liberal Attitudes These events have left many people, economic liberals among them, highly perplexed. Some of them are still enthusiastic about the EU and emphasise aspects like the Single Market which they want to reinforce and develop further. Others are more worried about the centralising and dirigiste tendencies. Such a spectrum of attitudes also exist in many other European countries; but it is fair to say that the centre of gravity of market liberal opinion in Britain is more suspicious of the EU than that of otherwise similar thinking people on the continent. One difficulty with this subject is to avoid getting bogged down in definitions. We can for instance debate for ever what is meant by the term "market liberal". I shall treat it as referring to someone who believes in a major role for markets and price mechanism in economic decisions, not only on efficiency grounds but because they provide more scope for choice and personal freedom. This general approach is compatible with a wide range of different attitudes, for instance to the Welfare State and redistribution towards the less well off. I shall also assume that economic liberalism is part of a wider liberalism embodying traditional personal freedoms and institutions which have grown up to protect them. Democracy is important mainly as a means to an end and needs to be subject to constitutional constraints. It should not just be the dictatorship of a temporary majority or plurality. We should not exaggerate differences. Market liberals on both sides of the channel can be presumed to share support for the Single European Market, even though they may differ on whether a single currency is an essential part of it. They dislike protectionist elements such as the Common Agricultural Policy and the toleration of industrial subsidies. They dislike the attempt to impose cost raising interferences in the labour market whether under the name of the Social Charter or in the guise of health and safety directives; and they want the European Union to take a lead in freeing world trade in negotiations such as Doha instead of dragging its feet on central issues. There is moreover a wide range of attitudes among British market liberals towards how far the EU is likely to help or hinder these objectives. While only a minority would like to leave the EU, it is not nowadays among market liberals where the greatest enthusiasm for the project is to be found. Countrywide Differences Obviously I can only give a rough sketch of different countries’ attitudes. France, as usual is most difficult to classify. Economic liberals are thin on the ground there and have as wide a range of attitudes to the EU as their British counterparts. French government policy is still based on the hope of restoring French power by taking a political lead in Europe. There is also a desire to maintain the "French exception" which has stood out against the revived free market movement of the last couple of decades. The original hope of German free market liberals was that the EU would continue on a bigger scale the market economy presided over by Erhard in their own country after World War II. Many of them have since become progressively disillusioned. German employers often complain of specific EU policies ranging from the euro to labour market interventions (which of course have their domestic counterparts). But they share enough of their government’s belief in the Franco-German alliance to avoid adopting too Euro-sceptical a tone. Some of them originally hoped, with ex-Chancellor Helmut Kohl, that they would achieve a political union in exchange for giving up the D-mark; but they have had to accept the euro plus a constitutional treaty as a sufficient political enterprise. Italy represents the strongest economic case for EU policies, including the euro. Free market economics has to be accompanied by some sort of monetary and fiscal discipline if market forces are to give the correct signals. Italian leaders had long despaired of achieving such a framework internally. Whereas in Britain it only weakened any economic argument to say it was necessary for European reasons, in Italy the opposite was the case and indeed there have been positive results. For instance Italian bond rates which were twice the German ones only 20 years ago, have now come down to the same - and much lower - level. Italian Finance Ministry officials assure me that they would not have been able to secure even a limited degree of fiscal rectitude if they had not been able to claim that this was necessary to meet the Maastricht criteria to allow them into EMU. Spain, like Italy, has benefited from greater international confidence in its finances. And like Ireland it has benefited from the Structural Funds to support the supposedly weaker regions of the Union. But in my view the part played by these Funds is much exaggerated. Both countries owe much more to the open door policies now adopted to trade and capital movements. Indeed there have been signs that the Irish have cooled off a little towards federal institutions since the last Commission tried to rebuke the supposed profligacy of a recent Irish budget. The new entrants from central and eastern Europe are easiest to explain. Many of them share British scepticism of centralised regulation. Indeed one Baltic negotiator said to me that negotiating with Brussels reminded him of previous negotiations with the Kremlin at time of the old Soviet Union. Nevertheless the new Eastern entrants wanted to join the EU as a sign of final emancipation from the Soviet bloc and also as a badge of respectability, which as in the case of Mediterranean countries has made it easy to borrow on international financial markets. The Scandinavian countries are, not surprisingly, nearest to the British in their attitudes. They welcome the free trade aspects but are hostile towards excessive regulation and centralisation. But they have resolved their dilemma in very different ways. At one extreme Finland is a full hearted member, playing a prominent part in running the euro. At the other extreme Norway has stood aside from the EU enterprise from the beginning. In between, Sweden and Denmark are less than full hearted members of the EU. They may or may not accept the constitution but they are still staying out of the euro. The Constitutional Treaty The proposed Constitutional Treaty highlights the dilemma of economic liberals. I am well aware that the opposition to the Treaty among French Socialists has been based on the charge that it incorporates Anglo-Saxon neo-liberal economics. But one must be very careful about concluding that a proposal, document or treaty which is a attacked from opposite sides is therefore a reasonable one. The problem lies in the "Community speak" in which the Treaty is written, in which either side can find substance for its worst fears. A good concise analysis comes from a paper of the US National Bureau of Economic Research ( The European Union: A politically incorrect view, A Alesina and R Perotti, NBER working paper 10342). The authors complain that the document fails to clarify the division of responsibility between EU institutions and national governments. It lists ten areas of so called "shared competence". These include very loosely defined ones such as "economic, social and territorial cohesion" and "freedom, security and justice". Members exercise their competence, "to the extent that the Union has not exercised its competence." There are also unspecified "supporting, co-ordinating or complimentary actions" in other areas including industry and education". Moreover "the union should have the confidence to promote and co-ordinate economic and development policies." As the authors remark: a legitimate interpretation of the verbiage is "it intends to leave the door open for future more or less veiled extensions of competence on virtually all possible areas one can think of". The Treaty makes most sense on the assumption that there is already a will to create a federal state but that in some areas there is still a lingering insistence on unanimous decisions. British supporters of the Treaty are making a mistake in supposing that it is enough to require such unanimity for tax, foreign policy and defence. The EU has been most intrusively dirigiste in "social policy", health and safety and similar areas. One simple test I often apply to proposed EU directives is this. Are there uniform policies in this respect in the United States or are they left to the discretion of individual states? The proposed Treaty makes no concessions to subsidiarity despite its generalised support for the concept. For the moment EU functions neither as a union of separate states nor a federation. It is a confederation in which different governments can obstruct each other, but no one has the authority to override sectional interests in the way the US president or British governments can attempt. Historically confederations have had a sad history. The one formed by the original American colonies was soon found to ineffective and gave way to the present US constitution in 1787. There was in the 19th century a German Confederation, whose main achievement was to hound Richard Wagner out of Germany and into neighbouring German speaking Switzerland. It was swept aside by the unsentimental "blood and iron" of Bismark’s Reich. One disturbing aspect of the proposed European Constitution is the expanded role for the European Court of Justice. I do not think for a moment that the judges there are deliberately plotting to impose a top down system. But they naturally tend to be people in favour of "building Europe" which they so often interpret as strengthening and underwriting legislation made at the EU level. The specific part of the consitutional document which causes me most concern is the so called Charter of Fundamental Rights. There already was a perfectly respectable ("Strasbourg") European Convention for the Protection of Human Rights, established by an organisation called the Council of Europe which long preceded the EU, and which I was delighted to see the present British Labour Government incorporate into British law. This new EU Charter adds to normal civil rights what it regards as social rights (Title Four, "Solidarity"). It entrenches collective bargaining and the so called social partnership as pillars of the union and threatens to reimpose the closed shop and many other horrors from which some countries have partially escaped. It does not really matter whether these labour market provisions are new or simply codify where the EU has arrived before the constitution was drafted. They underline the extent to which the European Union has come to incorporate a corporatist model in which governments and employers and unions bargain for shares rather than the more individualistic Anglo-Saxon labour market - which is compatible with quite a large amount of redistribution through the tax and social security system. A personal reminiscence may be in order. I used to be invited for a few years running to chair each spring a public discussion in Brussels of the latest Commission economic forecast. My hosts did not in the least mind that I was known to be sceptical of such forecasts. They thought that made for a better debate. But on one occasion I asked from the floor whether it would be possible to have the European Union without the "social partners". Nearly everybody on the platform was shocked and many people came up to me during the refreshment interval telling me how anti-democratic my question was. It may be coincidence that the run of invitations stopped after that particular meeting, but I have my suspicions. Two Conceptions of Democracy I have since been reflecting on this experience. While democracy is a means rather than an end, few of us like to be called anti-democratic especially when the implication is that some kind of dictatorship, however benevolent, is preferred. But there are at least two different concepts of democracy. One is that it is a balancing of interest groups. On this basis you need to bring together the farmers, industrial workers, merchants, capitalists and all the other main actors in the economic game. And you might for good measure add another group called consumers, although they are a more widespread and less specific group whose representation tends to be taken over by political activists with their own agenda. Into this interest group conception, "Social Europe" with its partners from business and the unions as well as governments fits very well. [Mention Alfredo Rocco] The other conception of democracy focuses on the general interest. This is a more subtle idea, difficult to explain accurately. I emphatically want to dissociate myself from the idea of Rousseau that there is some kind of superior General Will over and above the will of individual citizens. What I have in mind is something much more specific. lt is possible to have a supposedly fair balance between all the different interest groups and yet leave the consumer and the voter worse off. He or she may not realise this until there is a crisis which makes much of the protective structure untenable. The difference between these two conceptions cuts across national differences. The mainstream tradition of American political theory puts the emphasis on reconciling different interests. Political economists on the other hand put more emphasis on the national welfare, defined roughly as the long-run welfare of individual citizens, but not necessarily in the exact posts they occupy at present. By and large the European Union embodies the interest group or corporatist aspect, despite the valiant efforts of those in Brussels concerned with negotiating international trade agreements or promoting competition and the internal market. In recent decades the English-speaking countries -- the USA, Britain and Australia and New Zealand for instance -- have emphasised more the general interest approach. There are of course many backslidings, especially at election time. The influence of unions on the UK Labour Party and business lobbies among the US Republicans are still pulling in the special interest direction. But on balance recent US and British Administrations have been less devoted to the corporatist approach than Continental Europeans and officials. Although they might not make the frontal attack that an unelected commentator might make, they are not so shocked at the idea of giving less influence to unions and business federations together with the industrial and agricultural ministries that support them. Behind this schism there is a conflict between the long and the short-term. A defender of the corporatist model can say that people in affluent societies attach more importance to their role as producers than as consumers or citizens. A French farmer or a German coal miner might in the long run be better off with less protection and more productive employment but he might put the emphasis on his present comfort. In the abstract, one might just say it is a difference of preference and leave it there. But if we look at the problems facing Europe then the option of enjoying a high but static standard of living on the European social model may not survive. There are two main obvious threats. One is the increase in longevity combined with the fall in birth rates, known as the baby blip -- which is particularly severe in Italy -- will be increasing the dependency ratio, that is of old people to those of a working age. This means that policies to increase productivity are not an optional extra but necessary to reduce social tension. The same can be said of the challenge of the emerging countries, especially India and China that can produce an increasing number of American and European products at lower costs. I do not want to be apocalyptic about this; and matters are much more complicated than either the pro and anti-globalisation lobbies suppose. But at the very least there is pressure developing on the living standards of less skilled workers. It will be easier either to retrain them for other purposes or to redistribute income to them from the rest of the population with a more prosperous and -- to use the jargon phrase -- more "flexible" European economy. The Market Liberal Charge Sheet There is a slightly cynical aspect to the euroscepticism of some British economic liberals. Free market economics has never been a popular cause even in the country of Adam Smith. People do not go to football matches with copies of The Wealth of Nations tucked in their coat pockets. The free market school has however been quite successful in harnessing dislike of European federalism and foreign control to the free market cause. But it is possible to express the matter in a less chauvinistic way. In no country is there either a pure free market or one where intervention is limited to ascertainable social costs, public goods and principled redistribution. Left to themselves, the separate European states make unprincipled concessions to different lobbies, depending on their political strength: France to agriculture, Germany to heavy industry and so on. But in the EU these separate perverse policies are all added tother in way that is avoided in a free trade area. For instance, the UK, Scandinavia and the Czech Republic have to countenance a level of agricultural protection geared to French farmers and Bavarian weekend smallholders which could be avoided if decisions were returned to a national level. There are more mundane reasons why British business is less keen on the EU. A good example is the financial services directive. Originally the City was keen on extending the single market to financial services so that it could compete at the continental retail level. But it has now come to resent the mass of new regulation coming on top of the home grown variety. I was present this January at the annual City debate organised by the Futures and Options Association. In early 2002 a motion suggesting that "Regulation keeps reinventing itself to hide the inevitability of its failure" was lost by 60 pc to 40 p.c. of those present. A new vote was taken (without debate) on the same motion this year (2005). This time it was it was carried by 81 pc to 18pc.. The hard fact is that many City of London institutions feel that they are already able to compete for business on world markets and see little to gain from a theoretical extension of their opportunities to compete on the Continent if it comes at the price of ever more intrusive regulation. There is also the exchange rate aspect. The economic case against the euro is that it deprives national authorities of the ability to adjust monetary policy to domestic conditions. But this matters especially for sterling which is sandwiched between the dollar and the euro. The ability to move in one direction or another is much more important for a country which does a higher proportion of its trade with the dollar world than is the case for continental economies. Conclusion Where do we go from here? Whether or not the constitution is approved, it is time to draw a line in the sand and call a halt to efforts to "build Europe". These have been going on for 50 years and we could all do with a period of stability in which we try to make existing institutions work and even contemplate returning some decisions to a lower level. If we take this route, we should not try to prevent an inner group of countries, say France and Germany and any who want to join them, from advancing to a much closer union if that is what they wish to do. A two or three or even four speed Europe is a horror mainly to politicians and officials who are afraid of losing their place around some imaginary top table. In a union of 25 countries which could go up to 30 or more, it is most unlikely that one set of institutions will suit all of them. The need surely is to relax a bit. Let European countries develop in their own way and according to their own momentum and put aside dreams of joining to become a great power to rival the United States or China. Appendix on Comparative Growth I have been careful not to base my strictures on the EU economic model on the usual growth comparisons. In the decade up to 2004 the US GDP growth trend was approximately three per cent per annum in GDP terms while EU growth was two per cent. But as this difference represents almost entirely population growth. There is nevertheless a large absolute gap between GDP per capita of about 30 pc in the two areas which has not narrowed. This does not reflect productivity as measured by output per person or even per hour, where the gap has been virtually closed. The difference represents labour utilisation which is still much higher in the US. If the difference represented purely a greater European preference for leisure, holidays or early retirement as the expense of take-home pay, there would be no cause for concern except on the part of a statistical league table fanatic. The worry of the economic liberal is that the low level of labour utilisation in much of the EU represents the effect of so-called social provisions, whether legislation or agreements with unions which make it difficult for people to make their own choices and which price out of work fringe workers of all kinds. The so-called Lisbon Agenda adopted by the EU in the year 2000 had the inflated headline objective of making the EU "the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion" by 2010. Leaving aside the political fluff, the concrete aim was to raise average annual economic growth from two per cent to three per cent per annum. More important was the objective of raising the employment rate from 61 per cent in 2000 to 67 per cent in 2005 and 70 per cent by 2010. There has indeed so far been some improvement in the employment rate, but only about half of that envisaged at Lisbon. Examples of what has been done include the Hartz reforms in the German labour market, a more elastic interpretation of the 35-hour-week in France and more flexible rules for hiring and firing part-time workers in Italy. However according to a Goldman Sachs analysis (Pan-European Economics Analyst, Feb 10, 2005), nearly all this improvement has been at the national level and there is hardly a single example of a liberalising labour market reform emanating from EU activity. The main influence driving national governments has been competition from the ten new EU states with much lower levels of pay and social protection. There are two plans for reviving the Lisbon Agenda. One is that of the EU Commission, is to focus only on growth and employment. On the other hand an expert Group, headed by the former Dutch prime minister, Wim Kok, attempts like the original Lisbon communique, to combine the market-friendly reforms with more nebulous goals for social cohesion and the environment and these seem the more likely to be the basis of agreement. It must be emphasised that social cohesion and an improved environment are eminently desirable objectives. The objection is to their being imposed on widely different countries on the basis of fashionable left-of-centre slogans which in practice work against the market-freeing agenda. Whether one is interested in speeding up growth or expanding personal choice, it is difficult to escape the conclusion that the less that is co-ordinated at the EU level the better.
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