Germany and Britain: an alliance of necessity

Germany and Britain: an alliance of necessity

The authors argue that Europe needs Germany and the UK to form an alliance. These two countries are closer than they have been for a generation on many vital issues. But to realise their potential for partnership, the UK has to end its ambiguity about the euro, while Germany has to reform its economy and armed forces.

The European Union has to make fundamental changes to its institutions and budget, and its economies require deep structural reform. But it lacks leadership, say Mrs Grabbe and Mr Münchau. The Franco-German relationship, which drove major policy initiatives like monetary union, has become a drag on further progress. A strong partnership between Germany and the UK – two large, reform-minded member-states – is necessary to overcome the EU’s inertia on tackling these crucial issues. On institutional reform, Tony Blair and Gerhard Schröder have a surprising convergence of views. They now have enough common ideas to put forward a joint British-German agenda for the 2004 inter-governmental conference.

The authors identify several key areas for closer co-operation. Germany and the UK are both strong advocates of enlargement, and they must push the EU to accept its first post-communist members in 2004. After enlargement, the two countries should push for a radical reform of the EU’s budget. Both countries are contemplating the re-nationalisation of large parts of the EU’s agricultural policies, and both could support focusing regional aid on the poorest parts of the enlarged Union.

According to Mrs Grabbe and Mr Münchau, Britain would have more to offer Germany than France does, if it were part of the monetary union. The political dynamics in the Union would change on British entry. The Treasury would become less reticent in suggesting how to reform the European Central Bank. It would be more constructive in arguing for economic policy coordination. And Britain would find more willing ears in the rest of Europe for its arguments about the need for structural reform, particularly through the Lisbon process. Britain would not be an easy partner for Germany in the eurozone, but the two countries’ differences of opinion could be a useful stimulus to reform. Germany has found the fiscal straitjacket of the Stability and Growth Pact very uncomfortable, and its leaders are critical of eurozone monetary policy. Further convergence would take place after monetary union, as it would integrate their economies more closely and remove exchange-rate fluctuations. The authors conclude that Britain could push economic reform in the eurozone, and help Germany to liberalise its economy. But these goals can only be achieved if the UK joins the euro.

Heather Grabbeis research director at the Centre for European Reform.Wolfgang Münchauis editor-in-chief of Financial Times Deutschland.

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