The importance of EU reform

This analysis argues that the outcome of the Convention will be important for the British government’s chances of winning a possible euro referendum.

Why the European Convention and EU economic reform may be the key to a Yes vote on the euro

Few people in Britain have heard of the European Convention. Fewer still would link the Convention’s deliberations on the future of Europe with the domestic debate on whether Britain should the euro. Yet, the outcome of the Convention, and its timing, will be important for the government’s chances of winning a possible referendum. So will be the EU’s efforts to revamp its framework for economic policy making. This article tries to put Britain’s interest in the EU and its possible euro aspirations in a broader context.

For the fourth time in little more than a decade, the EU is trying to improve the way it allocates power internally, makes and implements decisions, and presents itself to its own citizens and the wider world. Three previous attempts – which resulted in the treaty changes of Maastricht in 1992, Amsterdam in 1997 and Nice in 2000 – were less than fully successful. On each occasion, EU leaders made some progress but ducked the more important issues. With ten new members set to join in May 2004, the pressures to reform have become stronger than ever. The Union has therefore decided to convene another inter-governmental conference (IGC, the representative assemblies used to prepare reforms) in 2004.

The EU decided that the 2004 IGC should be different from previous ones. It would have a broader mandate and more democratic legitimacy. Following a decision at the Laeken European Council in 2001, the EU in early 2002 established the ‘European Convention’ to precede the IGC with a wider debate on the future of the Union. Unlike an IGC, which consists of a narrow circle of government representatives with pre-determined negotiation strategies, the Convention is an open forum. It has more than one hundred delegates, mainly members of the European Parliament (MEPs), national parliamentarians, European Commissioners and government representatives drawn from current member-states and the 13 candidate countries. Hordes of non-governmental organisations, lobbyists and journalists follow or try to influence its proceedings. Discipline is bestowed by the Convention’s praesidium, which is headed by the former French president, Valery Giscard d’Estaing. After an initial brainstorming and ‘listening’ period, the Convention defined its task as nothing less than to work out a constitution for Europe.

Yet, in the UK the debate about the future of Europe is still notable mainly for its absence. The media tend to concentrate on snippets coming out of the Convention, such as an earlier suggestion that the EU should be re-named ‘the United States of Europe’ (a name invented by Winston Churchill). Few commentators offer rigorous analysis of the real issues at stake.

For most British people, Europe is primarily of interest in the context of the ongoing euro debate. If Britain adopts the single currency, they ask, is it linking itself irrevocably to a “European super-state”? Or would eurozone membership put Britain in a better position to push for economic reforms, thus making continental Europe look “more like us”? At the time of writing, many people were doubtful whether the government would hold a referendum on the euro membership later in 2003; or indeed during the current parliamentary term, which expires in 2006. The government has promised to base its decision whether and when to join on thorough economic analysis. Although the Treasury’s five tests focus predominantly on how the British economy would respond to eurozone membership, this does not mean that the wider context is not important.

What Britain wants

For most British people, it would be reassuring to know that Britain has so far been taking a leading role in the Convention, which is therefore highly unlikely to adopt any conclusions that Britain would consider contrary to its nation al interest. While other European governments were slow to wake up to the importance of this new body, the Blair government did so right from the start, sending cabinet minister Peter Hain to represent British interests. Tony Blair is keen to show that Britain is no longer a straggler in the EU, letting others decide first and then racing to catch up.

Britain has clearly defined its position in favour of a Union of sovereign nations and against any moves towards a federal super-state. With this, it is in broad agreement with most other members of the European Union. Many EU countries like to pay lip-service to the ideals of federalism. But when it comes to specific issues, they will fight for their national interest just as vigorously as the British. However, there are also areas of fundamental disagreement between Britain and some of its neighbours, namely the incorporation of the EU Charter of Fundamental Rights into the new constitutional treaty; tax harmonisation; EU defence policy; and the question of leadership in European institutions.

• Britain is sceptical about incorporating the EU’s Charter of Fundamental Rights into the new constitutional treaty. The British government is not opposed per se to incorporating the Charter of Fundamental Rights into the new constitutional treaty. Britain has already signed up to the Charter, and who could object to reinforcing the protection of human rights in Britain? However, the government fears that an article-by-article incorporation into the treaty would lead to a flood of cases against the UK at the European Court of Justice. Moreover, some in Britain fear that legally protected social rights – however basic – would make the UK labour market look more like Germany’s, with its long unemployment queues and cosy social system.
• The spectre of tax harmonisation is another bone of contention for the British. At present, the EU only set very broad minimum standards for taxes that directly affect trade, such as value-added tax (VAT). And although the EU is not actually planning to harmonise taxes on personal income or corporate profits, the UK wants to make sure the EU cannot gain competence in this area in the future. Britain’s main defence is a firm ‘no’ on any extension of qualified majority voting (QMV) to taxation. With its veto firmly in place, Britain hopes to dispel fears that countries with higher taxes, such as Germany and France, could try and erode Britain’s competitiveness by forcing it to equalise tax rates at a higher level. This point is also crucially important for the ongoing euro debate. At a time when the biggest eurozone economies are close to stagnation, the UK government does not want to debate the adoption of continental policies, such as higher taxes.
• The UK firmly supports European efforts to increase the EU’s military capabilities. But the government is opposed to suggestions from France and Germany that the EU should insert a common defence clause into the EU treaty since this is already contained in NATO’s article five. More broadly, the British government would not like to be seen to sign up to any EU defence pact that risks to undermine NATO, or weaken its ‘special relationship’ with the US in favour of tentative links with militarily weak continental European countries. Any weakening of transatlantic ties would provide a rallying cry for the anti-Europeans, and thus further undermine the government’s chances of winning a euro referendum.
• With its endless negotiations and complex institutional structure, the EU clearly has an image problem. The UK wants a thorough reform of the EU’s main decision-making bodies, namely the European Council (the regular summits of European heads of government) and the Council of Ministers (recurring meetings of EU finance, farm or health ministers). Britain, alongside France, is strongly in favour of scrapping the rotating presidency – a different member-state assumes the task of setting the agenda and leading the Council every six months. Instead, Britain wants a p ermanent president or chair for European Council meetings. But this is strongly opposed by the EU’s smaller member-states who fear that this may strengthen the Council at the expense of the European Commission, which they have traditionally seen as their champion.
• On some of the other institutional changes discussed in the Convention Britain is more cautious. For example, in foreign policy the British government does not want to ‘merge’ the position of the Council’s High Representative (currently Javier Solana) and the Commissioner for external relations (now Chris Patten) if this results in a stronger role for the Commission in EU foreign policy. Also, the UK government is lukewarm about the idea that the European Parliament – or anyone else for that matter – should elect the president of the European Commission. Nevertheless, it would be wrong to assume that Britain is simply fighting a rearguard action against increased Commission powers. In other areas, notably in internal security and immigration (called Justice and Home Affairs in EU-speak), Britain wants increased community competencies, including the Commission’s right to propose new measures.

Difficult timing

With all these disagreements, what are the chances that the Convention and the subsequent IGC will finish in time? The timing is important since it would be easier for the UK government to plan for a possible euro referendum without hefty debates still going on in Brussels. The draft constitution is supposed to be ready for the EU’s Thessalonika summit in June 2003. However, Mr Giscard d’Estaing has recently warned of delays, not least since member-states’ disagreements over Iraq could make it more difficult for them to agree on other sensitive issues.

EU leaders had originally planned that the end of the Convention should be followed by six months of deliberations and public debate before the IGC would start. But for many EU members, January 2004 is already too late to start the IGC. The Italians want the EU to sign its new treaty during the second half of 2003, when they happen to hold the rotating presidency. The result would be a new ‘Treaty of Rome’, giving it the same name as the EU’s founding treaty of 1957. The search for symbolism is not the only reason for haste. Many Convention delegates believe that EU governments already have enough influence in the Convention and that the subsequent IGC should therefore simply sign the deal reached at the Convention, not re-open the debate. They fear that after a 6-month delay, the Convention’s deal could unravel.

On the other hand, holding the IGC in 2003 would prevent the new member-states – set to join in May 2004 – from having their say on the future of Europe. Also, a “quick IGC” might not leave enough time for public debate of the Convention proposals. This would not bode well for the referenda that many member-states are planning to hold on the new treaty, including Denmark, France, Ireland, most of the newcomers and possibly Spain and Portugal too.

For those countries still outside the eurozone, the timing is even trickier. Sweden will hold a referendum on euro membership in September 2003, and does not want to start negotiating at an IGC at the same time. At the time of writing it was probable that if the UK decided to have a euro referendum during this parliament, it would likely take place during the first half of 2004 – perhaps coinciding with the IGC or the EU summits that are typically held to conclude IGCs. Both can be highly controversial and politically bruising. Many Brussels watchers till shudder in memory of the drawn-out battles and awkward early-morning compromises of the Nice summit in 2000. Some think that this memory alone might help reinforce a British decision to postpone a referendum until the next parliamentary term. This would be unjustified. Although the Convention will not decide every detail of the new EU treaty, it will firmly set the parameters for the IGC. I t is therefore reasonable to assume that the next IGC – and the summit that will follow it – will be a smoother and more harmonious affair. This still leaves the British government with another set of external worries for its euro campaign, namely the state of the eurozone economy and the rules for EU economic policy making.

It’s the economy, stupid

A quick glance across the channel inspires little confidence in even the most ardent supporters of the euro. Few forecasters expect the eurozone economy to grow by more than 1 per cent this year. Unemployment in the eurozone’s largest countries, Germany, France and Italy, hovers around 10 per cent. Some observers blame the policies of the European Central Bank (ECB) and the constraints of the stability and growth pact – the fiscal rules underpinning the euro – for Europe’s economic woes. They are wrong: economic problems in Germany, France and elsewhere are 99 per cent home-made. And at home – in national capitals rather than in Brussels – is where most of these problems should be and will be addressed. Nevertheless, British eurosceptics point to Germany’s sluggish economy with a certain schadenfreude. Their claims that Germany is now a basket case of sub-Saharan proportion are obviously wrong. But their argument that Britain should not tie itself to rigid and slow-growing economies resonates with the much of the British public. It is therefore important that EU economic policies help German efforts to kick-start economic growth. Yet, the Convention’s working group on economic governance has been one of its least successful parts. In October 2002, the group produced an inconclusive 8-page document that calls for reform while at the same time defending the status quo.

The Convention needs to engage in a broader discussion of Europe’s economic policy framework. Rather than endlessly discussing whether the EU’s new treaty should contain explicit references to ‘competitiveness’ and/or ‘full employment’, it should focus on more practical and pressing issues, notably: economic reform and the completion of the internal market; and the rules that govern the European Central Bank.  

At their Lisbon summit in 2000, EU leaders resolved to make the EU the most dynamic economy in the world by 2010. To this end, the EU tied together an ambitious package of structural reforms, market opening and deregulation while upholding environmental and social standards. Four years into the so-called Lisbon process, the EU is far from achieving its economic goals. Key elements of the EU’s reform agenda remain unresolved, because EU governments lack political will (for example in labour market reform) or because EU squabbles hold up agreement (as in the taxation of savings). Nevertheless, it would be wrong to declare the Lisbon process dead. Over the last 12 months alone, there has been progress on such crucial issues as opening Europe’s energy market; integrating financial markets; spreading the use of the internet and other new technologies; harmonising EU patent law; creating a single European air space and opening road and rail transport for international competition; and reducing red tape for business start-ups.

In other areas, such as research and innovation or labour market and pension reform, the EU will have to work much harder if it wants to achieve its Lisbon targets. Although institutional reform cannot be a substitute for political will, a streamlined and transparent system of decision-making, implementation and enforcement could do much to support progress towards Lisbon goals. At present, it still takes more than four years for the average EU regulation to be adopted. Implementation across the EU is often patchy. Consultation procedures are unsatisfactory. A series of relatively simple reforms could make a difference. For example, the EU should give the Council of finance ministers (Ecofin) a much stronger say in supervising all aspects of EU economic reform; it should make bette r use of its ‘open method’ of benchmarking and peer-pressure; and it should beef up its enforcement procedures.

Why the ECB needs to change

A well-functioning Lisbon-reform process is the EU’s best bet for medium-term growth. In the short-term, however, much will depend on the policy of the European Central Bank (ECB). Many people in Britain think that eurozone monetary policy was too slow to react to the economic downturn. They also perceive the ECB as aloof and undemocratic and are therefore reluctant to swap the policies of the Bank of England for those of the ECB. These criticisms are in many ways unfair. A study published last year by the CER shows that ECB monetary policy has so far been broadly adequate for the eurozone economy. Nevertheless, the ECB needs to change: It needs to prepare its decision-making procedures for EU enlargement; reconsider its policy targets; and become more transparent in its policy making.

The first task has arguably been accomplished. At their Brussels summit in March 2003, EU leaders adopted a new formula for decision-making in the Governing Council, the ECB’s policy-making body. With enlargement around the corner, the number of national central bank governors on the Council threatened to rise from 12 to 25. Together with the ECB president and vice-president and the other four members of the Executive Board, this would have boosted the size of the ECB’s rate-setting body to 31 – a recipe for policy gridlock. Under the new system the Executive Board would stay the same, but the number of national central bank governors allowed to vote would be capped at 16. Voting rights would be determined by rotation. For this, the national central bank governors will be split into three groups depending on the size of their economies and banking sectors. Sounds complicated? Even the ECB admits that much. But it excuses itself with the need to keep large and small countries happy while at the same time upholding the one-country-one-vote principle enshrined in the Maastricht treaty.

The muddled compromise adopted makes other reforms on the ECB agenda all the more important. The ECB has promised to review its ‘two-pillar’ monetary strategy by mid-2003. The ECB should use this occasion to dismantle the useless money supply pillar and redefine its inflation target. Not only is the inflation target too low – in 2002, the ECB missed it for the third year out of the four it has been in existence – but it is also lopsided: it only requires inflation to be lower than 2 per cent, but does not categorically rule out zero inflation or falling prices, both of which can be very harmful to economic growth.

More realistic monetary targets would also make it easier for the ECB to explain itself to the public. The Bank has already taken a couple of steps towards greater transparency. But its communication with policy-makers, markets and the public at large has remained clumsy. One thing the ECB could do to improve its image would be to publish the minutes of its policy meetings within a reasonable timeframe. And it should be required to write an open letter to both the chair of the Euro Group and the president of the European Parliament every time inflation remains above or below the reference value for, say, three months in row. With these reforms, the ECB’s policy framework would look more like that of the Bank of England, possibly making British people more comfortable with transferring monetary policy to Brussels.

Monetary policy is not the stuff that usually gets people’s blood racing. But every politician knows that the most sure-fire way to win an election is steady economic growth and secure jobs. And the most sure-fire way for the British government to persuade its people that the eurozone is worth joining is to show that its economies and its economic policies work well. Britain therefore has as much of a stake in reforms of EU economic policy-making as it has in influencing the outcom e of the European Convention.

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