This speech was written by Dr Fox for a forum in Brussels debating reforming the EU on 11 of November 2014
Before we can assess British attitudes towards the future of the European Union, a useful starting point is to review the influences that have taken us to our current position. In the only referendum held on European membership, the 1975 referendum on whether to remain in the EEC, the British public voted overwhelmingly in favour. I remember this event clearly as my parents campaigned on opposite sides of the question – I was thirteen at the time. My father, who voted in favour, did not want his children to be involved in the sort of European war that had ravaged the continent twice in the 20th century. He wanted to ensure, as did many who voted yes, that the forces of nationalism which had given rise to conflict would be diminished by greater economic interdependence.
The concept of “a common market” had and, I believe continues to have, wide support amongst the British people. Where there is widespread resentment, however, is that this concept of an economic community has gradually metamorphosed into a political entity to which the British public have never given their assent. In general election after general election, British governments have been elected who have taken a broadly similar attitude towards continued British membership, and, treaty after treaty has been passed deepening British political involvement in European institutions. It is this resentment, and feeling that the mainstream British political parties have sought to prevent any referendum on the direction of travel in Europe that lies behind current anger on the subject and the resultant rise of groups such as the referendum party and now, the United Kingdom Independence Party (UKIP).
This is not in any way, to suggest that the British people do not appreciate the benefits that the European Union has brought to the wider political environment in Europe. The fact that countries such as Spain, Portugal and Greece were able to transition so quickly from military dictatorships to pluralistic democracies is an enormous triumph for those who saw a Europe based on sound Western values.
Likewise, the fact that the European Union provided an attractive destination for those nations who lived under the Soviet yoke is one of the great political triumphs of the second half of the 20th century; and how we should celebrate the fact that millions of those who lived in the former Warsaw Pact states now live in freedom and security. These achievements alone justify the ambitions of the founding fathers of the European project.
So, why has disillusionment with the ideals behind the European Union reached such an extent that 30% of the seats in the European Parliament are now occupied by those who either want to see the end of the EU itself or, who want to create a fundamentally different entity or, who frankly want to leave.
In Britain, there are many people who want to have a referendum immediately so that they can vote to leave. Let me explain why this is both impossible and, even from the perspective of those who wish to exit, potentially undesirable. Firstly, it is only possible to hold a referendum in the United Kingdom when there is primary legislation passed through our Parliament. In the current House of Commons the Conservative Party does not have an overall majority and it is very clear that both the Liberal Democrat and Labour Parties do not wish the electorate to be given the freedom to determine their own destiny in a referendum. In my view, they will pay a high price for this at the coming general election.
But, for those who wish to have a referendum to leave as soon as possible, they might wish to consider the following. We all know that in any referendum, the outcome is unpredictable. What if the British people decide to remain in the European Union? Surely, for those who believe in either reform or exit, it is much better to have the choice between a reformed package and leaving, rather than the status quo and leaving.
Were the British people to choose to remain in the European Union without a renegotiated package, it would mean the status quo in perpetuity. For me, that would be the worst possible outcome, with Britain tied to the concept of “ever closer union” for ever, with the logical endpoint being union itself. It is why I believe that those who lie at any point on the Eurosceptic part of the British political spectrum should support the Prime Minister’s plan to attempt a meaningful renegotiation of our membership terms prior to any referendum taking place.
Today, I want to set aside the usual arguments about sovereignty and supranational decision making which constitute one of the major fault lines between those who wish to see less European integration and those who wish to see more.
I want instead to focus on two substantial areas of policy which are of huge concern to the British people, concerns that I believe are far more widely shared amongst the peoples of Europe than the political leaders of Europe, a disconnect which I believe bodes badly for the future.
The first relates to the Euro and the Eurozone and the second to the issue of immigration.
There were two intellectually defensible models for the euro. The first was to say that it was such an important element of the European project that everything possible had to be done to make it succeed.
Some saw this as analogous to the American experience after the civil war. With the abolition of the Confederate currency, the states’ debts were consolidated into the federal debt for the first time and free fiscal transfers were enabled between the federal and state governments if required. This process has so far proved impossible in Europe because of the huge disparity between different countries’ debt levels and the unwillingness of sovereign states to bail out other sovereign states.
The second model was a purely economic one. Currency union was to be available to those economically similar nations which could meet strict criteria for entry and maintain sufficient fiscal discipline to be allowed a say in the central bank.
In the end, neither model was followed; instead an unstable and unworkable hybrid emerged. Not only were countries who failed to meet the convergence criteria allowed to join anyway, 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 states operated in the apparent belief that whatever they did a financial solution would be found for them from outside.
Throughout this tragic pantomime Britain and the rest of the global financial community will largely only be able to look on, waiting to see how much damage is done to our collective economic prospects before the inevitable reality sets in. It is like an EU horror economic version of the ‘Emperor’s New Clothes’ childrens’ story, in which sooner or later the voice of sanity will be heard but after who knows how much damage will have occurred.
The euro crisis continues to be the most important issue in European politics, and this is unlikely to change any time soon. Despite all evidence to the contrary, European leaders continue to treat the problem as a fiscal issue when in reality it is the fiscal symptom of economic and cultural differences. The underlying truth is that the economies inside the Eurozone are no closer to convergence today than when the currency was created. There is as much chance of realizing the alchemist’s dream of turning base metals into gold as there is of turning an economy like that of Greece into one that resembles Germany’s.
Of course it is true that the euro did not create the deficits and debt that so bedevil the economies of Europe – we can see how many countries outside the system have the same difficulties – but the fact remains that certain fiscal and economic policies were permitted which widened rather than narrowed the gaps between the member states, ensuring that an unstable structure became even more unsafe.
This matters to all of us, whether we are part of the Eurozone project or not. It is my view that the Euro and the Eurozone represent the single biggest risk to global economic stability.
As Sir John Major told me during the writing of my book “Rising Tides”, “if the euro fails it will be a global event”. Let me put it another way. A friend of mine who works in the City of London was talking to me after the Spanish bond auction last year. He said to me that his boss had told him to buy as many Spanish bond is possible. “But”, I said to him “they may be complete junk”. “Oh yes”, he replied, “I know they may be junk, but they are underwritten by the European Central Bank”. This made my heart sink. “But what if the failure of a bank is so large that the ECB does not have the funds to deal with it? What if taxpayers, especially German taxpayers, do not want provide the capital required? What if the level of contamination across European banks and the liability across European governments is so great that the political commitment cannot be translated into financial responses? This all sounds a great deal like what my colleagues were saying on Wall Street before the crash of Lehman in 2008”.
The contradictions and high risks currently being run in the Eurozone need to be dealt with. The Euro project needs to be de-risked before it creates even greater economic problems. I recently spoke at an event in Bruges where Mario Monti was the preceding speaker. He said that the people of Europe should be grateful to their political leaders for the creation of the Euro and the fact that it was such a strong currency. But look at the reality.
As our Prime Minister, David Cameron, pointed out this week, Britain now gets more inward investment than the rest of the EU combined. This is neither an accident nor a coincidence.
In 2013, unemployment in the Eurozone states was 12.1%, in fact, it was 14.4% if Germany’s low unemployment rate is excluded. Unemployment in the non-Eurozone EU states was only 8.9%. These positions have widened as British unemployment has fallen dramatically with the creation of 1.5 million private sector jobs in an economy which is growing at almost 3% this year, in stark contrast to the stagnation and possible recession of the Eurozone.
If you look at the growth rates of the non-Eurozone countries with floating currencies, they have far higher average rates of growth than their Eurozone counterparts. This cannot be an accident. The fact that 58% of young Spaniards are unemployed will not cause them to celebrate the strength of the euro, rather, in the longer term, it is a recipe for political and social strife.
It seems to me that there are three potential ways in which the euro can be de-risked. The first is for the Eurozone countries to enter into complete economic, monetary and political union, so that there can be the free fiscal transfers required without the impediments of sovereign governments. Again, this is analogous to the United States after the civil war. If this is regarded as politically impossible, then one of two other possible solutions need to be implemented. The first is the exit of those countries whose domestic economic circumstances require a lower exchange rate to allow them to take advantages of global trading opportunities so that their peoples might enjoy the fruits of the global economy. This will mainly apply to southern European Eurozone members.
The second, possibly more logical, but politically impossible alternative, would be a German exit from the Euro, allowing Germany to have a currency more in keeping with its global economic strength and allowing the other Eurozone members to see a depreciation in line with their economic needs.
I do not, for a moment, doubt the difficulties that these options would present, but the alternative is that countries inside and outside Europe who have nothing to do with the Euro will be afflicted by the continuing weakness and uncertainty of the Eurozone project. In Britain’s case, the EU is an important trading partner, though somewhat less so than it has been in the past.
The issue that has brought the parlous state of the European economy into focus recently in Britain has been the demand for a huge extra payment into EU funds.
Leaving aside the dubious accounting practices used in the determination of the sum and the outrageous timetable applied for its handover, there is another issue, in many ways a more fundamental one, at stake here.
With the Eurozone economically flat at best, and facing recession or even stagflation at worst, there is a strong and growing view in the United Kingdom that Britain, having taken painful efforts to improve its economic efficiency and seen the reward in terms of higher growth, should not be asked to pay for the failures of the Eurozone by the backdoor.
For what will this mean in the future? There is no guarantee that this will be a one-off bill. It is not beyond the realm of possibility that Eurostat might question again the way in which Britain calculates its GNI.
It is also worth pointing out that the European system of Accounts, 2010 (ESA2010) is being introduced this year. This will once again revise how we calculate GNI and will include research and development and expenditure on weapons. Given the pathetic level of spending on defence by many of our European allies, with Britain being one of only four countries in NATO to meet the 2% GDP spending requirements, the idea that British taxpayers will tolerate carrying a disproportionate burden of European defence and then being asked to pay a surcharge to the EU for doing so is preposterous beyond belief.
If those in the European bureaucracy and our fellow European political leaders are looking to create the conditions for a British exit from the EU then they are certainly going the right way about it.
Although I believe the continuing crisis in the Eurozone to be the most important issue that needs to be dealt with by the EU, it is the issue of immigration that seems to have assumed even greater importance in the minds of European voters. All across the EU, in this year’s elections for the European Parliament, voters who have huge anxieties about immigration have been casting votes for parties who want to see reductions in the movement of people across national borders.
Britain has a very proud record on immigration, but for this to be successful in the future, I believe, two things need to happen.
The first is that those who are coming into our country need to wish to integrate. The second is that our own population has to be willing to allow them to integrate. When the numbers become too big, both of these tests are likely to be failed. Firstly, very large numbers who come in at the same time, are likely to stick together, resulting in high concentrations in selected areas with the potential for ghettoisation and the maintenance of their own culture. I believe that in terms of immigration and integration, different is good but separate is bad.
Secondly, very large numbers put pressures on schools, doctors, jobs and housing, and are likely to create resentment among the local population, making integration much more difficult.
The immigration issues arising from the free movement of people’s, itself a central part of the single market, is not unrelated to the failures in the Eurozone area. Let me be quite clear. I fully understand why those in the countries of the Eurozone where their economies are failing would want to come to the United Kingdom, with its greatly improving economic performance. But again, Britain cannot be expected to carry a disproportionate burden for the failure of the Eurozone, a problem exacerbated by the benefit system that the current British government inherited from its socialist predecessor.
Where there is greatest resistance, I believe, in Britain is not so much to the free movements of people, but to the free movement of entitlement. The welfare system is designed, or should be designed, to help those who are unable to help themselves. We have a system of national insurance contributions to ensure that all our citizens contribute to the costs of this moral obligation.
Most people in Britain do not have a problem with people coming to work in Britain and to create wealth for our country. But they do have a problem with people coming to consume the wealth of our country, either directly or by the use of our public services, when they have never contributed to them in the first place. If a way is not found to limit either welfare entitlement or the total movement of those coming to seek work, either by a system of permits or by some other means, then the patience of the British public may be pushed to breaking point. Like many other Western nations, including many European nations, we have an ageing population with high pension liabilities and requirements which need the maintenance of a roughly constant ratio of those in work to those in receipt of pensions. We know that we will require migrant labour to achieve this, given our current demographics. But there is an increasing demand that not only will the numbers need to be curtailed for the reasons I have suggested, especially after the disastrous consequences of the open-door policies of the Blair and Brown government’s, but that within these numbers, we must have the ability to also determine which people coming to our country.
I understand entirely the reasons why the free movement of people was made a centre element of the single market and, in a properly functioning European economy, it would make perfect sense.
But the failures of the Eurozone economies are producing huge distortions which are likely to produce huge political consequences if they are not addressed.
Those who voted in 1975 referendum for greater economic interdependence would never have envisaged that the collective failure of a huge part of the European economy, driven by entirely political reasons, would result in such high costs for countries such as the United Kingdom. Those, today, who understand that many of those costs are driven by a project that we consciously decided to remain outside are rightly frustrated and angered.
The lesson of evolution is that we must change or die. Those who stick rigidly to the concept of ever closer union, without regard to the changing nature of the world around us, or of Europe itself, risk the fragmentation of the continent with all the risks that that entails. It is not the Eurosceptics who are out of step but those with a fossilised view of how Europe should be, formed in the 1950s and locked in aspic since. The warnings of history are all around us. Today, of all days, we are reminded of them. We would be wise to heed them.