JORGE RODRIGUES SIMAO

Euro Crisis is Just Beginning, Global Collapse is Coming

8. In, out, shake it all about

UNTIL EUROPEAN ECONOMIC AND MONETARY UNION (EMU) came along with the Maastricht treaty, the general assumption was that all members of the European club would participate in all its formations and policies. Naturally there were exceptions: Ireland was neutral, so when it joined in 1973 it became the only member not in NATO; and the UK and Ireland stayed out of attempts to set up passport-free travel through the Schengen treaty. Some inner clubs such as the Benelux trio also existed. But Maastricht marked the first occasion when some EU countries, in this case first the UK and later Denmark, specifically opted out of a treaty obligation to join a major European project, the single currency. Also in Maastricht, the UK opted out of the so-called social chapter of social and employment legislation. Moreover, the treaty clearly envisaged that not all European Union members would qualify for EMU. Thus was born a new concept for the European project: that most were in but some would stay out of certain projects.

The newcomers to the European club in 1973, followed by Greece in 1981 and, to a lesser extent, Spain and Portugal in 1986, had long been an irritant to the more fervent Europhiles from the original six, especially those who believed that they were committed to a path that would lead to a federal United States of Europe. By joining the then EEC, all countries accepted the goal set out in the preamble to the Treaty of Rome, of an “ever closer union”. But, except for Ireland and, later, Spain and Portugal, all of them were more or less unenthusiastic about this objective. The UK especially came to be seen, notably during the years of Margaret Thatcher, as a backslider in Europe and an increasingly Eurosceptic country. That became even more obvious during the painfully protracted process of ratification of the Maastricht treaty by the British Parliament in the years of the John Major government between 1992 and 1994.

This perception, combined with the simple fact of the European Union then comprising 12 rather than six members (soon to become 15, after the accession of Austria, Finland and Sweden in 1995), led some to ponder the merits of a Europe that would move at different speeds or even towards different destinations. The idea that a small group of countries might go faster than others had been floated as far back as the 1970s by Leo Tindemans, then Belgian prime minister, but without finding favour.1 In 1994 two leading German Christian Democrats, Wolfgang Schäuble (who became the German finance minister in 2009) and Karl Lamers, published a paper in which they revived the notion by suggesting that, rather than always being forced to go at the pace of the slowest, a “hard core” of countries might move ahead with deeper integration, letting the back markers catch up later (or perhaps not at all).2

The concept was taken a stage further in the 1997 Amsterdam treaty. Denmark, Ireland and the UK insisted on the right to opt out of future justice and home affairs laws if they wanted to. And a new treaty provision was approved that specifically provided for the possibility of “enhanced cooperation”, meaning that a subset of EU members could go ahead with steps towards greater integration without having to wait for all to agree. By this time the notion had acquired many different labels. Besides hard cores and enhanced co-operation, these included variable geometry, avant-garde, pioneer groups, flexibility, concentric circles, multi-speed, two-speed, multi-tier, two-tier. The exact label used often depended on its user’s views: integrationists tended to prefer language that implied different classes or speeds of EU membership, whereas the British (and Danes) generally preferred wording that simply connoted variations in the terms of a country’s membership.

For most areas of EU policy, having some countries in but others out can be seen as a detail, perhaps a slight annoyance, but not otherwise a huge issue. There are few real concerns in Europe over the UK and Ireland insisting, as islands that lack compulsory identity cards, that they want to stay out of the Schengen passport-free zone, which anyway includes such non-EU countries as Norway and Switzerland. Similarly, nobody worries much that Denmark does not participate in most EU military or defense-related activities. The Amsterdam provisions for enhanced co-operation themselves have been used only twice, for a measure on divorce and for the EU patent (which Italy and Spain refused to join on linguistic grounds), without upsetting the entire system.

EMU is, however, more serious, mainly because it so strongly affects other European policies. Of course it was always going to be a club within a club, since the Maastricht criteria were designed from the start to restrict membership of the single currency to those that qualified. Greece failed in 1998, for example, though as the Commission said in its opinion on the matter it arguably still failed most of the criteria when it joined in 2001. But some countries that could have signed up for stage three of EMU (adopting the single currency) deliberately chose not to. The UK and Denmark had treaty opt outs.

Although Tony Blair seemed for a time hopeful of joining after he became prime minister in 1997, his Chancellor of the Exchequer, Gordon Brown, was against. The “five tests” that Brown devised for membership (on business cycles, flexibility, investment, financial services and growth) may have been more sensible than the Maastricht criteria, but they also proved impossible to pass.

Denmark put the matter to a referendum in September 2000, which returned a negative majority. Sweden, which was legally obliged to join by the terms of its accession treaty, chose also to put the issue to its people, who voted no in September 2003. Thus the euro began life with three “voluntary” non-members from the EU.

All countries that accede to the European Union are now legally required by their accession treaties also to join the euro (something that would apply, incidentally, to an independent Scotland). But they have to take the step only when they are ready and when they meet the Maastricht criteria. In practice, this has meant that no country can be forced into the euro if it chooses not to adopt it.

Moreover, the process was always going to take some time for the mainly central and eastern European countries that joined the EU in 2004 and 2007. Slovenia was the first new entrant to join the euro, in 2007. It has since been followed by Cyprus and Malta (2008), Slovakia (2009), Estonia (2011) and Latvia (2014). This means that 18 of the European Union’s 28 member countries are also members of the euro, while ten remain, at least for now, outside the single currency.3

When in trumps out

This division into ins and outs is, of course, somewhat blurred and fluid. Because it shadows the euro and the ECB so closely, Denmark already functions as if it is in, though it would need another referendum before it could actually join – and that seems unlikely for now. But most of the “outs” are, in effect, “pre-ins”. Lithuania will clearly follow the other two Baltic republics into the euro as soon as it can, probably in 2015. Poland will take quite a lot longer, but its intention to join at some point is clear. Bulgaria, Romania and Croatia may well need a long period before they are deemed ready to take on the euro’s obligations. Of the recent entrants, only the Czech Republic and perhaps Hungary seem to be unsure in principle whether to join the euro, putting them closer to the same camp as Sweden and the UK.

Why does any of this matter? There are three broad answers. The first is that, as the euro crisis has pushed its members towards deeper integration, so it has inexorably started to make membership of the single currency more important than any other aspect of the European Union. As noted in previous chapters, in the four years to 2014 the task of saving the euro has been overwhelmingly the main European business for Germany’s Angela Merkel, as for other euro-zone leaders. Similarly, the pressure on bailed-out countries to comply with creditors’ demands for fiscal retrenchment and structural reforms has overwhelmed any other EU actions and policies. Although the two are in practice often conflated, to citizens of Greece or Portugal it is the euro and not the EU that is seen to have made their lives a misery. Yet it is the EU, not the single currency, against which they tend to fulminate most loudly (opinion polls in most countries continue to find majorities for staying in the euro).

Second, institutional and other changes adopted by and for the euro can have a direct impact on the structure of the wider club, sometimes to the latter’s disadvantage. The emergence of the Eurogroup, which was fiercely resisted by most of the outs, especially the UK, has clearly reduced the significance of EcoFin meetings of finance ministers, just as the outs predicted. Now euro summits threaten to do the same to European Councils, one reason why Donald Tusk, the Polish prime minister, greeted their establishment with bitter words, addressed to Merkel, “Are we getting in your way? You are humiliating us.” Other institutional changes over recent years, including the setting-up of the euro, zone’s various bail-out funds, the fiscal compact treaty and the banking union, under which bank supervision for euro-zone countries is moving to the ECB, will not apply to several countries not in the euro. Future ideas could go even further: a euro-zone budget or insurance fund, or a separate euro zone Commission and Parliament, would clearly downgrade the role and significance of their wider EU equivalents.

Third, and related to this, the euro and the policies adopted for it can affect policies that touch on all EU countries, including outs. The most obvious risk is that decisions taken by the euro zone on issues like taxation could spill into or even damage the wider single market. Under the provisions of the Lisbon treaty, from 2015 onwards the 18 euro-zone countries will constitute a “qualified majority” in themselves. This means that if they were to form a caucus before meetings of the full 28-member Council of Ministers, they could, in effect, take a decision that would then willy-nilly be imposed on the rest. In recognition of this, the UK insisted that in the European Banking Authority, which is based in London, decisions should be taken by a “double majority” system that protects the position of outs by requiring measures to have majority support of both groups – though as more outs join the euro, this system will lose much of its potency and it will stop working altogether when fewer than four countries are out.

A couple of considerations make these three points more worrying for the future. The first is that there is a subtle ideological difference between the 18 ins and the ten outs. The first group has a slightly more protectionist, anti-free market bent, largely because it counts the Mediterranean countries and France among its most important members. By contrast, the outs include almost all of the EU’s most liberal free traders, including the UK, Denmark and Sweden from older members and Poland and the Czech Republic from newer ones. Merkel for one is fully aware of this, which is why she has always remained keen to preserve single-market policy decisions for the full 28, not the narrower 18, a group in which she has fewer natural allies.4 The second consideration is that the divide between ins and outs is likely to persist for some time, and conceivably forever. When any of the outs have raised concerns about being disadvantaged by their status, one easy response has always been to point to a simple solution to their worries: they should join the euro. And indeed, as already noted, many of the outs are pre-ins that are planning to do just that. But the euro crisis has made several countries extremely nervous about plunging in too soon. It has also led the ins to be more careful about whom they admit – many now believe that it was a mistake to let in Greece, for example. Some of the outs, including Sweden and Denmark, must also win referendums before they can join. Above all, there is one out, indeed the biggest of them all that is highly unlikely to join the euro for the foreseeable future, if ever: the UK.

Those pesky Brits

It may seem odd for a book looking mainly at the causes and consequences of the euro crisis to devote much space to a country that has no intention of adopting it. But the ills of the single currency and how they are resolved could have a profound effect on the UK debate about whether to stay in the club. And that debate in turn will affect the euro zone, for it is hard to see either it or the wider EU going ahead unaffected if a huffy UK were to pick up its toys and walk out, which has become a distinct possibility.

The UK has always been the most awkward member of the European club. This goes back at least as far as Churchill’s 1946 Zurich speech, when he called for a more politically integrated Europe but made clear that the UK would not be part of it, as well as to the detachment of the British representative at the 1956 Messina conference. It was only in 1961 that the British government decided it should get more involved, but by then France was led by de Gaulle, who implacably (if, perhaps, understandably, on the grounds that the UK had interests that were more Atlanticist than continental) twice vetoed British entry – to the chagrin of the other five members.

Even after Edward Heath triumphantly took the UK into the EEC in 1973, its reputation as a reluctant member endured. His Labour opponent, Harold Wilson, had opposed the entry terms and, when he won election in 1974, set about what he called a “renegotiation”, largely as a political gesture meant to appease his party’s fiercest anti-marketers (a tale that may sound familiar to observers of the British Conservative Party 40 years on). He knew that he could not push the idea too far, however, so he stopped short of calling for further treaty changes and settled for mostly cosmetic measures that were enough to secure an overwhelming yes vote for continuing membership in a referendum held in June 1975.

This by no means ended British grumpiness, however. After it lost the 1979 election, the Labour Party moved into a strong anti-European position. Under the leadership of Michael Foot from 1980, it campaigned for (and lost) the 1983 election on a manifesto promising immediate withdrawal from the EEC. But Europeans did not find the nominally pro-European Tory government elected in 1979 an easy partner, either. Margaret Thatcher began her time as prime minister by demanding her money back from the European budget and ended it 11 years later by crying “no, no, no” to suggestions that the European project might evolve towards a closer federal union, with the Commission acting as a government, the Parliament as a lower chamber and the Council of Ministers as an upper house – an incident that contributed directly to the rebellion within the party which led to her removal from office.

So it has been with the UK and the single currency, almost from its beginnings, and to an extent so it is today. From the original opt-out at Maastricht, which John Major, Thatcher’s successor, secured, until the establishment of the euro in 1999, the British government and public have remained deeply dubious about both the wisdom of setting it up and its prospects of survival. Indeed, in 1994 Major himself expressed his scepticism about the chances of the single currency ever coming into being: writing in The Economist, he talked of those who continued to recite the mantra of full EMU as having “all the quaintness of a rain dance and about the same potency”.5 When the euro duly arrived five years later, many Britons were surprised – and they were even more astonished when it survived its first ten years.

Against this background, it was to be expected that most British observers, and even many British politicians, reacted differently from the rest of Europe to the eruption of the euro crisis in 2009. With a strong feeling of “I told you so”, many appeared at first to welcome the single currency’s travails and to forecast its early demise. Since the UK had long warned against the folly of the euro, it chose –unlike, say, Poland and Sweden – to distance itself from most rescue packages for individual countries (save that for Ireland, with which the UK has obvious strong links) as well as to stand aside from any institutional or treaty-based response. That the euro crisis coincided with the arrival of a new Tory-Liberal coalition led by David Cameron in May 2010 made the British position even tougher, for since the mid-1990s the Conservatives have taken over from Labour as the mainstream party that most loves to hate Europe.

Indeed, Cameron has been under pressure from his Eurosceptic backbenchers to do something on Europe ever since he became prime minister. As a candidate for the party leadership in 2005, he had promised to pull out of the European People’s Party, the main transnational centre-right political group, and did so in 2009, annoying Merkel in particular, as well as weakening both his and his country’s influence in the EU. He also promised to put the new Lisbon treaty to a referendum, but later abandoned that pledge because the treaty had been ratified by the time he took office. Instead he passed the European Union Act, which requires that any further EU treaty that transfers significant powers to Brussels must be approved by a national referendum.

The Cameron government also took a different attitude from its Labour predecessor towards efforts to resolve the euro crisis. Although it stuck firmly to the principle that it was, essentially, none of the UK’s business and thus not for the UK to join in helping to solve, it quickly grasped that a meltdown of the euro would be highly damaging to the British as well as to the European economies.

So from quite an early stage Cameron and his chancellor of the exchequer, George Osborne, urged the euro zone to take whatever steps were necessary to resolve the crisis, including pushing for deeper political and fiscal integration from which the UK would stand aside. This was a big change from traditional British policy, which had always been to remain as closely involved as possible in all EU and euro-zone actions, often in the hope of slowing them down as much as possible.

This was still, however, not enough for Cameron’s Eurosceptic backbenchers. Frightened also by the growing appeal of Nigel Farage’s UK Independence Party (UKIP), which stood explicitly for withdrawal from the European Union, they still craved some kind of confrontation. They were granted their wish in December 2011 when the European Council wished to adopt the fiscal compact, a treaty cementing new rules on fiscal policy and also requiring national governments to insert “debt brakes” limiting budget deficits into their constitutions. Cameron came to Brussels threatening to veto this treaty unless he was given assurances protecting the City of London from possible future changes in financial regulations. Yet when he tabled his suggestions, the other governments ignored his request and simply adopted the fiscal compact as an inter-governmental treaty outside the normal EU framework. Nor did Cameron win much support in his refusal to sign up: ultimately 25 countries ratified the fiscal compact, including eight non-euro members, leaving only the UK and the Czech Republic as non-signatories (although the Czechs now plan to sign too).

Even that was not the end of Cameron’s European adventures. He took the hardest possible line on negotiations over the 2014–20 EU budget that went by the unlovely name of the “multiannual financial framework”. Rather than reopening the question of what the EU budget was for and whether it could be spent more efficaciously, a goal that might have been easier to achieve had he been willing to give up some of the UK rebate, he set himself the public goal of simply cutting the budget in real terms. With support from Merkel, he eventually got his way, but at the price not just of preserving farm spending broadly intact but also annoying both the European Parliament and potential central

European allies like Poland.

The budget wrangle did little to improve the mood of Eurosceptics in the Tory party. They still wanted some commitment to renegotiate the UK’s membership and promise voters an in/out referendum. Cameron fended off the pressure for as long as he could, but eventually he felt that he had to set out his plans. In his so-called Bloomberg speech in January 2013 (given in London after repeated failed efforts to find a suitable continental location), he called for substantial reforms to the EU, including less regulation, a completion of the single market, a more growth-enhancing agenda and a streamlined bureaucracy. He rejected the idea that the UK might adopt the Norwegian or Swiss options of being outside the EU but subject to most of its rules. He suggested a bigger role for national parliaments and some (unspecified) passing of powers back from European to national level. Although he carefully avoided specific British demands, he announced the establishment of a new audit of EU competences to see whether and where policy areas had stretched too much (thus far it has found remarkably few cases). And he added that at the next election his party would campaign for these reforms to be made by 2017 and, on the basis of a reformed EU, put the issue of the UK’s continuing membership to a referendum.6

Back to ins and outs

This is where the UK’s argument over its future impinges both on the future of the euro and on the relationship between ins and outs. Cameron may not win enough votes in 2015 to form a single-party government, so his threat to hold a referendum in 2017 may become moot. Both the other main party leaders are refusing to offer a referendum unless there is a substantial new treaty transferring powers to Brussels, but pressure on them is likely to grow. Either way, questions about the UK’s continuing membership are likely to persist. Yet the attention of most other European leaders will continue to be focused more on fixing the euro crisis than on what sort of concessions to keep the UK in the EU might be acceptable.

Most EU leaders, especially Merkel, would like to keep the UK in. Moreover, several countries, including the Netherlands, Sweden and Denmark as well as Germany, are sympathetic to much of Cameron’s agenda. There is a general desire to cut back excessive EU regulation and to rein in the European Commission and European Parliament. Yet there is a limit to the changes other countries might be willing to make to keep the UK in, and certainly no desire to give it special opt-outs or other arrangements that might benefit one country at the apparent expense of others. And there is a concern that, whatever is offered to the UK, its voters might choose to leave the EU anyway, an eventuality that somewhat weakens British bargaining power in negotiating a new deal.

What might clinch that outcome is any growth in feeling that the euro-zone ins are determined to go ahead with integrationist measures, including possibly further changes applying to them alone, that ignore the wishes or interests of non-euro countries. By not joining the euro, the British government has shown itself to be content to be in the outer circle of a Europe of concentric circles. But that does not inevitably have to mean being left on the fringes of all policy- and decision-making. In his first big speech on Europe in January 2014, Osborne expressed his own concerns about the outs being discriminated against, adding that without reform, the UK might face the choice between joining the euro, which it would never do, and leaving the EU. Perhaps ironically, given this worry, he also suggested that in some cases actions to deepen the single market could be taken by using enhanced cooperation. 7

If the outs are to feel protected, however, policies in areas as diverse as the single market, the environment, taxation, trade and transport should largely continue to be made at 28, as more obviously should foreign and security policy. If Merkel and her allies accept the idea of making policy in any of these areas at 18, the risk of the UK’s exit from the broader EU can only increase, as Osborne argued. The broader worries of the outs would increase as well. The French “Eiffel” group has proposed strengthening euro-zone institutions, making this problem potentially even worse. All this suggests that an important part of the agenda for euro-zone countries in the next few years should be a better arrangement of relations between ins and outs.

The fear of outs that in future policies may be made by ins without their having much or even any say echoes a broader fear of voters: that increasingly the European Union and the euro zone are deciding matters without sufficient democratic control. As the euro zone integrates further and more intrusively, it is running into a huge potential row about the legitimacy and democratic accountability of its actions. Indeed, it is this, rather than the financial markets, that could pose one of the biggest risks to the EU’s future.