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TheEuropeanJournal

The Journal of the European Foundation

The European Foundation 61 Pall Mall, London SW1Y 5HZ

Chairman: William Cash, MP

Volume 6 Number 7 May/June 1999 £2.50

Andrew Robathan, MPFighting for a Fair Vote

&Keith Marsden, Dr Brian Burkitt,

Charlotte Horsfield and William Hague, MP

MAY/JUNE 1999 VOLUME 6 NUMBER 7

THE EUROPEAN JOURNALThe Journal of the European Foundation

Typesetting by Nelson & Pollard, Oxford

The European Journal is published by The European Foundation. Views expressed in this publication are those of the authors themselves, not those of The European Journal or

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ContentsFor reference, numbers on pages are as in the printed copy Original PDFArticles below are hyperlinked – use the hand icon, point and click Page Page

Editorial 2 3Bill Cash, MP

In A Lonely Place: Britain and the World on the Eve of the Millennium 3 4David Wilson

Fighting for a Fair Vote 5 5Andrew Robathan, MP

Why the UK Should Treat Euroland as a Test Market 7 8Stuart Jackson

Is Cyclical Convergence a Good Thing? 10 11Andrew Lilico

White Paper on Europe 11 12

Euroland Economic Policy: A Muddle to Avoid 12 13Dr Brian Burkitt

Why We Need a Fair Referendum on EMU 13 14Frank Jenkin

Two-to-One Against the Euro 15 16Dr Julian Lewis, MP

Regulating European Labour Markets: more costs than benefits? 16 17by John Addison & Stanley Siebert Reviewed by Dr Nigel Ashford

Those Who Do Not Learn the Lessons of History … 17 18

The European Commission Needs Radical Reform 18 19Keith Marsden

In Europe, Not Run By Europe 20 21William Hague, MP

Modernising Government 21 22Charlotte Horsfield

Eurowatch 24 25

For subscription and advertising enquiries, please contact the editorial office.A subscription form is printed on the inside back cover.

Editor: Tony Lodge

Publisher: The European Foundation, 61 Pall Mall, London SW1Y 5HZTelephone: +44 (0) 20 7930 7319 Facsimile: +44 (0) 20 7930 9706

E-mail: [email protected]

ISSN 1351–6620

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The European Elections

At the 1995 Conservative Party Conference I gave aspeech entitled, ‘The Socialist Betrayal of Europe’. Had

the Conservative Party under John Major taken a strong andclear Eurosceptic line on the European issue it could evenhave won the general election in 1997 and certainly wouldnot have lost by such a large majority.

Since then the Conservative Party has shifted its groundon Europe very substantially. Not enough for many(including myself) but, by contrast with the last ConservativeGovernment and certainly the new Labour Government andtheir cousins, the Liberal Democrats, the Conservative Partyis undeniably Eurorealist.

The Labour ‘Manifesto’ is breathtaking in its sell out ofBritish national interests. The message is contained in thevery fact that the Labour Party is offering the voters of thiscountry a manifesto concocted by all the European socialistparties. “Goodbye Britain” is the unremitting theme.

They speak of “putting jobs first” and “working forgrowth”. But they do not recognise that the 20 millionunemployed in Europe are and will remain unemployed.They will remain unemployed precisely because of thepursuit of monetary union, the CAP, the strangulation ofbusiness by European red tape and follies such as theworking time directive, minimum wages and requiringdirectors to consult workers on company policy. These arepolicies to restrict, not to encourage growth.

They say they want to make the euro a success (now downby 10%) but all they dare say is that “the euro should make asignificant contribution to promoting sustainable growth,low inflation and high levels of employment”. Note that theydare not say it “will” but mainly that it “should”. This massiveleap into the dark, playing games with the democracy andjobs of the people, undermining our nation and nationalparliament is based on no more than a hope. Clearly they arecommitted not only to selling our gold but also to selling outon the pound.

They call for a new taxation policy with weasel words suchas “to prevent harmful tax competition” when everyoneknows that this is a progressive move by stealth to create aEuropean wide tax system.

They would sell us out by allowing more and moremajority voting and omit to mention that it is already partand parcel of the Common Foreign and Security Policy(CFSP) which they promoted in the Amsterdam Treatywhich came into effect on May 1st this year. We are careeringdown the road towards majority voting for defence and ofcourse all of this is in line with the new President of theEuropean Commission, Mr Prodi, who wants a EuropeanArmy. The way things are going under the Prime Minister’sSt Malo Declaration we will soon have a European defence

policy, without US forces to back it up. NATO is increasinglyat risk.

They say that “waste, inefficiency and fraud” must beeliminated but do not mention why the EuropeanCommission collapsed into ignominy. They prattle on aboutthe fact that “The European Commission needs to be betterorganised and more accountable” but in the same week theyendorse the idea of the Fraud Prevention Unit being locatedinside the European Commission – not outside as it clearlyshould be.

All in all it is a truly depressing prospect if the LabourParty gain more seats in the European Parliament. TheParliament itself is a depressing affair but, given that it isthere, the fewer socialists it has the better. Tony Blair can keephis Charlemagne Prize – without a Charlemagne Europe.

The Conservative Manifesto, by contrast, commits theConservative Party to keeping the pound (not ‘forever’ as Iwould) – but at least for the next seven years. There is room tobuild on this after the European Elections. There is also aclear commitment to NATO and to keep the veto, withtaxation only decided at Westminster. This is a manifestoworth voting for.

As for the Lib–Dems, well they are voting gung-ho for afederal Europe and the single currency and a “constitution forEurope” i.e., one country. They call this a “reformed Europe.”Joschka Fischer, Germany’s Foreign Minister, who shares thesame views would love it. Enough said.

There are of course other parties standing in the electionsand many of those who might be inclined to vote for themare Eurorealist Tories who rightly demand that we shouldrenegotiate the Treaties where they matter, e.g. on the singlecurrency and defence and much more. Unfortunately thereare those who suggest that we should get out of the EuropeanUnion altogether as soon as possible.

In practice these other parties are not in the businessof trying to become the government of this country.Furthermore, the ‘get outers’ will alienate large sections of thebusiness community and where they gain votes they will be atthe expense of the Conservative vote and therefore a boost tothe Labour Party and all the dreadful socialist policiesoutlined above.

We often speak of Eurorealism. Voting Conservative inthese elections is UK-realism. There is much to be done toimprove and harden the Conservative message after theelections, but let us vote Conservative now and get on withwinning the ‘No’ vote for the Referendum immediately afterthey are over. We cannot afford to suppose that theReferendum will be greatly delayed. It will come sooner thanlater and we must be fully prepared.

Bill Cash, May 1999

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The European Journal • May/June 1999

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In A Lonely Place:Britain and the World on the Eve of the Millennium

by David Wilson

These are interesting times. It isnow 37 years since Dean Acheson

portentously declared at West Point that,“Great Britain had lost an empire and hasnot yet found a role.” The British Empire’s‘Official Receiver’ and the wisest of theoriginal ‘wise men’ was right. Present atthe creation of the post-war world, theOlympian Acheson realised that Britain wasthen, as it is now, a geostrategically burnt-out case. Of the three great power blocs ofthe emerging tripartite world system – theUnited States of Europe, the DisunitedStates of the Asian-Pacific and the UnitedStates of America – the United Kingdomhas, not yet, found itself entirely at ease withany of them.

Our present crisis stems substantiallyfrom the fact that our strange sub-Hebridean archipelago is situated on theextreme western periphery of Mackinder’sworld-island; and that, though these islandsare part of the continental shelf of theEurasian landmass, they are strandedgeostrategically between North Americaand continental Europe. This position wasoriginally the making of the nation; now itis its nemesis.

For the great English statesman of the lastfour centuries, the Channel has provedwider than the Atlantic; or, rather, theywished Calais and continental entangle-ments were beyond their horizon. Thoughgeopolitically Britain is part of continentalEurope, it is not a position that L’AlbionPerfide, particularly since the Napoleonicera, has ever felt strategically comfortable. Iflet alone it has preferred to get on with itsself-appointed business of painting theworld pink, which is precisely what theVictorians meant by ‘Splendid Isolation’.Since the days of Elizabethan maritimeexpansion, this polity has looked seawards;away from the world-island and towards theworld. Britain possessed a singular sense ofmanifest destiny long before Acheson’sforebears, which is why the Pilgrim Fatherslanded at Plymouth Rock in the first place.

During the Henrician Reformation,Thomas Cromwell declared that “this realmis an empire”; nothing less than a unilateraldeclaration of independence. Britain’s firstgeostrategist, a kind of proto-‘nationalsecurity advisor’ to Henry VIII, was

national identity was largely forged on theback of native hostility to continentalCatholic Europe.

When Napoleon bestrode the continent,even the Francophile Jefferson warned that“It cannot be to our interest that all Europeshould be reduced to a single monarchy.”This has been the exact same attitude ofevery English statesman from Castlereaghto Churchill and their agency, the RoyalNavy, “those far distant, storm-beaten ships,upon which Napoleon’s army never gazed,but stood between them and the dominionof the world”. The Monroe Doctrineprevented the Royal Navy from interveningin the New World; but left it free to policethe world-island. Pace Pax Britannica, itwas in Washington’s and London’s decidedinterest to ensure a balance of power on thecontinent of Europe. Britain, because it wasitself a semi-detached European power andAmerica, because it needed to prevent anold world hegemon strong enough tothreaten its supremacy in the Westernhemisphere.

It is not necessary to accept the truth ofSir Halford Mackinder’s famous, if slightlyoverwrought, dictum in its entirety –

Who rules East Europe commands theHeartland;

Who rules the Heartland commands theWorld-Island;

Who rules the World-Island commandsthe world.

– to accept the strategic necessity ofpreventing Napoleonic France, Wilhelmineand Nazi Germany or Soviet Russia frombecoming the absolute hegemon in Europe.The central reality of the struggle formastery in Europe post-1871, whenBismarck engineered German unification,has been to restrain Germany’s continentalprimacy. This was achieved in the 20thCentury, only by America itself acting as afully-fledged European great power. NowGermany aims to achieve its Sonderweg, or“special path,” through its locum tenens (theEuropean Union) and the old Europeanorder is lost.

The one fundamental geostrategicimperative, that Britain is an island; andnecessarily, a maritime nation – that led thecountry to embark on its imperial projectin the first place, has led to its currentrelative isolation. As Zbigniew Brzezinskihas recently pointed out, Britain is in manyways a retired geostrategic player; a super-annuated power. After the terrible auditof two world wars, the abandonment ofoverseas empire, and the, not unrelated,decline of its industrial suzerainty, Britainhas been forced to abandon its traditionalrole as a great maritime power and imperialhegemon, and make its peace with thecontinental behemoth to its East. Despitethe valiant, but vainglorious, pretension togreat power status that characterised theThatcherite interregnum, Britain has beenforced to become a state almost like allothers and, subsequently, collapsed intostrategic neo-isolationism.

For Mackinder, what is now referred to asthe Atlantic Community, he termed the‘Midland Ocean’; this consisted of penin-sular Western Europe, the United Kingdom,Eastern Canada, the United States and, notleast, the Atlantic Ocean itself. Thesimilarities between Mackinder’s ‘MidlandOcean’ and the North Atlantic TreatyOrganisation, formed in 1949, do not needelaborating. However, the Atlantic Alliancewas scarcely a partnership of equals and,

specifically declaring to the world that theBritish state was a sovereign entity,beholden to no earthly power, or spiritualauthority, and that its conscious intentionwas to go were its destiny would take it.After the Henrician Reformation, Britainceased to be, in any meaningful sense, aEuropean state; divorced from WesternChristendom in its continental fastnessit turned to the oceans. In the aftermath,

Britain has been forced to

abandon its traditional

role as a great maritime

power and imperial

hegemon, and make

its peace with the

continental behemoth

to its East

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since Soviet forces no longer stand on thebanks of the Elbe, it is now a question ofbeing caught between Plymouth Rock and acontinental size hard place: between, on oneside of the Atlantic, the world’s only existingsuperpower and, across the straits of the‘English Channel,’ a nascent continentalsuperpower. For Germany, no longer adependent of one superpower and apotential victim of the other, the way is nowclear for a new hegemonic order.

But this order is characterised by anintellectual furtiveness. Euro-federalism isan emotional weltanschauung, more aMitteleuropean fantasy, than an intellectualargument. At the margins, it has all theappearance of a branch of metaphysics.Noel Malcolm has termed it “a kind ofcartographic mysticism that intuits thatcertain large areas on the map are cryingout to emerge as single geopolitical units.”Not a million kilometres removed from theFinlandisation of an entire continent.

Even that old ham Harold Macmillan –who endeavoured to turn Britain away fromEmpire and the Atlantic towards Europe –could fret that the “boastful, powerfulEmpire of Charlemagne, now under French,but [is] later bound to come under Germancontrol.” Berlin’s true ‘variable geometry’ –the EMU, and its concomitant EuropeanCentral Bank – is not a fiscal project but ageopolitical attempt to end the Westphaliansettlement in Europe that has held since1648. It is an attempt to evacuate thepolitical arena and to make the Europeansuper-state an apolitical entity: at once,

undemocratic, extra-territorial and anti-national; in a word geostrategic. As apolitical alliance it is anti-Anglo–Saxon:hostile to the UK tactically and regionallyand to the US strategically and globally.

Whatever the case, Britain is ‘in’ Europebut not of it. General de Gaulle’sunconcealed antipathy to ‘les Anglo–Saxons’ – what has been termed ‘ThePolitics of Qualified Grandeur’ – is re-emerging under the guise of the Elysée’sso-called ‘anti-hegemonic foreign policy’.Anti-Americanism, and its corollary anti-Englishness, remains the one politicallyacceptable prejudice of modernity; anantipathy so ingrained in the greatchancelleries of continental Europe as to bepart of their baroque architecture.

The British world died in 1940. TheWehrmacht cleared away forever the greatforests in which the European Union hasbeen able to grow. The whole of Europe isbeginning to live in the house that Adenauerbuilt, and, the lebensraum in Kohl’s garden.In the mid to long term, power will begin todrift Eastwards; from Bonn to Berlin, awayfrom the Atlantic hinterland and towardsthe vast expanses of the heartland whereEurasia has lain; latent and untapped.

Britain is now landlocked into acontinental Fortress Europe – a dirigisteautarky of ‘Little Europeans’, specificallydesigned to subvert the British trading state.How this country ever became part of apolitical project, one of whose primarygoals was to undermine its influence in itsimmediate geostrategic area, is a comedy of

diplomatic manners. The British foreignpolicy establishment remains permeated,not so much by a culture of appeasement, asby one of accommodation. This latter-dayCliveden Set suffer from a kind of displacednationalism. They have invented a newcountry they call ‘Europe’. There is a wordhiding in the subtext of Euro-federalism:that word is decadence.

It is now ninety years that since that ‘verysuperior person’, Lord Curzon, delivered hiscelebrated providential curse: “Englandfrom having been the arbiter will sink atbest into the inglorious playground of theworld. Our antiquities, our nationalbeauties, our mansion houses and parkswill attract a crowd of wandering pilgrims.People will come to see us just as theyclimbed the Acropolis at Athens, or ascendthe waters of the Nile. England will becomea sort of glorified Belgium.” Stranded in apost-imperial sea, the hunter in his hubris,has at last been captured by the game.Britain has dissipated virtually all itsstrategic power: it remains an isolatedand spectral remnant on the edge ofMackinder’s world-island; senescent,resentful, watchful (and, it has to be said,slightly bored). As our French cousins say:à l’outrance – to the end.

David Wilson is a civil servant. His articleDefending Our Decadent West; the mean-ing of contemporary Atlanticism appearedin the December 1996 Journal.

… news in briefSchröder defends NATO strategy

The German Chancellor has also defended what he has interestinglyreferred to as NATO’s “double strategy” of bombing Yugoslavia andsimultaneously “seeking a political solution”. He insisted that there wasbroad support for German policy from all political parties except theCommunist PDS. The Chancellor repeated his government’s oppositionto the use of ground troops. The argument over the war dominated whatwould otherwise have been a budget debate in the Bundestag.[Tagespiegel, 6th May 1999]

Waiting for the new CommissionWhen the European Commission ‘resigned’ in March – ‘resigned’ ininverted commas because all the Commissioners have remained in theirposts ever since – it was felt that a new Commission would be appointedas swiftly as possible. Tony Blair, for instance, leaped on a “reform”bandwagon, insisting that the mass resignation, evidently a disaster, wasin fact a great success and an opportunity for swift “root and branchreform”. Whether it will be “root and branch” remains to be seen(although this is unlikely, as many Commissioners are either going to beformally reappointed or recycled as MEPs). Swift, however, it will not be.Although Romano Prodi was confirmed in his post until September, the

new Commission will not be confirmed by the newly elected EuropeanParliament until then. In other words, it will have taken six months forthe new team to be installed. [Handelsblatt, 6th May 1999]

Deportee dies on plane out of AustriaA 25 year old Nigerian deportee died on a plane from Vienna to Sofiaafter having offered resistance to the Austrian police. They restrainedhim and put tape over his mouth. This caused him to lose consciousnessand when the plane arrived in Sofia he had died. [Der Standard, Vienna,3rd May 1999]

Green minister says bombing will continueJurgen Trittin, the Green German Environment Minister, has replied tothese protests by saying that the bombing campaign against Yugoslaviashould continue. He was specifically responding to a suggestion bymembers of his own party that the bombing should stop for one day sothat aid organisations could bring aid into Kosovo. On the other hand,Mr Trittin criticised the attacks on civil targets in Yugoslavia, singlingout the attacks on TV stations as wrong and counterproductive. Hisremarks came against the background of increasing unrest within theGreen party over the war. Green party leaders fear their members will goover to the PDS, the successor to the Communist Party. [Handelsblatt,5th May 1999]

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Fighting for a Fair Voteby Andrew Robathan, MP

For good or ill, referendums have nowbecome part of our political process.

Readers of this Journal will know thata referendum on our membership ofEconomic and Monetary Union is plannedby this Government and was indeedpromised by the last. Although there is thepossibility of a referendum on proportionalrepresentation, it is EMU that is likely to bethe next candidate for a populist decision.

Whatever one feels about referendums, itseems to me valid that, on an issue of greatconstitutional importance, there should bethe opportunity for the electorate to expresstheir opinion. The Neill Committee andothers have recommended that refer-endums, if they are to be held, should beproperly regulated. My Bill is designed tomake future referendums fair and to enacttwo of the main recommendations of theNeill Committee, namely that there shouldbe equal core funding for both or all sides ina referendum debate and that both or allsides should have equal access to thebroadcast media. It would also set up aReferendums Commission to ensure thatreferendums are fairly conducted and thisCommission would deal with furtherdetails and regulations. Such a matter ofconstitutional importance should not be aParty political issue and my Bill has genuine

All Party support. I have also had usefuladvice from the Home Office, but sadly thisis not of course the same as having thesupport of the Government. I and mysupporters believe that we will have thesupport of all democrats and all those whobelieve in democracy will surely wish to seethat both sides in an argument are fairlyheard. The Bill should be considered non-controversial and I find it astonishing thatthe Government is prevaricating on theimplementation of recommendations madeby a Committee that they instructed.

However, at second reading there was arather pathetic attempt to talk the Bill out,notably led by a very dismal Labour MPcalled Dismore, who succeeded in speakingfor nearly an hour. Since there were a largenumber of people that wished to speak onthe matter anyway, this was not onlydemeaning to himself, but extremelydiscourteous to all those other Memberswho attended the debate. The Bill iscurrently in Committee, but we expect toget it out soon and hope to return to thefloor of the House for a report stage. Thisof course gives the Government itsopportunity to destroy the Bill. Candidly,I expect it to do so, but I hope that theGovernment’s prevarication and weaselwords on this will be exposed.

The Government’s position is that itintends to enact the recommendations ofthe Neill Committee as a package and willpublish a draft Bill before the summerrecess. This sounds entirely sensible and Iwould willingly withdraw my Bill if a com-mitment were made by the Home Secretaryor the Prime Minister that there would beno further referendums under the aegisof the United Kingdom Parliament beforeNeill’s recommendations on referendumshad been enacted. The failure of theGovernment to make such a statementinevitably engenders cynicsm. The refer-endum in Wales in 1997, where only aquarter of the population voted for anAssembly and nearly the same numbervoted against struck the Neill Committee –and I suggest all who believe in democracy– as a very uncertain test of the public will.Regrettably, it appears that somebody in10 Downing Street considers that itmight be foolish to make any concessionsto democratic will, when of course allthe cards are currently held in theGovernment’s hands.

The Prime Minister’s personal position issomewhat confused. On July 24th 1994, hesaid that “I am actually not a great exponentof government by referendum”. Since thenhe has held referendums in Northern

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Ireland, Scotland, Wales and London – withresults which all supported his position.Neill’s recommendations might make suchcompliant results more difficult to achieve.Peter Mandelson, still close to the PrimeMinister and “Uncle Peter” to his children,made a very telling comment on 18thOctober last year when asked by DavidFrost if the Government was obliged toaccept the Neill recommendations. Hereplied, “we don’t have to, but we need to bemindful of the analysis he is offering”.Concern about the Government positiontherefore seems entirely justified and itseems unlikely that a Prime Ministeraccused of being a “control freak” would bekeen to give up control over this issue.

The only referendum in which I havebeen able to vote was the 1975 referendumon the Common Market. The situation is ofcourse very different now, but whenconsidering a referendum on EMU, it isillustrative and useful to know whathappened last time round. Apart fromanything else, in 1975 I voted to remain in

the Common Market – I shall not vote tojoin a single currency. In 1975 the LabourGovernment was of course split on the issueand gave an equal sum of money to eachside in the campaign as well as equalbroadcast time – both as recommended byNeill. However the ‘Britain in Europe’campaign spent over ten times the anti-Market ‘National Referendum Campaign’.This was because the Britain in Europecampaign was heavily financed by some 60company donations and indeed by theEuropean movement. The disproportion-ate sums expended on advertising, at a timewhen less was known about ‘Europe’ thannow, certainly influenced the thinking ofpeople such as myself. When and if there isa referendum on EMU, we must hope thereare fair rules and also that we are able to getour case across to the British public.

Despite overwhelming cross Partysupport, both inside and outside theHouses of Parliament, it seems that this Billis unlikely to become law. I have noparticular personal pride involved in this,

but I do regret that, should it fall, we couldeasily see a referendum called on EMUwithout fair rules being in place, unless theGovernment does bring forward its ownlegislation. We are all aware that it is thequestion that determines the answer, inopinion polls or referendums, so it isessential that public opinion is fullyinformed before such a momentousdecision affecting the future of this countryis taken. Perhaps I am being unduly cynicalabout the Government’s motives, butexperience of both this Government andthe last has caused me to be thus. All thesponsors and supporters of this Bill believeit is an important step for democracy andthat the measures should be enacted beforeany further referendums take place in thiscountry – I hope that all readers of thisJournal will assist in holding theGovernment to account on this issue.

Andrew Robathan is Conservative MP forBlaby.

Conclusions on Broadcastingfrom the Neill Report, 1998

12.38 The broadcasters should also, in our view,reconsider their position with regard to referendums.Although they provided both sides in the 1975referendum campaign with free air time, they have beenreluctant to do so since. Their reasons are set out in theirrecent Consultation Paper on the Reform of PartyPolitical Broadcasts:

“Experience has led the broadcasters to believe thatfairness over single issue referendums cannot easily beachieved by a simple application of the rules governingfairness between parties. Bearing in mind the Court’sdecision at the time of the 1979 Referendum in Wilson v.IBA, the difficulty of achieving fairness when parties areunequally balanced between two sides of the question (asin the recent Scottish and Welsh Referendums ondevolution), the difficulty of achieving fairness whenparties are internally divided on the issue and theuncertain status of umbrella organisations, we have noplans to introduce a series of Referendum broadcasts.”

12.39 We agree with the broadcasters that “fairness oversingle issue referendums cannot easily be achieved by asimple application of the rules governing fairness betweenparties”, but we draw a different conclusion: namely, that

the broadcasters should consider allocating free air timeto the two umbrella organisations on each side of areferendum, if two such umbrella organisations exist.There seems no reason on the face of it why thebroadcasters should not follow the lead of the ElectionCommission in this matter (see paragraph 12.35 above). Ifthe Commission designates two such organisations for thepurpose of receiving core funding, those could be theorganisations given free air time. If the Commissioncannot in any instance identify two organisations as beingappropriate recipients of core funding, then thebroadcasters would not be under any obligation toprovide free air time to anyone.

12.40 We should perhaps add that, in terms of their newscoverage, the broadcasters fully recognise their obligationto be fair to the various parties participating inreferendum campaigns and to be neutral between them.In the case of the 1997 Welsh referendum, we were happyto hear from some of our witnesses that the broadcastershad gone out of their way to cover the ‘No’ campaignand to give the ‘No’ campaigners opportunities to makeknown their views. One ‘Yes’ campaigner complained thatthe broadcasters virtually invented the ‘No’ campaign.

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Why the UK Should Treat Euroland as a Test Market– A Plea for a Sixth Test and More Time

by Stuart Jackson

1. Dicing with death

Multinational corporations live in adangerous environment. In the shadowslurk nameless assassins. Sudden death canstrike down failed managers, failed projects,failed companies. Multinationals havesearched for and found ways that offerbetter prospects of staying alive. Theirdiscoveries are well worth taking note of,particularly if you are the UK governmentpeering nervously across the Channel atEuroland.

2. A marketing perspective

To anyone familiar with consumermarketing, EMU has the appearance of agigantic test market. By adopting the wellestablished principles of test marketassessment, we should be able to shine atorch into some of Euroland’s darkestcorners.

3. Risk and uncertainty

In situations of uncertainty where thepenalties for failure are severe, there is anatural desire to avoid unjustified risk.EMU is risky. Even its most ferventproponents admit as much. Risky butexciting, they say. Or risky but noble in itsaims. In whatever way these sentiments areexpressed, the fact of risk is not denied.

High risk puts a premium on riskreduction. The shortest route to riskreduction is improved information. Testmarkets provide that information.

4. What test markets are about

a) History

Test markets were invented by multi-national corporations in the 1950s with theobject of avoiding catastrophic new productfailures. They are defensive (i.e. losslimiting) in character.

A successful new product programmecan vault a company over its competitorsto a position of market dominance. Anunsuccessful new product programme canbreak a company on the wheel ofunsustainable losses.

b) Nature

Test markets are scaled down versions of anational launch. The areas selected for thetest are usually a television area of a town.

Although in a formal sense test markets arefully commercial operations, they aredesigned as an information collectingprocess. As such they are closer to marketresearch than to normal business. No largecompany would contemplate sub-nationalmarketing as a serious long termproposition.

c) Purposes

The purposes of test markets are twofold: toidentify things that can go wrong and tofurnish the data from which reliablepredictions can be made of ultimate successor failure.

5. Types of error

Reducing risk is a matter of reducing error.Statisticians classify errors into two types,which they call Type I and Type II. Type Ierror is taking a course of action that turnsout to be mistaken. Type II error is rejectingthe course of action that had it beenpursued would have turned out to be right.

In effect, Eurosceptics are saying aboutEMU: watch out, there are sharks in thewater (i.e. don’t make a Type I error).Advocates of helter skelter entry into EMUon the principle of close your eyes and jumpare pointing to what they see as a splendidopportunity that could be missed (i.e. forheaven’s sake don’t risk making a Type IIerror).

6. Action standards

Multinationals evolved action standardsalongside test marketing. They did so inself-defence. Managers of subsidiarycompanies scattered across the globe caninflict untold harm on the parentcorporation if they commit either of twokinds of fault: they may dither and delay inan effort to avoid the agony of making anydecision at all or, the opposite, they mayplunge precipitously into a venture that hasnothing more substantial to recommend itthan their own wish fulfilment.

Action standards are a way of callingmanagers to account. Managers arerequired to say precisely and in detail beforethe event, not after, what course of actionthey intend to take in response to thecomplete range of results that a test marketmight theoretically throw up. Tell us now,head office demands of them. Don’t leave it

until later to see what mood you happen tobe in at the time the test results becomeavailable.

7. The five Treasury tests

In October 1997, soon after the Labourgovernment came to power, the Treasuryissued a list of five economic tests that hadto be satisfied before UK entry into theEMU could confidently be recommendedto the British electorate. They are:

(i) Are business cycles and economicstructures compatible, so that the UK couldlive comfortably with an EU-widemonetary policy on a permanent basis?

(ii) If economic crises occur doessufficient flexibility in product and labourmarkets exist for them to adjust rapidly andefficiently?

(iii) Would joining EMU create betterconditions for firms making long terminvestment decisions in the UK?

(iv) What impact would EMU entryexert upon the competitive position of theUK’s financial services industry?

(v) Would joining EMU provide greaterstability, higher growth and a permanentincrease in jobs?

The trouble with these tests is that theyare general to the point of vagueness. Whatis lacking are decision criteria based onquantitative measurements that can betranslated into clear and unambiguousaction standards.

8. Monitoring the euro

– the sixth test

Fortunately, there is another test readily tohand that satisfies these requirements toperfection. The value of the euro in theforeign exchange markets provides acontinuous flow of data that can be used tomonitor the progress of the new currencyrelative to other currencies.

Let us call this the sixth test. It refersdirectly to EMU’s central institution, itsvery keystone. It is a test whose virtues areindisputable. It is objective, external andexact.

The euro was launched at the beginningof 1999. From the start its movement wasone of decline. In less than three months itsvalue had fallen by seven per cent relative tothe pound sterling and by ten per cent

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relative to the US dollar. Its futureprogression is a story yet to be told.

Europhiles have responded to the euro’searly weakness with claims that it is goodfor Euroland’s exporters. You can be surethat if the euro had risen since its launch,they would have praised its strength. And ifit had remained more or less constant, theywould have rejoiced in its stability. Sometest, indeed. Small wonder that smugnessfills the air. Dr Pangloss, Voltaire’s comicdepiction of complacency (“all is for thebest in the best of all possible worlds”),would have felt at home. Action standardsare needed urgently.

9. Other problems

There are two other problems of evaluationto be considered.

a) Time

Except when failure is immediate, testmarkets are notoriously defective aspredictors in their early stages. It is onlywhen the key variables have settled downthat predictions can be made with anyassurance. A fatal temptation, often yieldedto, is to curtail the test market prematurely,lunging impulsively into a national launch,thereby risking the large scale failure thatthe test market was designed to avert.

The relevance of this to EMU is clear.Give Euroland plenty of time before makinga binding decision on behalf of the UK.Think of a number, and then double it atleast. If in doubt, keep testing.

b) Representativeness

To be valid, a test market must be represent-ative of the whole, enabling generalisationsto be made from the test area (the micro-cosm) to the larger area (the macrocosm).In purest terms, no such area can everbe found, but in practice satisfactoryapproximations can usually be obtained.

to be applied (the UK) is the lesser, thereverse of standard practice.

This goes to the heart of the decisionfacing the UK. Is continental Europe asuitable geopolitical entity for the UK, anoffshore island, to be associated with, letalone be absorbed into?

10. Let caution be our guide

The world of politics is different from theworld of business. Nevertheless, at timesthey overlap. Each can learn somethingfrom the other.

Business managers know thatsentimentality brings heavy retribution. Ifthe chairmen of multinational companiesindulged in the vapid abstractions commonin political circles (“I believe passionately inthe European ideal”, Heath, Jenkins, Radice,passim), they would be putting in jeopardythe very survival of the enterprises forwhose fortunes they are responsible.

An episode from Graham Greene’s classicfilm, The Third Man, captures the mood. Apost-war Austrian racketeer is parrying hispersistent questioner. With a faint smile,part supercilious, part sinister, he says: “Youshould go careful, Mr Martins. Everyoneshould go careful in Vienna.”

These menacing words speak to us acrossa divide of fifty years. Let us take them as awarning.

A market researcher by profession, StuartJackson has specialised in new productdevelopment and test market evaluation.

EMU presents complications of a raresort. Euroland comprises eleven ins, withfour outs in the queue. The UK is one of theouts. The test area (Euroland) is the greaterpart and the area to which the test results are

… news in briefLife sentence requested for Andreotti

The public minister in Perugia has called for Giuliano Andreotti, seventimes prime minister of Italy, to be sentenced to life imprisonment forordering the murder of a journalist in 1979. The prosecutor of Palermocalled for 15 years in prison three weeks ago. Mr Andreotti was one ofthe principal architects of the Maastricht treaty, playing an especiallyimportant role when an “ambush” was conducted on the Britishgovernment at a summit in Rome, forcing Britain to accept theIntergovernmental Conference which led to the treaty. [Le Monde, 4thMay 1999]

Mr Prodi spells it outThe new president of the European Commission, who was confirmed inhis post by the European Parliament on 5th May, has said that the eurowill not help Europe’s chronic joblessness. “Although internationalmonetary stability is a fundamental condition, the true factor forgrowth will be a new ‘round’ of liberalisation of international exchangesnegotiated within the framework of the World Trade Organisation.” Thisis something for which the “European Commission has a fundamentalcompetence”. In other words, the euro is not going to help stem the risein unemployment and Europe will have to wait several more years – ittook nearly a decade to negotiate the last ‘round’, which Europe is busy

smashing up – before there can be any hope of recovery. Meanwhile,people in many countries are becoming increasingly sceptical that ‘freetrade’ is a more important priority than stimulation of domesticdemand and production. They see ‘free trade’ as little more than anexcuse for rapacious asset stripping by foreigners, especially in thefragile economies of Central and Eastern Europe. [Actualité européenne,5th May 1999]

Mr Prodi also insisted that the European construction was pro-American, even in the monetary domain. Emphasising again and againthe need to have “a stronger Europe” – he dwelt long on the need toreinforce the powers of the Commission to “give political leadership” –he said it would “facilitate a better and more durable balance betweenthe two sides of the Atlantic and would lead to a model with two motors.This will without doubt be more stable than a system based on onesingle currency”, (i.e. the dollar). He also devoted much of his speech toemphasising the need for Europe to develop its own defence capabilityand expressed approval for “a grand international conference on theBalkans”. He called for this conference to integrate the Dayton accordswith the Rambouillet agreement, saying that these accords could be“placed in a framework which would be definitive for the whole regiononce the Yugoslav Federation has returned to the European family ofnations”. [Le Monde, 6th May 1999]

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Is Cyclical Convergence a Good Thing?by Andrew Lilico

The Labour Government has set fiveeconomic tests for whether the UK

should join the euro. Without a doubt, themost important of these is test number one:whether the economic cycles of the UK andEuroland have achieved sustainableconvergence. This subject has had somediscussion in the media, but one significantissue has been ignored: is converging itself agood thing, just a neutral thing, or actuallya bad thing?

What does cyclical convergence mean?Well, all economies move through cycles, asthey gradually adjust to variable harvests,changes in technology, wars, and the othereconomic shocks which occur from time totime. These cycles affect many areas ofeconomic activity, but the most obviousones are inflation, growth, unemployment,and interest rates. Economies tend to cyclesbetween periods of relatively low unem-ployment with high growth, inflation, andinterest rates (‘upswings’ or ‘booms’), andperiods of high unemployment with lowgrowth, inflation and interest rates (‘down-swings’ or ‘recessions’).

Now the position of interest rates in thesecycles is of particular importance, since theinterest rate is a tool of economic policy.That is, the interest rate is used to controlthe economic cycle, to some degree. Ifunemployment becomes very low, orgrowth becomes very high, the interest rateis used by the government (whetherdemocratically elected or Central Bankgovernment) to try to stop the upswingbecoming too pronounced and inflationbecoming too high. This is because if theupswing is too strong and too inflationary,then the next downswing will also be verystrong, leading to social misery such as highunemployment.

Similarly, if growth becomes too low andunemployment is rising too fast, theninterest rates will be lowered to prevent thedownswing becoming too pronounced.Hence, what the appropriate interest rate isfor the economy depends on where it is inits economic cycle.

If two countries have different economiccycles (if their economic cycles are ‘diverg-ent’) then their governments should pursuedifferent interest rate policies. However, in acurrency union like the euro this is not apractical possibility. Hence, for Britishmembership of the euro to work at all, the

British economic cycle would have to be thesame (or at least almost the same) as that ofthe other members of the euro, particularlyGermany. If Britain joined the euro with itseconomic cycle different from other euromembers, then Britain would always havethe wrong interest rates, making its boomsmore inflationary and making its recessionscause greater unemployment.

will make a widely appropriate monetarypolicy impossible, as we have discussedalready). Let us suppose that if the UK wereto join the euro then that would tend toincrease convergence. Furthermore, let ussuppose that the drive towards the Euro willlead to greater cyclical convergence. (Forexample, the British Chambers ofCommerce argues that the Governmentshould be actively seeking convergence!)But is this convergence good?

If cycles (say between Germany and theUK) are negatively correlated that meansthat when the UK is booming, thenGermany is in recession, and vice versa.Now when the UK is booming, demandtends to outstrip supply, leading to capacityshortages. That is why booms areunsustainable, and why the cycle alwayseventually involves a downswing.

Similarly, when Germany is in recession,there is overcapacity, leading to an increasein unemployment, as firms lay of unneededstaff. But since the UK and Germany aremajor trading partners, being in oppositeparts of the cycle benefits both. Why? Well,when the UK has under-capacity, whichwould tend to create inflation in the UK,UK consumers can, instead, buy fromGerman exporters, rather than bidding upprices in the UK. Thus the UK gains. And inGermany, instead of laying off workers,German firms can use their spare capacity

Correlation coefficients of US, UK, French and German growth rates

UK/US UK/D US/D UK/F D/F US/F

1970–96 0.66 0.31 0.40 0.46 0.65 0.301979–96 0.56 0.01 0.17 0.38 0.49 0.10

Economic cycles:

1975–81 (UK) 0.86 0.82 0.78 0.82 0.97 0.861981–92 (UK) 0.47 -0.14 0.10 0.48 0.19 0.051982–93 (Intl.) 0.52 -0.30 0.11 0.35 0.42 0.06

Source : UK membership of the Single Currency – An assessment of the five economictests, HM Treasury October 1997

The facts are that over the past twentyyears the UK economy has divergedconsiderably from the German economy,and diverged very slightly from the US eco-nomy, although it remains quite close to theUS. One important measure of convergenceis called the correlation coefficient. If thecorrelation coefficient is 1, that meansthat the economic cycles move in perfectharmony. If it is -1, then they move preciselyin opposite directions. For the period1979–96 the correlation coefficient betweenUK and US growth rates was 0.56 (i.e. areasonable amount of correlation) whereasthe correlation between UK and Germangrowth rates was 0.01 (no correlation at all).The UK/French correlation was 0.38 (some,but not all that much).

The picture for UK/German correlationhas changed dramatically since the 1970s.For 1975–81 the correlation coefficient was0.82 (the cycles moved almost exactlytogether), whereas for 1982–93 it was -0.30(that is, the economies tended to move inthe opposite direction!). To put this incontext, since 1979 most Eurolandcountries have moved to being more closelycorrelated to the German cycle than the UScycle. Thus the UK is moving in theopposite direction from Euroland states interms of convergence.

The European Commission argues thatthe lack of convergence currently is not

crucial, because the very introduction of theeuro will tend to create convergence. PaulKrugman disagrees, claiming that greaterintegration will lead to greater regionalspecialisation and hence to greaterdivergence. However, let us suppose for themoment that the Commission is right (afterall, if Krugman is right, then the euro willhave severe problems because divergence

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to export goods to the UK. Hence being inopposite parts of the economic cycle isgood for both countries.

If we move towards greater cyclicalconvergence, that means that all cycles willbecome more pronounced. Our recessionswill become deeper, and our booms willbecome more inflationary, because we willhave lost the automatic stabilizer effects ofhaving trading partners in different parts ofthe cycle.

Thus Labour’s key test of whether weshould join the euro is really a case of“damned if you do, and damned if you

don’t”. If we join the euro without cyclicalconvergence then we will always have thewrong interest rates, making our economiccycles more unstable, thus creating higherinflation on the upswings and greaterunemployment on the downswings. But ifdo achieve convergence, that itself will tendto create cyclical instability. How can weescape this problem? Easy. Just keepcyclically divergent – as we have been since1981 when our economic performance hasbeen good – and stay out of the euro.

This argument also provides oneimportant reason why it is not necessarily

good to be in the largest possible country,and hence against too much politicalconvergence in the EU. Large countriesalmost invariably use a single currency, andhence tend either to have widely inappro-priate monetary policy, or to have too muchregional convergence, creating cyclicalinstability. Big is not necessarily best.

Andrew Lilico is a macro-economicconsultant, was formerly an economist at theIFS and the IoD, and is a regular contributorto the Journal.

White Paper on EuropeMr William Cash, Conservative, Mr David Trimble, Ulster Unionist Party (Leader), Mr Tony Benn, Labour,

Sir Michael Spicer, Conservative, Mr Austin Mitchell, Labour, Mr Peter Luff, Conservative

That this House calls on Her Majesty’s Government to publish a White Paperon the constitutional, economic and political implications of the

United Kingdom joining the European single currency.

Tapsell/Peter, ConClark/Alan, ConTaylor/ John D., UUP – Dep. Ldr.Bercow/John, ConWilkinson/John, ConPaterson/Owen, ConLewis/Julian, ConMalins/Humfrey, ConSwayne/Desmond, ConRuffley/David, ConHayes/John, ConBody/Richard, ConFlight/Howard, ConBrazier/Julian, ConHunter/Andrew, ConWardle/Charles, ConSyms/Robert, ConWinterton/Ann, ConLoughton/Tim, ConRobertson/Laurence, ConSt. Aubyn/Nick, ConAtkinson/Peter, ConWinterton/Nicholas, ConShepherd/Richard, ConBrady/Graham, Con

Smyth/Martin, UUPRoss/William, UUPForsythe/Clifford, UUPBeggs/Roy, UUPHowarth/Gerald, ConGorman/Teresa, ConGill/Christopher, ConRoe/Marion, ConTaylor/Teddy, ConTownend/John, ConSteen/Anthony, ConWilshire/David, ConFaber/David, ConRobathan/Andrew, ConGrieve/Dominic, ConClifton-Brown/Geoffrey, ConAtkinson/David, ConMitchell/Austin, LabWoodward/Shaun, ConColvin/Michael, ConPrior/David, ConAmess/David, ConSimpson/Alan, LabHawkins/Nick, ConHopkins/Kelvin, LabGodman/Norman A., LibDem

Taylor/David, LabChapman/Sydney, ConMaginnis/Ken, UUPTredinnick/David, ConJohnson Smith/Geoffrey, ConRandall/John, ConFabricant/Michael, ConSayeed/Jonathan, ConDonaldson/Jeffrey, UUPKeetch/Paul, LibDemPaisley/Ian, DUP – Ldr.McCartney/Robert, UKU – Ldr.Blunt/Crispin, ConHarvey/Nick, LibDemDrew/David, LabDuncan Smith/Iain, ConBruce/Ian, ConFallon/Michael, ConGray/James, ConMates/Michael, ConPage/Richard, ConKirkbride/Julie, ConCryer/Ann, LabKing/Tom, ConGillan/Cheryl, ConClark/Michael, Con

Laing/Eleanor, ConLeigh/Edward, ConWells/Bowen, ConSoames/Nicholas, ConOttaway/Richard, ConGreenway/John, ConRedwood/John, ConLansley/Andrew, ConShephard/Gillian, ConDuncan/Alan, ConHammond/Philip, ConTaylor/John M., ConEvans/Nigel, ConViggers/Peter, ConNorman/Archie, ConJenkin/Bernard, ConWhittingdale/John, ConAinsworth/Peter, ConFraser/Christopher, ConCryer/John, LabLetwin/Oliver, ConWise/Audrey, LabMcDonnell/John, LabCable/Vincent, LibDemLivingstone/Ken, Lab

Since March the European Journal has received notice from a large number of readers calling on their MP tosupport EDM 185. Some MPs have provided a number of interesting reasons for not signing. However, two

notable new signatures are Vincent Cable, MP, the Liberal Democrat’s Finance Spokesman andKen Livingstone, Labour MP for Brent East and Mayor of London hopeful.

The EDM requires more support. If your MP does not appear on the above list and you have not alreadywritten, then please write and suggest support of EDM 185 – White Paper on Europe. Address letters to:

The House of Commons, Westminster, London SW1A 0AA.

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Euroland Economic Policy: A Muddle to Avoidby Dr Brian Burkitt

Whether Britain should join the

euro has long been a matter ofheated theoretical debate, but now thearguments can be tested against threemonths experience of the single currency’sactual operation. The striking aspect ofthese three months is how they havevindicated the arguments of eurosceptics,far sooner than most of them anticipated.For instance, a key argument of thoseopposed to further EU integration is thefutility of fitting a single monetary policyinto the framework of a multitude ofvarying national economies. Between 1stJanuary and 31st March 1999, it has becomeobvious that a single interest rate cannotmeet the needs of all eleven Euroland econ-omies; thus Germany and Italy currentlyrequire lower interest rates, while Irelandand Spain require higher ones. The problemwould become more acute if the UKparticipated, with its even greater cyclicaland structural divergences. Therefore theMaastricht Treaty makes it impossible toconduct a coherent economic strategyacross divergent national economies.

An OECD Report of March 1999 statedthat Euroland economies are at greater riskof boom and bust than in the past. UnlessEMU governments act to iron out structur-al differences between their economies, amonumental task that would take gener-ations to achieve, “output volatility couldrise”. The problem is particularly difficult inthe EU because labour mobility is low, withjust 5.5 million of its 370 million citizens,approximately 1.5% of the total labourforce, working in other EU countries.

Barely three months of experience ofEMU has exposed its structural flaws, i.e.the contradiction between the monetarismof Maastricht, embodied in the EuropeanCentral Bank (ECB), and nationalgovernments responsible for their citizens’welfare. The Maastricht Treaty establishedthese conflicting rights to economic policyformation; such a flawed structureembodies compromises between nationalobjectives, which took fiscal and monetarypolicy further from democratic control.

Under the Treaty and its subsequentdevelopment:(i) the ECB is answerable to nobody and issupposed to set a single monetary policyappropriate for all the economies ofEuroland;

(ii) the Stability and Growth Pact (SGP)stipulates rules for all participatingcountries to follow, the most importantbeing the 3% GDP government deficit limitfor 1997, with further deflation to nil by2002;(iii) all nations adopting the euroirrevocably surrender foreign exchange rateflexibility.

These three self-imposed characteristicsof EMU exclude all possibility of economicpolicy adjustments. Given the widelydifferent economic conditions faced byEuroland’s member economies, a ‘one-size-fits-all’ policy generates a wideningdivergence between them. In contemporarycircumstances it creates rising Germanunemployment simultaneous with acceler-ating Spanish inflation.

In theory, the ECB sets Eurolandmonetary strategy in isolation. However,the issuing of government bonds is a crucialdimension of monetary policy, whichremains under the control of nationalgovernments. Likewise foreign exchangeissues remain the province of the euroeleven finance ministers; thus, by fixing thedollar-euro exchange rate, they couldensure the imposition of US monetarypolicies upon the EMU zone!

Authority over budgetary policy isequally divided and confused. For example,if Euroland unemployment remains at 11%compared to 6% in Britain and 4.4% in theUSA in an era of zero inflationary pressures,a budget deficit within member states couldstimulate expansion and create jobs.However, any government pursuing such astrategy would be in conflict with the SGP.The ECB has already announced that itwould respond to expansionary nationalmeasures by tightening monetary policy,thus deflating other Euroland economieswhere demand is adequate and the SGP isbeing implemented. Therefore the ECB’sclaim for a role in fiscal policy makes theEMU zone’s economic policy mechanisminefficient and confusing. It is alsoundemocratic; at no stage are votersinvolved or even consulted.

The ECB has further confused the issueof where economic power is located withinEuroland by advocating structural labourmarket reforms, which, whatever theirmerits, are surely not within the jurisdictionof a central bank. Moreover, the ECB’s

pronouncements on the topic rarely reflectthe facts that structural reform is onlyeffective over a lengthy period and that,even then, it requires an economic andpolitical environment where voters feelsecure enough to tolerate major socio-economic alteration.

The confusion of powers in theformulation of euro zone economic strategyinvites a prolonged turf war, with risingunemployment as a consequence. The onlylogical solutions are:(i) to dismantle the inefficient, undemo-cratic structure, a choice that will appearincreasingly attractive over time;(ii) to move towards a federal Euroland.For this to occur, France would have toabandon its apparent control over policy,whilst Germany would need to accept thatother nations possess rights over itscurrency. The achievement of such a radicaltransformation in attitudes constitutes amajor problem, given the stagnation,unemployment and future power strugglesthat are EMU’s legacy.

Tensions between the ECB and Eurolandpoliticians were inevitable, because theMaastricht Treaty created a central bankdedicated to price stability, which came tobirth in an era of looming deflation andhigh unemployment. The ECB’s lack ofaccountability, transparency and demo-cratic legitimacy proves conclusively that itis in need of urgent reform. As currentlyconstituted, it is an anti-democratic,economically inept and potentially corruptinstitution. It fails to live up to modern bestpractice, as laid out in the IMF’s proposedinternational code on central banking,whilst its operational structure lags farbehind those entrenched in British andAmerican legislation.

It is crucial that British voters, when andif consulted, possess the informationnecessary to enable them to steer clear ofwhat promises to be an inefficient,bureaucratic nightmare.

Dr Brian Burkitt is Senior Lecturer inEconomics at the University of Bradford anda regular contributor to the Journal.

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Why We Need a Fair Referendum on EMUby Frank Jenkin

For reasons of democratic account-ability the Government should adopt

Lord Neill’s proposal that a referendum onBritain joining EMU should be fair andimpartial. But this would be of little valueunless we can first convince voters that theyhave a real choice. Most of the argumentswill be familiar to the readers of this Journal,and I will amplify just one aspect, namelythe world developments within whichEuropean policy must fit, before discussingthe referendum.

What are the long term prospects forBritain, Europe and the world? Forecastingis a notoriously difficult art, yet some trendsappear well established. First, population isgrowing far faster in the developing count-ries than in the industrialised countries and,second, the developing countries seek toprogress towards the standard of living inthe developed countries. We can examinethese trends using some recently publishedscenarios (Global Energy Perspectives,prepared by the World Energy Council andthe International Institute for AppliedSystems Analysis). These project economic,social, energy and environmental develop-ment in eleven different world regions.

Based on purchasing power parities, in1990 the EU15 countries were responsiblefor 20% of world economic output. By theend of the next century, on quite modestassumptions about a catching up of livingstandards by the third world, then, using theabove scenarios, the EU15 countries willshrink to typically just 10% of worldeconomic output – a halving in size.Enlargement of the EU will merely slow thisprocess slightly.

Other trends of the past 10–25 years canbe expected to continue: the spread ofdemocratic government and of the marketeconomy system, the progressive freeing ofworld trade under the auspices of the WorldTrade Organisation, and the globalisation ofbusiness and capital flows. Of course therewill be setbacks and problems from time totime, as recent Asian experience shows. Yetin the long run the world will surelycontinue to progress.

Even the subject of global warming isrelevant. Based on the scientific conclusionsof the Intergovernmental Panel on ClimateChange, the WEC/IIASA have prepared a“green” scenario, which assumes inter-national co-operation on environmental

On this view some global warming isunavoidable, and a major part of thestrategy for coping with it must beadaptation. This is quite feasible for theindustrialised nations, which have thewealth and technology to adapt over time.

Many developing countries are not in thishappy state, yet they will have to adapt too.They can best do this if they continue tomake progress economically and, on theevidence of recent years, this is best fosteredby the spread of democracy and the marketsystem. There is a clear responsibility onthe industrialised nations to help suchcountries. Aid alone is not enough. Moreimportant is full involvement backed by anopen trading policy, with reduction in tariffand non-tariff barriers to trade under theauspices of the WTO.

What does this mean for Britain’s longterm trade pattern? The relevant factors are:first, a world economy growing much fasterthan that of the EU; second, a freeing of theworld market under the WTO which islikely to match the development of the EUmarket under EMU; third, the advantage ofBritain diversifying its trade portfolioacross the world; and fourth, the moral dutyto help the developing countries. If natural

economic forces are allowed to operatewithout interference, then these factorssuggest that Britain’s trade balance (split atpresent about 50–50 between the EU andnon-EU) will swing decisively towards therest of the world in the long run (perhapsrising to 60% or two thirds).

These conclusions provide a necessaryperspective to the economic and politicalarguments for Britain joining EMU.

Consider, for example, the argument thatjoining EMU will eliminate exchange raterisks. Even now, this is a half truth. For inrecent years the £ has shown less volatilityagainst the US$ than against the DM. Sofixing the £ against the DM (euro) wouldtend to increase the volatility of the £against the $, adversely affecting 50% of ourtrade outside the EU which is mostlydenominated in US$. Critically, if tradeoutside the EU grows as predicted above,then in relative terms the benefit of stabilityagainst the euro will decline and thedisadvantage of instability against the US$will increase.

The world view gives a completely newperspective on Britain’s choice. For the viewof those favouring Britain joining EMUappears to be exclusively Eurocentric. Itassumes that trade will be increasinglyconcentrated on Europe, that our economymust converge with Europe’s, that furtherintegration with the EU economy andpolitical system is inevitable, and that wecannot afford to be left out the club.

But from a world perspective there is noobvious reason for any of these assump-tions. For suppose, as suggested above, thatin 2100 two thirds of Britain’s trade liesoutside the EU. It would then be bizarre thata minority of our trading partners, led byFrance and Germany, should bind us torules and regulations which were irrelevantor even inimical to our wider tradinginterests. For on a number of matters – over-regulation and harmonisation, inflatedsocial security costs, labour marketinflexibility, high unemployment – it is theEU which is out of step with world trends,not vice versa.

The country has a real choice. Howshould it make that choice?

The standard answer is that, in the Britishpolitical system, “Parliament decides”. Butthis is a half truth. Why are the Britishpeople prepared to give so much power to

protection, policies to reduce energy useand extensive help to developing countries.This scenario assumes a major switch fromfossil fuels to renewables and nuclear by2100, leading to a reduction relative to 1990of two thirds in carbon emissions.

Yet even this scenario predicts a 1.5°Cincrease in mean global temperature by2100. Other scenarios are worse. And globalwarming is hardly a priority problem for thedeveloping countries, when many facemuch more urgent problems of poverty andlocal environmental pollution.

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their rulers? Surely because, as part of thedemocratic process, the people have thepower to dismiss their rulers. And, havingdone so, they can elect a fresh governmentto reverse earlier decisions.

Hence the power of Parliament is inpractice limited in two respects. First, itcannot bind future parliaments. Second, itcannot extend the duration of its owntenure of office (at least in peacetime).These constraints arise precisely becauseotherwise the democratic contract betweenthe people and its rulers (right of the peopleto dismiss parliament) would be broken.

Exceptionally, issues such as joiningEMU involve entering into an internationalcommitment which is intended to hold for along time (one can never say for ever: videthe break up of the USSR). The generalmandate given to a government at a generalelection (where many issues are conflated,and people often vote ‘against’ parties) ishardly sufficient to cover this, and it wouldshow bad faith with our internationalpartners if the very next parliament were toexercise its democratic right under theBritish system to reverse the decision. So areferendum adds a degree of stability to aninternational commitment. If this is to be

Many other powers have been transferredto the EU in the Maastricht and AmsterdamTreaties (and by decisions of the EuropeanCourt of Justice), all without the directapproval of the people, and all affecting thedemocratic bargain between rulers andruled. There is strong pressure within theEU to harmonise taxes, and the economictheory of a monetary union indicates aneed for greater tax raising anddispensation at the centre. Given theexperience of the 1975 referendum, voterswould be unwise to put any reliance onclaims by the Government that they wouldveto such developments. For governments,and circumstances, change.

We should aim to do better this time. TheGovernment should adopt the Neillrecommendations on the conduct of a fairand impartial referendum.

Frank Jenkin is a former consultant to theWorld Energy Council and a former directorof the Central Electricity Generating Board.He is a member of the British ManagementData Foundation.

achieved, arguably a referendum majorityof one in a bitterly fought contest isinsufficient grounds for making a majorconstitutional change.

The need for rules of fairness arisesbecause an international commitment ofthis nature alters the power of the peoplerelative to their rulers. For it is of less andless value to be able to throw out the Britishgovernment every five years if more andmore policy decisions are delegated tooutside bodies (e.g. a council of ministersoperating under majority voting).

It is precisely for this reason that thepeople should make the decision to enterinto such commitments, not their rulers.For if the latter (i.e. the government) makethe decision and then use all their powers tocajole or bully the people into supportingthem, they are taking it upon themselves toabrogate the powers and the remediesavailable to the people.

In the 1975 referendum, the issue ofaccountability was not explained to theBritish people in the terms set out above.Promises were made to the people (thesafeguard of the national veto, no threat ofjoining EMU) which have since beenbroken.

… news in briefNo respite in sight for euro

The euro has continued to fall, hitting a new low against the dollar. OnFriday 30th April it fell to $1.0552. European Central bankers areunderstandably starting to sound a little nervous. Almost daily, peoplelike Hans Tietmeyer, Wim Duisenberg, Jean-Claude Trichet, ErnstWelteke and Jurgen Stark are saying that it has now sunk enough andthat they are not deliberately adopting a policy of neglect towards theeuro rate. These declarations have made no difference. Instead, themarkets are concentrating on the apparently contradictory statementsemanating from the ECB, interpreting them as signs of policy weakness.The market view is that the ECB has signally failed to manage itsmessage as well as Alan Greenspan does at the Fed. The markets are also,naturally, looking at the underlying weakness of the euro zone economyand drawing the appropriate conclusions. They are also aware that theUS grew at a rate of 4.5% in the first quarter of 1999 while the predictionhas been for 3.3%. Growth in Europe, by contrast, is so weak that someanalysts are not ruling out further cuts in euro interest rates, whichwould naturally drive the exchange rate down even further. [FrankfurterAllgemeine Zeitung, 3rd May 1999]

To add to the gloom, one of Germany’s biggest banks reported onMonday that there was no recovery in sight for the euro economy. Totaleconomic production is 0.9% lower than at the same time last year andfurther economic contraction is expected for the second quarter of1999. Although the recent cuts in rates would normally boostconfidence, the figures coming out of industry only give cause forpessimism. Both orders and expectations of production are down. [FAZ-Wirtschaft, 4th May 1999]

The markets are also, naturally, factoring in the war in Kosovo. It isreported that the markets feel that only an early end to the conflict couldhalt the euro’s collapse, even though the currency’s fundamentalweakness would of course persist. [FAZ-Wirtschaft, 4th May 1999] Thisall explains why, contrary to the announcements of the europropagandists, Asian countries have shown reluctance to use the euro asa reserve currency. The head of the Hong Kong monetary authority toldthe Financial Times that “EMU has not actually been tested yet. The timethat it will be tested is when there will be a real recession in Europe.”

New German commissioners to be red and greenThe next two German commissioners are to be drawn from the ranks ofthe Social Democratic Party and the Green Party. This was confirmed ata meeting of the governing coalition in the Chancellor’s office late on 5thMay. “This is a coalition agreement”, said a spokesman. “It is anirrevocable decision.” The SPD is likely to appoint Gunter Verheugen,currently State Secretary in the Foreign Ministry, while the Greens havenot yet decided whom they will choose – although they have said it willbe a woman. [Handelsblatt, 6th May 1999]

How Commissioners are being recycledRemember how the European Commission “resigned” in March? Well,all 20 Commissioners have remained in their posts, continue to draw fullpay and will cash in 3 years’ salary when they leave. Furthermore, aclutch of them are even now preparing to continue riding the euro-political merry-go-round by getting themselves elected as members ofthe European Parliament. Not only will Jacques Santer, the man whoused to run the Commission, be ensured of a safe position on aLuxembourg list, but also Emma Bonino and Franz Fischler are going tobecome MEPs.

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Two-to-One Against the Euroby Dr Julian Lewis, MP

Opinion polls are drastically under-

estimating popular opposition toreplacing the pound with the euro. Theprocess parallels one in the early 1980s,when Labour’s unilateral nuclear disarmerswere claiming majority support. That claimwas found, on inspection, to be based onpartial or incomplete poll questions, suchas: “Do you think that Britain should acceptUS cruise missiles and/or purchase theAmerican Trident nuclear missile system?”

To counter such tactics a group of uscommissioned Gallup to ask the basicquestion every few months: “Do you thinkthat Britain should contribute to possessnuclear weapons as long as other countrieshave them?” With remarkable consistency(and irrespective of fluctuations in the ColdWar), the same results were repeatedlyobtained – two-thirds replied “Yes”, onequarter said “No” and a small minority wereundecided.

At first our opponents denounced theterms of our question. They claimed thatwe should not have made any reference towhat other countries did or did not do.Yet, everyone knew that when electioncampaigns were fought the question ofLabour’s ‘unilateralism’ or ‘one-sidedness’would be central. Consequently, after a fewyears of such systematic polling, even theCND conceded that two-thirds of thepopulation were opposed to unilateralism.

The time has now come to give EMU adose of this treatment – and all the signs arethat the outcome will be the same. I firstcommissioned ICM last October to ask thequestion: “Do you think that Britain shouldreplace the pound with the single Europeancurrency?” 32 per cent answered “Yes”, 56per cent said “No” – a margin of 24 per cent.

Was this the right question to ask – unlikethose polls on EMU which refuse to refer tothe pound? In fact, there is a strong parallelbetween polls in the 1990s which ask aboutjoining EMU without mentioning thepound, and polls in the 1980s which askedabout British nuclear disarmament withoutmentioning nuclear disarmament (or thelack of it) by others.

In any referendum campaign on EMU,the issue of keeping or replacing the poundwill undoubtedly be paramount. It follows

from this that polls which ignore the loss ofthe pound will underestimate the likelylevel of opposition to EMU if and when thecampaign occurs.

Thus, on February 11, the Guardian ledwith the banner headline:

“UK WARMS TO THE EURO”.Its report claimed that:

“Support in Britain to join the euro hassurged to his highest ever level, according tothe first major opinion polls to be takensince the rest of the European Unioncelebrated the single currency’s new yearbirth.”

the Guardian, had evaporated in just fourweeks or (more probably) that it had neverexisted in the first place.

If opposition to the euro actuallyincreased between October 1998 and March1999, what is there for opponents of EMU tofear? The answer is “fear itself ” – inRoosevelt’s memorable phrase. A systematicpropaganda campaign is under way in thepro-euro press to convince the ‘silentmajority’ of EMU opponents that they areheading for defeat.

It is not enough to obtain the datashowing two-to-one opposition to the euro.The exercise must be carried out time andagain, and the anti-EMU media shouldreport their poll results as prominently asdo their pro-EMU counterparts.

Continental politicians seldom concealtheir political agenda for Europe and thecrucial role to be played by EMU. HansEichel – the ‘moderate’ successor to OskarLafontaine as German Finance Minister –stated in July 1997: “European unification isan absolute must… The euro is notEuropean unification, but it is oneimportant step towards this end.”

Romano Prodi, incoming President of theEuropean Commission, declared in June1996: “Economic and Monetary Union andpolitical union are two sides of the samecoin.” As recently as March 1998, he addedthat Europe “was born of a political project.The economic successes … should be seenas part of a design that has always had as itsultimate objective political integration.”

Such candour cannot be expected fromTony Blair and Gordon Brown, who boastthat EMU entry will depend on economiccriteria alone. Yet, they dare not proceed indefiance of a two-to-one majority againstreplacing the pound with the euro. For once,opinion polls are protecting rather thanundermining parliamentary democracy.

Dr Julian Lewis is Conservative MP for NewForest East.

POLL DATA

This poll (coincidentally also carried outby ICM) claimed that 36 per cent supportedEMU and only 52 per cent opposed it – amargin of only 16 per cent. Yet, it made noreference to the pound – even thoughabolition of all national currencies isinseparable from the definition of EMU.

I immediately asked ICM to repeat thequestion they had polled for me theprevious October. The fieldwork wascarried out in the first week of March,before the resignation of the Commission.

This time 30 per cent answered “Yes” and60 per cent said “No” to replacing the poundwith the single European currency – amargin even greater than that six monthsearlier. The result strongly suggests thatFebruary’s alleged “surge in support” forBritish membership of EMU, trumpeted by

Continental politicians

seldom conceal

their political agenda

for Europe and the

crucial role to be

played by EMU

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BOOK REVIEWS

Regulating European Labour Markets:more costs than benefits?

by John Addison & Stanley SiebertLondon, Institute of Economic Affairs, 1999, ISBN 0255362-2, £8

Reviewed by Dr Nigel Ashford

In the debate on whether Britain shouldsign up to the Social Chapter of the

Maastricht Treaty, the opponents lost. TheLabour Government signed with thesupport of the great majority of the public.Why was it that a normally Euroscepticelectorate should have endorsed such acentralising and damaging position?Discussion with my students revealed: theycould clearly see the benefits but wereunaware of the costs; the desire to improveworking conditions was more concrete thantalk of ‘flexibility’; the social chapter simplyprotected ‘rights’ that everyone had. Thispamphlet from the Institute of EconomicAffairs, by leading academic experts onlabour markets, John Addison and StanleySiebert, does an excellent job ofdemonstrating the potential costs, but failsto challenge the underlying principles.

After a brief introduction, the authorsprovide a history of the development of EUsocial policy. In the Treaty of Rome, socialpolicy was given a very restricted role,primarily equal pay for men and womenand social security benefits for migrantworkers. The Commission used this smallopening to extend gradually into newareas. In 1989 it grandly proclaimed theCommunity Charter for FundamentalSocial Rights, which identified 26 such‘rights’, and proposed 47 Directives.Notably lacking was any attempt to justifythe existence of these ‘fundamental socialrights’. They were simply assumed. TheCharter eventually became the SocialChapter of the Maastricht Treaty in 1990.The Major Government correctly opted out.The Blair Government’s signature satisfiedits union constituency, but it repeated itssupport for flexible labour markets. Theinconsistency is discussed by David Smithin The Sunday Times (7 March 1999). Blairfalsely claimed that he could veto anydirectives that threatened British industry,

Any reading of the EU social policyliterature shows an incredible lack ofjustification for employment laws. Manybooks on the EU simply list the benefits andnote the opposition of British governments,without explaining the costs or the source ofBritish opposition. As examples, see thewidely used textbooks by Clive Archer andFiona Butler, The European Union (Pinter,1996) and Desmond Dinan, Ever CloserUnion? (Macmillan, 1994). Theseacademics do not feel it necessary to informtheir readers of the arguments.

In the absence of such a case from theCommission itself, the authors had toconstruct the rationale for EU employmentlegislation in chapter 3. The arguments ongrounds of efficiency (or market failure) aremonopsony (single buyer), externalitiesand asymmetric (or unbalanced) inform-ation. The arguments on grounds of equityare redistribution and social dumping. Theauthors recognise a theoretical case for

market failure, but that must be balanced byreference to government failure, as “itcannot be presumed that the governmentcan be relied upon to correct matters”(p50).

Chapter 4 examines the empiricalevidence on costs and benefits. The authorsendorse the widely held view amongsteconomists that the flexibility andderegulation of the US and UK labourmarkets, in contrast to continental Europe,are major contributions to their much lowerunemployment rates. They conclude that“the net effect of employment protectionand analogous rules on labour demand(and supply) does seem to be loweremployment, greater and longer unem-ployment for some, and, implicitly, a declinein the speed with which labour relocatesfrom declining to growing sectors of theeconomy” (p74). The Economist recentlyreported even more evidence on the valueof flexibility (February 6, 1999, p100).

The conclusion condemns the failure ofthe Commission to conduct studies of thepossible consequences of its proposedregulations, and the almost total absence ofsupportive economic analysis. They accuseit of “sheer amateurishness” and of basingits policies on “ethereal notions offundamental social rights” (p76). They urgethe creation of an efficiency audit of socialpolicies, conducted independently of theSocial Affairs Directorate, which has its ownvested interests. This study provides furtherevidence of a fundamental flaw in thebehaviour of the Commission. It measuresits activities by intentions rather thanconsequences. Set up a new programme, orintroduce a new directive, and theCommission feels it has demonstrated itscontribution to ‘Europe’. It declines theresponsibility to examine the consequencesof its actions. This was the core of thedamning critique by the independent

when there is Qualified Majority Voting incertain areas. The Amsterdam Treatyextended intervention further with theEmployment Chapter, which will give theCommission another excuse to propose yetmore employment directives.

The Blair Government’s

signature satisfied its

union constituency,

but it repeated its

support for flexible

labour markets.

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experts. “It has become difficult to findanyone who has even the slightest sense ofresponsibility”. (The report is available athttp://europarl.eu.int/experts/en/default/htm). The appointment of yet morepoliticians committed to the European ‘idea’will do nothing to make up for this flaw.

Addison and Siebert do a splendid job ofdemonstrating the weakness of the case forlabour relations and the severe potentialcosts in employment and growth. However,I fear this will not convert its supporters,because they have a complete lack ofinterest in empirical evidence. For them, it isan ideological stance based on a faith in

social rights and social consensus. What isrequired is a critique of the values andassumptions behind EU social policy. Thereare no ‘fundamental social rights’. They failto meet the necessary criteria of humanrights: they are not universal; they are notabsolute; and they are not inalienable.‘Social consensus’ must be revealed as apolite word for ‘corporatism’, in whichpolicy is made by the big battalions oforganised big business and the mass tradeunions at the expense of small and mediumsized businesses and the non-unionised andthe unemployed, a return to the disastrouspolicies of the 1970s.

The signing of the social chapter was amajor error. It provides a danger ofdirigisme; it does not inevitably require it.Opponents of a ‘social Europe’ mustcontinue in identifying its weaknesses, notonly economically, as this pamphlet does,but also politically and philosophically.

Dr Nigel Ashford is Senior Lecturer in Politicsat Staffordshire University. His next project isto provide a political and philosophicalcritique of social rights in transatlantic tradeagreements.

Those Who Do Not Learn the Lessons of Historyare Compelled to Repeat Them

The chart shows the result of opinion polls conducted by Gallup in the period1970 to 1984, using the question closest to “Are you for or against membership ofthe EEC?” The result shown is the balance against or in favour as a percentage ofthose expressing an opinion.

Source: Opinion, Economics and the EEC, by James Y. Bourlet. Gallup data cited inAppendix 3.

198419821980197819761974 197519721970

0

20

60

40

-20

-40

AG

AIN

STFO

R

%

–– B

rita

in's

En

try

–– 1

975

Ref

eren

du

m

–– D

irec

t El

ecti

on

s A

ccep

ted

–– G

ener

al E

lect

ion

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The European Commission Needs Radical Reformby Keith Marsden

The mass resignation of EuropeanCommissioners provides a golden

opportunity to reform the EC and the way itdoes business. What kind of central publicservices do Europe’s citizens want? In theBBC satirical series “Yes, Minister”, Britishcivil servants are portrayed as inveteratecynics who continually frustrate the naïveinitiatives of their political masters. Incontrast, EC officials seem to pursue afederalist vision with missionary zeal,presenting European Union (EU) actions inthe best possible light, ignoring or with-holding unpalatable facts and censoringideas that they (and some member states)regard as apostasy.

The EC’s sixth report on regionaldevelopment lends some credence to thiscaricature and illustrates the weaknesses ofexisting policy formulation and evaluationprocedures. One of the EU’s main objectivesis to narrow income disparities betweenpoorer and richer countries and regionsin the Community. The EC allocatessubstantial funds and implements specialpolicy instruments to further this goal. Fourmembers (Greece, Ireland, Portugal andSpain) have been singled out for particularattention and labelled the ‘Cohesioncountries’. The 1999 EC budget earmarks 30billion euros for “structural” and “cohesion”funds, 35.5% of its total resources.

Cohesion countries also benefit fromother EU programmes, including theCommon Agricultural Policy (CAP) whichaccounts for 47% of total EC spending. Infact, Cohesion countries are the only sig-nificant net beneficiaries of EC budgetarytransfers, receiving 15 billion euros morethan they contributed in 1997. The othereleven EU members got back less than theypaid in, or ended up more or less even, eventhough they all have lower income regions.Surprisingly, a balance sheet showing thedistribution of funds by country is notprovided in this EC report, which is sup-posed to assess the impact of EC actions.

The 130 page report focuses on progressover the 10 years 1986 to 1996. It states thatGDP per head in the four Cohesioncountries went up from 65% of the EUaverage to 76.5%. It claims that “This is anunusually rapid pace of convergence, bothfrom an historical and internationalperspective”, and concludes that “It hasbeen driven largely by closer European

integration, but the Structural Funds havealso played an important part.”

However, the report does not point outthat convergence occurred mainly becauseincome growth has slowed dramatically inthe EU as a whole over the past fourdecades. Readers of the report have tosearch elsewhere to find pertinent Eurostatdata. These show that Greece, whichbecame a full member of the EU in 1981,and Spain and Portugal which joined in1986, have all performed less well within theUnion than they did outside (see table).Ireland is the only Cohesion country whereincomes have risen substantially faster thanthe mediocre EU average during the 1990s,and at a more rapid rate than during thethree previous decades.

compared to just 38% in Portugal. Lowerlabour costs have allowed Portugueseexports and GDP to expand faster thanSpain’s since 1980. But the report definescompetitiveness in a way that effectively ex-cludes wage differences as a factor affectingeconomic performance. “Competitiveness”,it says, is “the ability to produce goods andservices which meet the test of internationalmarkets, while at the same time maintaininghigh and sustainable levels of income”.Because of its insistence on the “harmonis-ation” of social policies, the EC is reluctantto accept that lower wages may be necessaryif poorer countries are to compete withricher countries which enjoy higher labourproductivity due to larger capital stocks perworker. For the same reason, it fails to

Real GDP Growth (% change per year)

Greece Ireland Portugal Spain EU 15

Average 1967–70 7.6 4.2 6.4 7.3 4.8Average 1971–80 4.7 4.7 4.7 3.5 3.0Average 1981–90 1.6 3.6 3.2 3.0 2.4Average 1991–96 1.4 6.6 2.0 1.5 1.5

Source: Eurostat, Economic Data Pocket Book, Table 1, January 1999

These data raise serious doubts about theefficacy of EU policies and programmes.Why has closer political integration,harmonisation of economic and socialpolicies and the creation of a single internalmarket not only failed to boost growth, butapparently retarded it? Has the plethora ofEU directives and regulations acted as adrag on enterprise and reduced marketflexibility, thus hampering job creation? Hasthe premature enforcement of EU social“acquis” blunted the competitive edge ofsome countries, preventing them fromexploiting their initial comparativeadvantages of lower labour costs and longerworking hours? Have rising tax burdens andexpanded welfare programmes weakenedincentives for innovation and work effort?These issues should be addressed, even ifthe findings challenge some articles of faithof EU members. The following evidencemight be taken into account in theassessment.

Wage Costs and Working Hours

According to the OECD, average gross wagecosts of production workers have risen to67% of the German level in Spain in 1996,

examine the possibility that too rapidconvergence of labour standards hasconstrained the growth of the Cohesioncountries since their accession to the EU.The average number of hours actuallyworked per week in industry has dropped to40.4 in Portugal and 38.5 in Spain, roughlyon a par with Germany’s 39.4. A reformedEC should make harmonisation a develop-ment objective, reached after the effective-ness of different policies and “models” havebeen properly evaluated by nationalelectorates, and competitive market forceshave been given adequate rein. Harmonis-ation should not be based upon untested(or failed) ideology, nor enforced byuniform legislation which puts everyone ina straitjacket.

Taxes

Governments in three of the four Cohesioncountries increased their slice of the cakemassively from 1960 to 1996. Their currentreceipts as a percentage of GDP rose to53.9% from 21.1% in Greece, to 42.3% from17.6% in Portugal, and to 39.0% from18.1% in Spain. Can this trend be excludedfrom the factors responsible for the

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deceleration of their growth over thisperiod? In Ireland, the tax/GDP ratioreached a peak of 40.7% in 1988 (up from28.0% in 1960), but its government hasmade strenuous efforts to ease the taxburden (particularly on labour andinvestment) since then. Social securitycharges amounted to 5.2% of GDP in 1995,a third of the EU average level. Thecorporate tax rate is just 10% formanufacturers and providers of financial,insurance and computing services. Theoverall tax ratio dropped to 34.5% in 1995.It is difficult to argue that tax reductionsplayed no part in the outstanding Irisheconomic performance in the 1990s.They are certainly a plausible explanationfor the burst in foreign direct investmentinto Ireland (averaging 5.4% of GDPfrom 1987 to 1996) which is noted in thereport. The positive impact of tax incentiveswould surely not have been ignored bythe Commission if they did not run counterto EU dogma that tax competition isharmful.

Unemployment

Substantial net receipts of EU funds,equivalent to between 2% and 4% of theirGDPs annually, did not prevent unem-ployment rates soaring to 22% in 1996 inSpain from 14% in 1981, and to 16% from4% in Greece. The EC report recognises thatunemployment is a growing problem, andadmits that the mismatch between labourdemand and labour supply might be“exacerbated in some cases by the way that

wages are set”. It even suggests that “the levelof taxes and social charges levied on labouris a potential contributor to this mismatch”.But it stops well short of recommendingliberalisation of wage fixing procedures,and shies away from any discussion ofalternative tax policies. Governments mightencourage “flexibility”, it says, but no meansare examined. The main solutions offeredare the use of structural funds to boostinvestment, increased training and “assist-ance to help people find jobs” – a very vagueprescription. There is no analysis of theeffectiveness of such activities in the past.The fact that Spain spends about the sameproportion of its GDP on active labourmarket programmes as does Portugal,yet has an unemployment rate three timeshigher, does not appear to give theCommission pause for thought. A re-examination of such conventional wisdomsis long overdue.

In short, this anodyne report fails todispel the disquiet caused by recentrevelations of widespread fraud andmismanagement within the EC. It hardlyjustifies the high salaries and generousperks given to EC officials. Nor does itprovide a convincing case that the fundshanded over to the EC by EU taxpayers(85.5 billion euros in total this year) will beput to good use. It simply ignores thehidden cost of misguided policies imposedon member states by EU directives andguidelines. This hidden cost is the incomeforegone resulting from inefficiency andsluggish economic growth.

Before the Berlin Summit, Europeanleaders promised greater transparency andaccountability in EU affairs. They need toset an example by insisting on morerigorous analysis of past performance andan open discussion of alternative ap-proaches in the reports submitted to themby the EC. This requires a radical shift in theworking ethos within the Commission.EC officials cannot be expected to do anhonest job when an auditor is suspendedfor revealing financial irregularities, an eco-nomist is sacked for writing a book aboutthe differing views on monetary policy ofFrance and Germany, when Commissionersare political has-beens rewarded for theirpast services to their governments, andwhen their cronies are appointed as topadvisers. This does not mean introducing a“Yes, Minister” cynicism. Rather, it demandsfewer sacred cows, more respect fordivergent views and greater recognition ofcompetence, political neutrality and integ-rity in selection and promotion procedures.Loyalty to the institution should be shownby commitment to goals, not in blindadherence to a particular doctrine. Thismay be asking a lot. But major reform isneeded if the potential gains from Europeanco-operation (and competition) are to berealised.

Keith Marsden is an economics consultantbased in Geneva. He is a regular contributorto the Wall Street Journal Europe.

… news in brief“The war in Kosovo will further the enlargement of the EU”

Presenting a key policy document on Europe, the leader of theopposition Christian Democrats in Germany, Wolfgang Schauble, hassaid that the war in Kosovo would further the cause of EU enlargement.He was presenting a paper written in conjunction with his old colleague,Karl Lamers. The paper recalled the paper, Reflections on Europeanpolitics, published in 1994, which outlined the theory of the “hard core” –a doctrine which the new paper reaffirms vehemently. In the 1994 paper,Lamers and Schauble had famously said that if Eastern Europe couldnot be stabilised by the EU, then Germany might have to resort to“traditional means” to do so on its own. The authors did not say whetherthey considered the present war to be an example of that.

Littered with references to Europe’s “federal structure”, the paper alsoblows a hole in Tony Blair’s continued pretence (inherited from JohnMajor and shared by William Hague) that European integration is aneconomic issue. The document suggests “basic principles for aconstitutional treaty” and Karl Lamers insisted that “the Europeanquestion is in its very core a constitutional question”. He said thatEurope already consisted of “united states” even is they could not becompared to the United States of Europe. The title to the published

version of the article is uncompromising and clear: Europe needs aconstitutional treaty. It suggests that a group of “outstandingpersonalities” be appointed from the member states and from thecandidate countries to draw up the new constitution.

The document also emphasises that European integration affectsdomestic policy and the internal structures of member states.“European policy becomes immediately domestic policy and vice versa.”It says that Germany has a “leading function in Europe” and that theMaastricht treaty means that “any politician who tries to pursue anotherpolicy will be guilty of infringing the treaty”. [Frankfurter AllgemeineZeitung, 4th May 1999]

Kohl calls for Serbia to be admitted to EUThe former German Chancellor, Helmut Kohl, has called for Serbia to beadmitted to the European Union. He told a Dutch newspaper that Serbiaand other Balkan states ought to join. This was the only way to ensurepeace and stability in the region, he said. Serbia, Croatia and Sloveniawere ancient European countries and if they fulfilled the criteria for“democracy, human rights and the recognition of borders”. Hepresumably thinks that NATO is also recognising borders in its attackson Yugoslavia on behalf of Kosovo. [NRC Handelsblatt, Amsterdam, 5thMay 1999]

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In Europe, Not Run By EuropeExtracts of a speech made by William Hague in Budapest on May 13th, 1999

The desire of a people to live atpeace in a unitary state is not a negative

or illegitimate aspiration. If the idea ofnational identity seems frightening to some,let us instead call it democracy. But what-ever name we call it by, it is that aspirationthat has allowed me to speak here today as ademocrat among fellow democrats in a freeHungary.

I am honoured to be here, not just as yourguest, but as the leader of a party which hasalways tried to play its role in building a freeEurope.

It was ten years ago that my predecessoras leader of the Conservative Party,Margaret Thatcher, said these words to anastonished audience in Bruges:

“We must never forget that east of theIron Curtain peoples who once enjoyed afull share of European culture, freedom andidentity have been cut off from their roots.We shall always look upon Warsaw, Pragueand Budapest as great European cities.”

Her speech was received with ridiculeand contempt in many of the palaces andchancelleries of Europe. But, barely ayear later, those cities were free. As so often,Margaret Thatcher had been under-estimated by her rivals.

That, perhaps, was excusable. But whathappened afterwards was not. Theoverthrow of Communist tyranny was anopportunity which the European Unionfailed to grasp.

At the beginning of this month, theAmsterdam Treaty came into force. Itwas meant to be the treaty for enlargement.But, as so often happens, this laudable aimwas wholly forgotten amid the bickeringof the final summit meeting. Faced withthe need to make practical changes to theirinstitutions and structures, Europe’s leadersbalked at it.

What emerged from Amsterdam is ablueprint for a deeper, not a wider, Europe.None of the necessary reforms has beentackled: neither the liberalisation ofagricultural policy, nor the decentralisationof power, nor the streamlining of theBrussels bureaucracy, nor even thepractical, precise institutional changesneeded for enlargement to happen. Far frompreparing for expansion, the EU is goingdown precisely the opposite path, taking yetmore powers from the nation states to thecentre.

Nothing represents more the failure ofEurope’s left wing leaders to prepare the wayfor enlargement than the failure at March’sEuropean Council to agree even the fudgedCAP reforms put together by agricultureministers.

The truth is that, in order toaccommodate states with widely differingconditions, the EU must be prepared todevolve power to a lower level. The EU’sstructure was designed for six broadlysimilar economies in the 1950s. It cannoteasily be made applicable to Europe in itsglorious, diverse entirety.

Who seriously imagines that it will besensible or possible to extend our wastefuland damaging Common AgriculturalPolicy to Hungary or Poland? Who trulybelieves that it will be sensible or possibleto extend the Social Chapter to the workersof central Europe, with the rises inunemployment that would follow?

British Conservatives will at these Euro-pean elections be pressing for governmentsto have greater freedom in deciding which

other aspects of EU policy they intend toadopt. To use the Euro jargon, we want togive applicant countries a partial deroga-tion from the acquis communautaire.

There is no reason why a new membershould not be able to adopt the provisionsof the European single market and customsunion while retaining full control over, say,defence policy, or fisheries, or social andemployment policy. Nor is there any reasonwhy member governments should notco-operate with each other over issues likeforeign and security policy, or justice andhome affairs. What I am saying is that just asin a restaurant every diner is not required toorder the same food from the menu, norshould members of the European Union beforced to sign up to every policy coming outof Brussels.

In other words, we should be in Europebut not run by Europe.

William Hague is Leader of the ConservativeParty and MP for Richmond (Yorkshire).

The Labour Government has chosen aregional list system of ProportionalRepresentation for the 10 June 1999election to the European Parliament,using closed lists:

• Britain is divided into 11 GovernmentOffice regions. Northern Ireland hasits own PR system.

• Party lists of candidates will stand ineach region, named on the ballotpaper.

• Under the closed list system, votes arecast for a party only; there is nochoice between candidates. Inde-pendents may also stand.

• Votes for parties will cascade throughthe party lists, electing MEPs inproportion, in the order ranked bytheir party.

A new balance of power

Under PR, on the 1997 general electionfigures, the number of Tory MEPswould rise to 28, the LibDems to 12, withLabour dropping to 42.

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Modernising Governmentby Charlotte Horsfield

Astudy of the Government’s recentWhite Paper, Modernising Govern-

ment, helps to fill in some remaining detailsof a design ultimately to be unveiled; forsoon to be revealed is the final shape andform of the government of the EuropeanUnion. This White Paper tells us somethingabout the place of Whitehall in the schemeof things.

By degrees most of our constitution hasbeen overlaid by another, so much so thatour own institutions now perform moremenial tasks than the ones for which theywere designed. Parliament has effected arevolution whilst pretending only to betinkering with the works to extend theiruseful life. So let us look at what has been theeffect of this overhaul, for in a democracythe electorate are supposed to be players onthe stage, or at least privy to the text of theplay; instead they are treated like any audi-ence who may as members of the payingpublic come to watch the actors, a governingélite, perform in a political thriller.

In 1789 Edmund Burke, whilst musing onthe Revolution in France, wrote:

Though a king may abdicate for his ownperson, he cannot abdicate for themonarchy. By as strong or by a strongerreason, the House of Commons cannotrenounce its share of authority. Theengagement and pact of society whichgenerally goes by the name of theconstitution forbids such invasion andsuch surrender.

In 1972, however, Parliament invited aninvasion and surrendered to the terms ofthe Rome Treaty. Nor was that its finalsurrender, for subsequent Parliaments haveratified additional treaties.

Perhaps the paying public should now beallowed to pronounce on the performance,by booing or clapping as they think fit. Theunderlying plot of the play has been one ofintrigue and trickery, employed to replace afine old constitution, Gothic and beautifulas embodied in the Palace of Westminster,with a tatty new one, embodied in theBerlaymont building which houses theEuropean Commission. Before the curtainfinally comes down, the last scene of theplay may show the people of Britain wakingup to what they have lost, to the destructionof their Christian heritage by the followersof Mammon.

European Union. The House of Commonspublished a report in 1997 on the draft ofthat Protocol and the members of the com-mittee which examined the draft suggestedthat, because of the European Parliament’sscale and distance, national parliaments willremain the primary focus of democraticlegitimacy within the European Union.Here we have a conundrum. How candemocratic legitimacy be expressed byassemblies which have no power? Or putanother way, if power rests primarily withbodies which are neither national norelected, how can those which are nationaland elected remain the primary focus ofdemocratic legitimacy? The answerproposed by the Protocol is to seek to“enhance their ability to express their viewson matters which may be of particularinterest to them”. There are 15 nationalgovernments, soon to be increased to 20 ormore, all of which must be encouraged toexpress a view, but in the end decisions aretaken by a qualified majority vote of theCouncil of Ministers after the Commissionhas floated a proposal. How convincing canthe democratic legitimacy of nationalparliaments remain under such a system?How can the common man be heard if even

his representative has no power to effectchange? Devolution to regional assembliesmakes little difference if they are, likenational parliaments, subordinate to thewill of the European institutions; that, inother words, the power being devolved isphoney. The local assemblies will besubsidiary to the central government ofEurope. What they will assuredly do isdestroy the unity of the nation andobliterate its constitution and, with it, theloyalty to and affection for a sovereignnational Parliament. Various taskshave beenassigned to them, such as the dispersementof sums of money from Europe’s structuralfunds, but they will also have to findbenefactors to match those sums beforethey can be spent.

Furthermore, as Modernising Government indicates, our civil service is to be

integrated more fully into the EuropeanUnion. This the Prime Minister presents inthe form of seven challenges to our civilservants. They will have to be retrained, ofcourse, in their new role; they will have to bemotivated too. Somehow they have got tobe integrated into Europe and at the sametime work closely not only with theUK government but with the devolvedadministrations. They will have to learnto be innovative, take risks, work acrossorganisational boundaries. It all soundsvery exciting. A new breed of bureaucratwill have to be invented. To this effect theLocal Government Association has set upthe Local Government Improvement andDevelopment Agency. The very title musttake some of the friskiness out of the newbreed. The Civil Service is setting up anew Centre for Management and PolicyStudies; the Department of Education andEmployment is setting up the new NationalCollege for School Leadership; and theArmed Forces now have a new JointServices Command and Staff College. TheHome Office, the Inland Revenue and Cust-oms & Excise are conducting pilot exercisesto change their culture to fit the newconstitution. All parts of the public sectorhave National Training Organisations andsoon there will be a Central GovernmentNational Training Organisation to developand maintain a corporate strategy fortraining and development. All this activitymay put to flight the spectre of

To understand the extent of the surrenderof our constitution by Parliament, we needonly look at the Protocol set out in theTreaty of Amsterdam “on the role ofnational parliaments in the EuropeanUnion”. The Protocol is binding on nationalparliaments, now no longer seen assovereign. It desires those parliaments tobecome involved in the activities of the

Devolution to regional

assemblies makes little

difference if they are,

like national parliaments,

subordinate to the

will of the European

institutions…

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unemployment but it bodes ill for the payerof taxes who must finance it; for more of thebest are to be encouraged to join and staywith the civil service, thereby inflating thehopes of the bureaucracy. However,outdated assumptions about public sectorpay are to be challenged. “Mainstreaming”must also be taken into account for this is aNew Britain term which means that all theanti-discrimination law which stems fromArticle 119 of the Rome Treaty andsubsequent amendments relating to ECsocial policies must be strictly observed;and of course joking is forbidden becauseno joke can stand up to translation intoumpteen languages.

This, we are told, heralds “informationage government”. New technologies will beput at the service of the civil servants whowill be linked together with the latestequipment. But the real jewel in the crownof information age government will be themulti-purpose smartcard, which it ispredicted will evolve into still morepowerful technologies. This small pieceof plastic will be a digitally signedpersonalised identity card, finger printed,named and numbered to be on the safe sideand loaded with personalised information.Through this marvel of modern technologywe can have delivered ‘joined upgovernment’. This will allow us to notifythe authorities of our change of addressand all the government departments willsimultaneously be informed “simply andelectronically in one transaction”. It isintended that by the year 2008 all dealingswith government will be deliverable

electronically. New energy is being injectedinto the system by means of financialrewards and every Permanent Secretary willbe responsible for driving through the keygovernment targets. Everything is going tobe high quality and efficient. In order toshow that the Government means what itsays, those seeking further information canlook for it on the Internet.

Modernisation is not confined to the civilservice. The iconoclasts are setting to workon the House of Lords. “Even at this latestage of our parliamentary history theGovernment do not suggest reform forreform’s sake”, said the Lord Privy Seal(Baroness Jay of Paddington) whenintroducing the Second Reading of theBill to reform the House of Lords on the29th March. “This Bill is part of ourdetermination to change our country’sinstitutions so that they are fit for the 21stcentury, to achieve a new constitutionalsettlement… We are looking at ways toimprove the delivery of the Government’sown policies. I am grateful to the nobleLord, Lord Lucas, for his pertinent questionon this during Question Time. They willindeed build on the technologicaldevelopments of recent decades. Tomorrowwe will publish a White Paper, ModernisingGovernment, which will set out a strategy forimplementing change… This House cannotbe immune from that process of reform.”

There we have it. Our institutions are allbeing shaken out, picked over by the rag andbone merchant. Bits and pieces are to besaved and stitched together into a patch-work quilt to form administrative regions of

a European Union. Surprisingly the LordPrivy Seal claimed that the Government’s“sensible incremental responses based onliberal constitutional principles” have thesupport of the electorate. She invoked thedemocratic principle, and pitched it againstthe privileged position of the hereditarypeers in the Upper House, believing theirprescence there to be an anacronism in ourBrave New Britain.

One of the joys of the hereditary elementin Parliament has been the way it hasbrought into public life some of the mostaltruistic free spirits to be found in politics.It is perhaps this characteristic which upsetsthe sheepdog instincts of the presentGovernment and which is driving it toexpell this less selectable, countable orwhippable element from Parliament. Infuture if the hereditaries want to exercisetheir legislative skills, for many of them arevery skilled legislators and there is noimmediate plan to abolish hereditary titles,they may have to wait to be appointed tothe Upper House by an appointmentscommission, or stand for election like anycommoner.

In the same way as there is no place forjokes in the European Union, there is noroom in Parliament for the maverickpolitician. Joy and originality are to be bredout of the constitution and out of thenational character, offered as a sacrifice, nodoubt, on the altar of some strangemillennium goddess.

Charlotte Horsfield is a regular contributor tothe Journal.

… news in briefCouncil of Europe “should intervene even more”

Speaking on the 50th anniversary of the foundation of the Council ofEurope – the continent’s primary “human rights” body – the presidentof the Council’s parliamentary assembly, Lord Johnston (formerly SirRussell Johnson) has said that, “The defence of democracy is a neverending task.” “The war in the Balkans”, he added, “should encourage usto continue our work.” And for good measure: “The dominantcharacteristic of the Council’s action in the next five years should beinterference in the internal affairs of member states.” Lord Johnstonneed have no worry: the Council will certainly be doing so, especiallysince the integration of the European Convention on Human Rightsgives the Strasbourg Court the right to overturn criminal convictions inBritish courts. It has already indicated that it will do so for the two boyswho murdered Jamie Bulger. [Suddeutsche Zeitung, 6th May 1999] NB:In recent years the Council of Europe has admitted all the formerWarsaw Pact countries from Eastern Europe and several prominentmembers of the former Soviet Union, in the first place Russia itself butalso Ukraine and, most recently, Georgia. This means that many of the

“judges” who sit on the Strasbourg court are either “human rightsactivists” (of the kind whose activity the House of Lords ruled wasincompatible with an impartial judicial activity) or old Communistfunctionaries.

Protests across Europe against war in YugoslaviaTrades unionists demonstrated against the war in Germany, where theywere addressed by the former Finance Minister, Oskar Lafontaine, whowas making his first public appearance since his resignation. To theapplause of some 12,000 people, Lafontaine said that the militaryplanning of the war had not been thought through and that it was amistake to ride roughshod over the United Nations. The DefenceMinister, Rudolf Scharping, was greeted with chants of “Murderer,murderer!”

Elsewhere in Europe, similar Mayday celebrations took on an anti-NATO tone. In Kiev, Sofia and Moscow demonstrations were heldagainst NATO. In Sofia some 20,000 people chanted “NATO’s fascists aretoday’s terrorists”. In Madrid, 20,000 demanded rights for the KosovoAlbanians and an end to the war. 10,000 demonstrated in Istanbul.[Frankfurter Allgemeine Zeitung, 3rd May 1999]

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EUROWATCH

The ECB’s attitude to the value of the euro was “benign neglect”,said its president, Wim Duisenberg. He later modified thatstatement to say he meant not neglect, exactly, but that the Bankwas not unduly concerned about the euro and would notintervene in the market to support it. True, the Bank’s remit is tocontrol the money supply and inflation and not the currency, butthere is little the Bank could do anyway. Market intervention isnever effective in the long run, as Britain discovered when it wasforced to drop out of the ERM in 1992 and, before that, theSnake. Since the G7 summit, there has been no furthersuggestion from European politicians of concerted interventionor of fixing target zones for the euro to fluctuate within.

No; the value of the euro depends first and foremost on thefundamental performance of its member economies andspecifically of France and Germany, as these make up more thantwo thirds of the euro bloc economies. The euro is strugglingagainst the doubled edged sword of sluggish European growthand the unexpected buoyancy of the US economy. Apologists forthe euro claim that over exuberance in the US economy is theprincipal reason for the euro’s lacklustre performance. ForBritain, whose business cycle is more closely attuned to the US,the pound has remained nicely in the middle of the twocurrencies; stronger than the euro but weaker than the dollar.

Some financial analysts argue that US equity prices are greatlyovervalued and that P/E ratios have reached unprecedentedhighs. Nevertheless, the Dow Jones index shows little inclinationto reverse its almost continuous upward trend. Unemployment inthe US fell again in the first quarter of this year, while in Europe itrose again. The threat of worldwide recession now seems to havedissipated as the Asian economies show signs of recovery. TheIMF and OECD have revised upward their estimates ofworldwide growth in 2000 to 3.4%, but do not anticipatesignificantly stronger growth for the core European economies.The outlook for the euro is therefore one of further weakness. Inthe currency markets there is talk of not whether, but when, itreaches parity with the dollar.

Surprisingly, perhaps, we have recently heard less from the pro-euro camp about the disadvantages to the British economy of thestrong pound. Our export sector and inward investment wouldsuffer if we did not join the euro, it had been argued. But thepound is still competitive in the dollar market and forecasts thatsome 25% of world trade would be invoiced in euros within ayear of the single currency’s inception now seem wildlyoptimistic. Less than 10% of transactions even between the euro-zone countries have been transacted in euros. The number ofprivate accounts so far opened in euros is minuscule asindividuals continue to use their national currencies. Highcommission charges for eurocheques by the French banks, inparticular, have hardly encouraged an enthusiastic switch to theeuro. Inward investment continues to flow into the UK, attractedby its flexible labour markets and lower taxes than in Europe.

This government is, by stealth, preparing the UK for entry toMonetary Union. Selling off our gold reserves is another move inthat direction. More worryingly, it will mean bringing oureconomy more into line with the rest of Europe.

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