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8. New options for Britain 

Flexibility in external relations should be a key objective for Britain, giving her freedom to join NAFTA if she so wishes. A constitutional conference on Europe is now needed to trigger change.

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‘No-one should doubt that as a country we are in Europe and in Europe to stay. … The national interest demands that we work constructively with the European Union to achieve the labour market, product market and capital market reforms essential for European growth.’

Gordon Brown, Mansion House speech, June 10, 1999.

‘Europe is heading in the wrong direction. And with most EU governments now in left-wing hands, there is no sign of a change of direction. Far from it. The institutions of the EU are now being used not just to further this out-dated, job-destroying social and economic agenda, but also to impose it on countries like Britain which have pursued another course.’

William Hague, London Business School, May 15, 1999.

How is Britain to position herself in a world where economic geography is shrinking and distance declining as a constraint on trade? Should she be able to enjoy free trade, not only with countries comprising the European Union, but also with external trading partners? How could she achieve such flexibility? And what would be the costs or disadvantages?

These questions are arguably more pertinent for Britain than for any other country in the EU. For it is the profile of our global trade and investment, heavily skewed towards North America – the US in particular – that makes us particularly attuned to developments in the global economy. Britain’s non-EU trade as a percentage of total trade is the highest of any of the 15 member states. Taking visible trade and invisibles together (what we earn from services such as banking and insurance as well as investment income), more than half (51.4 per cent) of our current account credits come from outside the EU. In 1998, Britain’s total exports to the non-EU world came to £180 billion, of which invisibles accounted for £114 billion. EU trade (measured by exports) came to £171 billion, of which £75 billion comprised services income.

It is the US that is our single largest country market. In 1998. it accounted for £61.4 billion (17 per cent) of total exports. By comparison, our biggest single trading partner in the EU is Germany, accounting for £34.2 billion or 10 per cent of the total.

The fastest growing area of UK exports is services, and here our trade outside the EU is especially important. Services trade with non-EU countries accounted for almost two thirds of our total 1998 services credits. Finally, our total non-EU trade has been growing faster than our EU trade in recent years. Between 1992 and 1998, UK exports of goods and services to the EU grew at an annual average rate of 7.1 per cent, while non-EU trade over the same period grew by 8.5 per cent. What is particularly striking is that growth in total trade with NAFTA countries (US, Canada. Mexico) was notably strong, rising at an average annual rate of 9.2 per cent (see charts 8.1-8.4 and table 8.1).

Chart 8.1: NAFTA gains, Europe loses
Chart 8.2: The World also matters
Chart 8.3: Why the EU needs Britain as a trading partner
Chart 8.4: What Britain pays to the EU (gross and net)
 
 
Table 8.1 UK Budget Contributions: Summary
UK total gross contribution to the EU budget 1973-1997 (£ million) UK total net contribution to the EU budget 1973-1997 (£ million)
Gross: £102,170mn Net: £30,299mn
 

In addition, North America – the US in particular – is, and historically has long been, the most popular location for UK outward direct investment. The two countries share a common language, and a similar business, financial and political culture. Huge volumes of two-way trade and investment bind them. In the development and exploitation of information technology, the UK looks more to US experience than to continental.

There are other reasons, too, why the UK is compelled to give keen attention to her external trade with the non-EU world. Globalisation has brought intense pressure to bear on tariffs and barriers to trade. A succession of GATT rounds has brought tariffs down to 3.5-4 per cent in some sectors. Free trade pacts are growing. So how is the UK to position herself in the rapidly changing global economy? What other forms of relationship might she enjoy with Europe other than full membership of the EU?

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Britain and the EEA model

Choices are on offer, and precedents for a more flexible and amicable relationship do exist. Of relevance here as a relationship model is the European Economic Area. The defining feature of the EEA is that it is a free trade area, not a customs union, and its members are free to enter into a free trade agreement (as is currently underway) with NAFTA. The EU is a customs union. Because the UK is an EU member, she cannot join NAFTA since she is not free to lower the tariffs and other trade restrictions laid down by other EU members.

No such restriction would prevail were the UK to opt for a relationship with the EU modelled on that of the EEA. Indeed, the freedom that Norway, a participant in the EU single market, enjoys to enter into a free trade agreement with a NAFTA member leaves the EU single market members in an anomalous position: if Norway can join, why not other members of the single market?

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How the EEA works

In June 1990, the EFTA countries of Norway, Iceland and Liechtenstein entered into negotiations to help regularise their relationship with the EU, to enable joint consultation and decision-making on new legislation and to provide for the settlement of disputes. These negotiations established the EEA in May 1992, comprising the members of the EU and these three members of EFTA (Switzerland remaining outside the EEA). The relationship chart 8.5 sets out ‘who belongs where’ in Western Europe.

In many respects, Norway’s relationship with the EU fits more closely with the flexible ‘free trade model’ that we would like to see adopted by the UK. The EEA has served its purpose reasonably well. Norway’s relationship with the EU is in many respects more amicable and mutually respectful than that between Brussels and the UK. It is notable that Norway’s major trading partner by far is the EU (accounting for more than 75 per cent of total exports) but this has not prevented Norway from prospering outside of the EU.

However, while there are a number of features about the EEA agreement that are attractive, it is by no means ideal. An institutional bias in favour of the EU is evident in the Agreement, which does not give Norway full rights and powers as a co-partner. Many Norwegians are uneasy about the volume of regulation that has been introduced and over which they feel they have insufficient control.

The problem with the EEA arrangement is that it obliges Norway to accept laws and regulations it does not like. There is a theoretical opportunity to refuse – a right to veto – but the political costs would be heavy because it would simultaneously undermine a co-operation agreement beneficial to Norway in other areas. In the domestic sphere there is seen to be little point in discussing the pros and cons of regulations which there are only minimal prospects of changing. This suggests there is a democratic deficit, as large, on some accounts, as the one Euro-sceptics feared would come about if Norway joined the EU. Euro-sceptics in Norway are dismayed because the EEA agreement is leading to unprecedented EU adjustments, contrary to the message expressed by the voters in the 1994 referendum. There is concern about the arrival of ‘fax democracy’ – that Norway receives directives from Brussels by fax which it is then obliged to ensure are put into force.

Both sides want a clearer, less muddled relation with the EU, and a flexible EU may be the means by which Norway enters a recalibrated union. According to Norwegian commentator Aslak Bonde, ‘A transformed EU will be more flexible, making it easier for Norway to take its particularities along with it into the Community.’ Any EEA style relationship for the UK would need to specify clearly the core areas of the binding treaty, together with the specific voting rights on matters arising within them, and the non-core or voluntary areas.

Chart 8-5: European economic co-operation and integration

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‘Go-it-alone’

Another option for the UK is to go it alone, replacing her membership of the EU with a series of bilateral trading agreements such as those existing between Switzerland and the EU. The Swiss option gives the UK maximum independence. But there are other options which may prove more attractive.

This brings us to another key area of reform: a recalibration of the EU membership to allow those countries that wish to join external free trade associations to be free to do so. Recent speeches by leading Conservative spokesmen, in particular William Hague and Francis Maude, the Shadow Chancellor, have advocated a global role for Britain in advancing free trade between North America and Europe. But in truth no such role can be credibly advanced until the UK herself has regained competence in external trade relations ceded to the EU and until she is in a position to entertain such agreements, either directly with NAFTA or with Canada and EFTA.

For this to be possible would require, not only the ‘flexibility clauses’ proposed by William Hague, but a change in the basic, ‘core’ element of the EU from customs union to free trade area. This would be truly to give life and meaning to his description of a Britain ‘in Europe but not run by Europe’.

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The case for joining NAFTA

Another option is for the UK to join NAFTA (or some variant such as a North Atlantic Free Trade Agreement). NAFTA covers a broad range of issues including tariffs, non-tariff barriers, investment, trade in services, intellectual property rights, government procurement and rules to address unfair trading practices. It seeks the elimination of all tariffs between members within five years, the elimination of barriers and discrimination in services, greater access to government contracts, and special measures for review of anti-dumping restrictions. (A guide to NAFTA is set out by way of separate panel below.)

Should the UK seek a free trade agreement with NAFTA, and in due course join NAFTA? The question seemed academic at first, but is gaining support and momentum on both sides of the Atlantic. Conrad Black, the Canadian newspaper proprietor, brought the issue to national attention in a speech in 1998:

‘None of the continental European countries has a particular affinity with the United States and Canada or anything slightly comparable to Britain’s dramatic modern historic intimacy with North America. British trade patterns are also clearly distinguishable from those of the other EU countries. Almost twice as much of Britain’s trade, as a percentage, is with North America than is the case with other EU countries as a group. Britain’s share of trade with the EU has actually declined recently, and if exports shipped on through Rotterdam and other European ports outside the EU and overseas investment earnings are included, the EU’s percentage of British exports is probably about 40 per cent, and less than 10 per cent of the UK’s GDP.’ There are several powerful reasons why the question of the UK’s possible membership of NAFTA should be higher up the political agenda than is currently the case. The first is that it would formally recognise and ratify the substantial two-way trade and investment that already exists between the UK and North America. The two fit well together in terms of language, accounting practice, legal systems and business culture. This culture, together with the English language, is coming to prevail in the process of globalisation. It would, of course, encourage further trade and investment.

There are real and tangible benefits to UK corporates and the economy generally that we explore in more detail below. It would provide for the UK an immediate and substantial relationship and ally in the global trading world outside the EU, countering the argument that we would be ‘alone’, ‘isolated’ and ‘defenceless’. Finally, NAFTA is attractive to Britain for what it is not. It does not require economic convergence. It does not impose social and employment regulation. It does not involve a single currency or loss of sovereignty. There is no restless, relentless ambition for economic and political union. NAFTA exists solely to promote free trade.

Now Senator Phil Gramm of Texas, chairman of the US Senate's powerful Banking Committee, has asked the International Trade Commission to prepare a study on the impact of the UK joining NAFTA. He and Newt Gingrich, a keen advocate of UK membership of NAFTA, have been widely reported as sponsors of a bill to invite the UK to join. These developments draw on a growing concern among US policymakers of the loss of an economic ally in the UK, and of the British economy being drawn further into the Continental economic model, leaving US investment here exposed to the worst features of pre-Thatcher, 1970s recidivism. The Gramm study will help ensure that this issue receives more detailed consideration and coverage over the next year.

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How NAFTA works

NAFTA is a free trade area. It is not ‘another EU’. Both are examples of preferential trading arrangements. But there are fundamental points of difference in terms of objectives, goals, and complexity. First, the EU (unlike NAFTA) is a customs union. A customs union obliges all members’ tariffs or other trade regulations such as anti-dumping duties to be the same (the common external tariff). This is not so for NAFTA. For example, the US is free to cut tariffs on, say, Bulgarian computers and impose a quota on Taiwanese tomatoes. Canada, her NAFTA associate, can still impose tariffs on Bulgarian computers and abolish quotas on Taiwanese tomatoes. The EU common external tariff is the key reason why the UK cannot unilaterally join NAFTA. She would either have to secure agreement for all of the EU to join NAFTA, or seek renegotiation of the Treaty of Rome so that it is a free trade area, not a customs union (see below).

There are other fundamental differences. The EU aims to become an economic and political union. NAFTA is purely a free trade area. It does not contemplate the creation of a customs union, common market or economic and political union. It does not seek to promote economic integration by, for example, the free movement of workers among countries. There are no provisions for the free movement of labour among NAFTA member countries.

With an economic union such as the EU, member countries cede control over monetary and exchange rate policies to a supranational body (the European Central Bank). NAFTA does not include provisions for common monetary or exchange rate policies, nor does it envisage a loss of macro-economic policy autonomy. There is no transfer of sovereignty in NAFTA, as there is with the EU. And in NAFTA there is no agenda for harmonisation of laws among member countries, as there is with the EU.

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How free trade works

The importance of the NAFTA model from our point of view is how free trade agreements can spur trade, without the apparatus of economic and monetary Union (EMU). Trade between the US and Canada is the largest in the world, totalling (in 1998) $504 billion. US direct investment in Canada has increased from $85 billion in 1991 to $130 billion in 1997. Canadian direct investment in the US has gone from $63 billion to $99 billion in the same period. The US-Canadian trade increase shows what can be done under a trade agreement particularly in the light of the fact that two-way trade has more than doubled since 1989. Between 1992 and 1998 two-way trade increased by more than 13.7 per cent per year or approx. $1.5 billion per day.

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NAFTA

What it is, who’s included, how it works

The North American Free Trade Agreement (NAFTA), together with three supplemental agreements, came into effect on January 1 1994. The Agreement is designed to reduce barriers to trade and investment among the United States, Canada and Mexico. The supplemental agreements address issues related to labour, the environment and import surges.

The agreement covers a broad range of issues, including tariffs, non tariff barriers, investment, trade in services, intellectual property rights, government procurement and rules to address unfair trading practices.

Among major provisions are:

  • Elimination of all tariffs within 15 years
  • Rules of origin to restrict benefits to goods of North American content
  • Elimination of barriers and discrimination in the trade of services
  • Prohibition of many restrictions on investment
  • Rules to clarify and expand rights for patents, copyrights and other intellectual property
  • Greater access to government contracts
  • Special procedures for review of anti dumping and countervailing duty matters
  • Procedures for resolution of disputes.
Economic models generally showed that NAFTA would lead to an overall gain in US income, although the gain was projected to be relatively small and some sectors were expected to be hurt.

Canada is the most important trading partner of the US. In 1992 US trade turnover with Canada accounted for 19 per cent of total trade. The US is Canada’s most important trading partner, in 1992 accounting for 78 per cent of Canada’s exports and 64 per cent of its imports. Two thirds of US-Canada trade was already tariff free at the time NAFTA was signed.

Mexico was the third most important trading partner of the US at the time of signing. US trade with Mexico accounted for 8 per cent of total US trade turnover. The US is Mexico’s most important trading partner. At the time of the NAFTA agreement the US accounted for 76 per cent of Mexico’s exports and 69 per cent of its imports.

Mexico’s officials took the lead in pushing for a free trade agreement with the United States. They believed that a NAFTA could draw US and other foreign investment into Mexico. A free trade agreement would also increase access for Mexican goods to the US market and encourage Mexican industries to become more competitive.

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Cheaper food and goods

From our point of view, therefore, NAFTA has big attractions over the EU customs union. NAFTA and the US have let market forces largely take their course in the decline of manufacturing. The main exception is steel, about the only heavily unionised industry left in the US. But then steel is even more protected in the EU. Furthermore, US agriculture is much less protected than EU agriculture, largely because it is so much more efficient; and this protection is given directly by the country's own taxpayers and not by price-fixing as in the EU where food is part of the customs union.

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What NAFTA offers Britain

Thus, if we joined NAFTA, both our food and manufactures prices would decline sharply, a huge gain to our consumers. Because we are large net importers of both, this consumer gain would not nearly be offset by the loss to our domestic producers.

There is more to it than just these gains. On the crucial industrial investment inputs of computers and software, we pay something like 50 per cent more in the EU than we would in NAFTA because of the EU protection given to lagging EU producers such as Philips. In the USA, 40 per cent of investment today is in computers, as it will soon be here. So we are taxing our own cost base heavily inside the EU, especially in computer-intensive industries. Since these are the fastest-growing ones today, this twisting of our comparative advantage reduces growth and slows job creation.

As for economic policies within NAFTA, there would be no social charter US-style, no tax harmonisation, no worries about being asked to bail out insolvent partner countries with unaffordable state pensions. The EU offers free movement of people and the single market. But there is little migration in Europe, and the single market has proved a recipe for excessive regulation. In any case joining NAFTA would not stop us doing what we want vis-à-vis the EU.

Chart 9-1: State pension expenditure (as % of GDP)

Herein lies the beauty of the NAFTA option: its permissiveness in external relations. Our present EU membership prevents our joining NAFTA because it would violate the EU customs union by letting NAFTA products into the UK free of tariffs and other restrictions. But NAFTA members would not interfere, subject to free trade with them, as we renegotiated our relationship with the EU- witness Canada's current negotiations to join the European Free Trade Area as well.

NAFTA is therefore a gradualist route to general free trade – Britain’s best option. Now that our economy is competitive and (nearly) fully employed again, we need have no fear that the competition of world markets will give us a nasty unemployment headache. We can happily let market forces push us to where we get best value from our fully employed workforce.

If free trade in one giant step seems too risky in a world of regional blocs with intermittently protectionist agendas, then NAFTA offers us free trade in easy stages within a large club with strong bargaining power in the context of trade disputes, rather than a Britain out in the cold.

What, then, are the drawbacks? The first, and most obvious is that any application by the UK to join NAFTA would require a fundamental recalibration of our membership of the European Union. The UK would be accused of betraying the European ideal and commitment to ‘the ever closer union of the peoples of Europe’. Intense political pressure would be brought to bear on the UK to maintain her relationship with the EU, if only on the calculation that renegotiation by one member might open up a Pandora’s Box of renegotiation attempts by others. There would be alarming talk of Britain ceasing to attract inward investment and of retaliatory trade action being taken against us by other EU countries, as outlined in the preceding chapter.

The immediate issues raised are legal. The UK, as a member of the EU, is not at liberty to enter unilaterally into any free trade agreement with a non-EU country. External trade relations are a Community competence. This does not debar some form of trade accordat with NAFTA, but it would require EU-wide agreement. Any such agreement looks a long-odds outsider. Indeed, there has been a notable increase in trade policy friction between the EU and the US over the past two years.

So, how can these drawbacks be addressed? There are powerful arguments in favour of encouraging the growth of global free trade, and the UK would by no means be on her own. A recalibrated EU, in which members were free to join outside free trade associations such as NAFTA, may work to attract Norway and Switzerland into a ‘new model’ union. An alternative route would be to create an intermediate body between the EU and NAFTA which could seek agreement on tariffs in specific areas, on a case by case basis. This North Atlantic Treaty approach would have considerable appeal.

But even that may not be agreeable to some members of the EU, who regard the US with distrust and who wish to challenge US economic and political hegemony. The most serious problems, were the UK to pursue a NAFTA partnership would be, first, maintaining membership of the Single Market through an agreement similar to that achieved by the European Economic Area, sustaining business and investor confidence during the transition and dealing with threats of retaliation. Much business opinion would be sympathetic, bearing in mind that there are huge two-way ties of trade and direct investment between the UK and NAFTA, and that we would be able to avoid the huge costs and labour market burdens of the continental model. The US is our largest single inward investor. Any serious attempt at trade sanctions (which we regard as highly doubtful) would be counter to GATT rules. And finally, the EU has much to lose: as we examined in the preceding chapter, the EU-14 enjoy a substantial surplus on trade with Britain which would be counter-productive from their view to prejudice.

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The gains for Europe

Flexibility in external relations thus opens more doors for (and to) the European Union. It is the key that simultaneously unlocks the door to enlargement, the inclusion of Norway (and possibly Switzerland in due course), and the door to membership of free trade alliances round the world.

For the UK, it would furnish the freedom to join NAFTA if she so wishes, and to take up the opportunity to be a powerful and influential player in global trade and business councils. Not to pursue this course puts at risk our separate representation in the Group of Seven major industrial countries, the World Bank and IMF. The next European inter-governmental conference would provide an opportunity to have these profoundly important issues at the very least fully and properly debated.

What is to be done if the efforts of the flexicons prove of no avail? The question of single currency membership has still to be put to British voters in a referendum. A ‘no’ vote would itself alter the landscape of possibilities for the UK’s European policy quite dramatically, for it would require a searching re-examination of Britain’s relationship with the EU and how she could avoid being passively borne along in the after-tow of convergence.

A decision not to join the single currency would itself be an inflection point for change and the most positive first step to a Britain ‘in Europe but not run by Europe’. It would catalyse a process of wider re-examination. In this it would not serve the interests of the EU 14, any more than those of the UK, for us to be forced kicking and screaming towards further convergence. This agenda for reform should form the basis for a constitutional conference at which the UK and other members seek to persuade the rest of the EU of the need for change.

Opposition is likely to come from those who believe Europe stands or falls as a bloc, and who wish to press ahead with the full programme of economic and political union. The alternative for the UK and other like-minded flexicons, were they to be confronted with a refusal to negotiate a flexi-Treaty, would be renegotiation of their memberships, which could lead ultimately to withdrawal. The EU, it is feared, might retaliate with trade sanctions. But in the case of the UK, this is an outcome that would be most adverse to the other members, if only for this reason. Currently the EU-14 enjoys a substantial balance of payments surplus with the UK. In 1998 the surplus on trade in goods alone amounted to £5.5 billion (see graph). Continental countries have thus every incentive not to put their UK trade and investment at risk. It is in the interests of the rest of the EU, as much as in Britain’s, that a reconfiguration of the treaty is not only undertaken, but that it is also amicable.

The Prime Minister insists he is in favour of radical EU reform but rules out any renegotiation, a stance that disintegrates on any serious analysis. As we have set out, amendment to the constitution of the EU is essential to secure a flexible Europe and to avoid the damage that would be inflicted by the advance of the solopaths and the ‘one-size-fits-all’ model.

Not only is there precedent for re-negotiation – both Harold Wilson and Margaret Thatcher undertook and secured renegotiated terms for Britain – but failure to contemplate such a process would recklessly expose the UK to the economic consequences of convergist drift set out in Chapter 4.

What if no agreement is forthcoming after a constitutional conference? It would then be necessary for the UK to revisit the 1972 European Communities Act. It is through Section 2 of, and Schedule 2 to, this Act that EU law is enforceable in British courts. Any new Act passed by Parliament clearly stating that it is to prevail over these sections would prevail as the law of the UK. This would, in effect, remove the superior jurisdiction over British courts of the Luxembourg Court of Justice. Supplementary provisions would also have to be made allowing the government, subject to parliamentary approval, to repeal or amend any legislation from which we suffer as a result of the sections repealed.

This would, in effect, turn off the writ of EU law in the UK. Lord Pearson of Rannoch, who bravely introduced just such a Bill in January 1997, described this as a ‘Moses’ clause ‘to allow the government to lead our people out of the captivity of the Treaty of Rome and to regain… that priceless right to self governance’. Such a step remains the ultimate protection of UK sovereignty in the event of failure to secure change to the Treaty to allow flexibility. The very threat of such of an option should render resort to it unnecessary, the more so especially as the benefits flowing from an orderly reconfiguration are so manifest and substantial to all sides.

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9. Conclusion: New Way or passé?

Greater integration with continental Europe is neither desirable nor inevitable. Drastic changes are now needed. Our separation from the continent and progressive integration into a global order led by the US make a change in our relationship with the EU compelling and necessary.

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For as long as most voters can remember, attitudes to the European Union have been a battle between two negative influences: fear of being subsumed in a continental super-state run from Brussels, and fear of being isolated and alone on the outside. Until now, fear of isolation (coupled with a sense of helpless fait accompli over our relationship with the EU) has prevailed. The UK has acquiesced in a fitful convergence with the EU. But there is now growing unease about the appropriateness and efficacy of the continental model. These concerns are heightened as we approach a quantum leap in the integration process: membership of the single currency.

Britain’s relationship with the European Union is set to be the most important political issue of the coming decade. It is by no means confined to the decision on whether the UK will, or will not, join the Euro. The remit of the EU now runs much deeper, spanning foreign and security policy, economic and monetary policy, employment and social legislation, farming, food and environmental matters, business conduct and competition issues. So pervasive has EU regulation become across almost every facet of life, it is no exaggeration to say that if we cannot get our relationship with Europe right, little else is likely to come right.

Much of this permeation has been justified on the grounds of diffuse or indirect economic benefit. Britain has acquiesced in the convergence programme (where she has not sought derogation) for fear of perceived disadvantage, tempered by recognition of the need to be involved in EU-wide policy formulation and decision-making. There has also been a sense that convergence with continental Europe, however much we may dislike the petty and often absurd harmonisation measures, is the inevitable price to be paid for combined strength and influence in global markets.

Some compare the UK’s situation to that of a middle-sized quoted company whose management and shareholders have come to recognise that merger, however they may dislike the fact, is the only means of survival in global markets. Our prospects, runs the argument, are best served by merger with a larger and manifestly more powerful unit: size matters.

But there are parallel truths about the corporate world that should not be overlooked by those who roll out this analogy. Few amalgamations in business are genuine mergers in the true sense of the word, but outright and often brutal take-overs of one management by another. Often the ‘merger’ does not achieve the market share or earnings per share gains initially hoped for (though the facilitators, advisers and public relations officers gain handsomely before the truth emerges). In other cases, the mooted financial benefits are a thin rationalisation for mergers driven by greed and delusions of corporate grandeur.

Many good businesses have been destroyed by merger. A radical rethink of conglomeration in recent years has seen corporations pursuing performance and competitive enhancement by de-merger and ‘unbundling’, allowing the larger components to concentrate on core competencies while secondary activities are set free to develop outside the holding company structure. Countries are only to be compared with corporations to a limited extent, but to this extent there is likeness: it is competition, rather than amalgamation, that has proved the better spur to innovation, service and performance.

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Options for change

Across the main political parties there is a growing realisation that the EU as it stands is deeply unpopular with voters; hence there is also a commitment to improve its performance. The most frequent calls are for changes to accelerate enlargement; to provide greater openness and transparency; to eliminate fraud in the EU budget; and to promote a more competitive, liberal and flexible approach to monetary and economic policy – all this while defending national sovereignty and ‘drawing a line’ against further encroachment. Much of this commitment barely extends beyond the rhetorical: there is no clear, focused programme of specific proposals or a strategy for pursuing them to a successful conclusion. Meanwhile, the economic costs to the UK of drifting further towards convergence with the EU model continue to mount.

As we have set out here, the opportunity cost in terms of potential GDP growth foregone at around 7 per cent over the next six years and an increase in unemployment of two million and with far more to come. Failure to pursue a reform programme to a successful conclusion is not just to be measured in political terms. There are real, and biting, economic costs which now have to be taken into account.

We have explored two broad options for policy – staying ‘as we are’, or seeking flexibility clauses in the EU treaties and pursuing recalibration to allow member states to enter into external free trade agreements if they wish.

Apologists for convergence often brand the flexibility option as unworkable, or as an attempt to ‘take Britain out of Europe’. In truth, such a charge is rhetorical. Britain, by virtue of ties of trade and investment, has been ‘in Europe’ since the beginning of her history (our trade with Europe accounted for about half our total trade at the time of the Spanish Armada). By these same ties, the continent is, and is set to remain, a critically important economic theatre for the UK. What the apologists’ sleight of rhetorical hand seeks to do is to close off alternative policies for consideration by portraying the future of Europe and the current political construct of the EU as one and the same thing. We disagree. In any event, we will not know whether a clear and specific policy agenda is workable – or not until one has been drawn up and other EU members invited to discuss. It is also clear no enlargement of the EU can take place unless there is a fundamental re-examination of what the EU is and where it is heading.

There has been little realisation of the imperative of change (other than rhetorical lip service) by the Labour government. Indeed, the central tenet of New Labour under Tony Blair has been that we must be closely integrated into a Social/Christian Democratic Europe. While his programme has been presented to voters as building on the foundations left by Thatcherite conservatism, his party’s actions so far in office have slowly but steadily moved to a harmonisation of our practices with those of continental Europe. These extend across the labour market, the social charter, devolution and a ‘Britain of regions’, ‘tax harmonisation’, and in such apparently small things as stamp duty (actually a recipe for serious homeowner immobility).

He has proclaimed that this is both inevitable and ‘modern’. He has tried to paint the Conservatives as anti-European for trying to stand on the ground of ‘in Europe but not run by Europe’. But the truth is that, unpopular as they still are, the Conservatives are on these matters basically in tune with public opinion, which will prove an impossible hurdle for Mr. Blair to overcome in pursuing his European programme.

For Labour has misunderstood the European issue, just as for years it misunderstood the socialist issue. New Labour has made itself over on socialism, presenting a ‘middle way’ – a sort of bowdlerised free market. But on Europe it shows its heart still lies with corporatist social democracy. Labour’s love affair with Europe began with M. Delors in the late 1980s. As the then head of the European Commission, he announced to a UK Trade Union Congress conference that Europe would press forward a Social Agenda to ‘complement’ the Single Market.

From then on, Labour dropped its previous hostility to the EU (remember the young Blair’s ‘anti’ position?), seeing it now as a way of reversing the hated Thatcher reforms in the UK by the back door. This reversal could never be sold to the British people as a free-standing package. But Labour’s idea was that it would be accepted as part of the dispensation from an ‘inevitable' Europe.

For this strategy to proceed it is necessary for us to accept that more integration into continental Europe is indeed inevitable. Yet both history and analysis of our current situation suggest the opposite: that our separation from the continent and our progressive integration into a global order led by the USA are the inevitabilities of today.

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Free trade serves us better

Let us start with politics – easily the least controversial part of this discussion. Britain throughout her history has never been indifferent to, or disconnected from, political and economic developments in continental Europe. We have never followed – nor are minded to now – the grand Napoleonic or Bismarckian conceptions of a single European state or empire. We have been fiercely and proudly supportive of the sovereign rights of the nations of Europe. And we instinctively respect and warm to the upholders of diversity in Europe, such as the respected German economist Wilhelm Röpke: ‘To try to organise Europe centrally’, he wrote, ‘and to wield it into a block with a single economic and social policy, would be nothing less than a betrayal of Europe and the European patrimony.’

In this reluctance to promote grand continental projects, Britain was by no means being insular. The Empire and Commonwealth could be said to be the world's first successful ‘global’ project. The Anglo-Saxon world was born and formed the basis for the alliances in two world wars between Britain and other European countries and the US to maintain the balance of power and resist the attempts by one European power to dominate the rest of Europe.

Turning from history to the present, we see that this Anglo-Saxon world is seeking to build a free trade environment based on the World Trade Organisation, supported by the military force of the North Atlantic Treaty Organisation in maintaining international law and order. Politically, the European element in these arrangements is fairly puny. It goes along, grudgingly, from force majeure, with what it sees as an alien free trade philosophy led by an uncongenial monopoly superpower.

But, many will rightly say, we joined Europe because of economics. We were repeatedly told that we were too small to ‘go it alone’, better to join a 350-million European market. There was also a view within the Foreign Office (and the US State Department – witness Dean Acheson’s dictum that ‘Britain has lost an empire but not yet found a role’) that we should join for political reasons, to ‘punch above our weight’. However, that view is now a minority one among our diplomats. Indeed, in serious recent episodes affecting our interests – the Falklands, the Gulf War, and Kosovo, for example – it has been our alliance with the US that has served both our and their interests. That point has not been lost in the White House either, whatever the State Department may have tried to say.

But if economics was the reason, we can now see we were badly mistaken. With the four economic things that Europe has done – customs union, the single market, harmonisation and the single currency – our interests have been badly served. The customs union has given us protection and high prices for food and manufactures, of both of which we are heavy net importers. This implies that while our farmers and manufacturers gain, the rest of us lose far more and would be better off out, giving them compensation.

The single market has, in many respects, been a mixed blessing. It has been used by the integrationists as a vehicle for harmonisation of costs and the spread of often needless and petty regulation, and hence the reduction of consumer choice. Our consumers would be better served by rival UK and continental standards with plain old free trade. Harmonisation has proved to be a method by which socialism can be reimposed on us. And the single currency would give us a ‘one-size-fits-all’ monetary policy that would most of the time not suit us at all.

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Where three circles meet

Both modernity and inevitability suggest we will not continue along this road for very long, at least unless some very drastic changes occur in the ‘European Way’ – changes which are most unlikely since they would run counter to the whole history of the European Community since it was founded in the 1950s.

The present Tory policy of ‘in Europe not run by Europe’ may be seen as an attempt to buy time which rhetorically goes with the grain of British interests. But the logic of those interests implies that we will choose to strengthen our attachment to the global (and the truly modern) world being led by the United States.

What is needed is a re-statement of the strategic vision that guided policy in the post-war (and pre-EEC debate) years, and which was broadly shared by two contrasting foreign secretaries, Ernest Bevin and Anthony Eden: a view of a global Britain at the centre of three interlocking circles, namely North America, Europe, and now (in place of empire) the developing as well as developed economies of Asia and Australasia, South America and sub-Saharan Africa. Putting the world economy at the centre of our perspective is what will serve us best.

Joining NAFTA looks like the best ultimate way to achieve this – it gives its members free trade with whomever they choose, together with the muscle of a big club against free trade abusers. It would give Britain the chance to maintain its global course while seeking in a friendly spirit to retain free trade and close politico-economic co-operation with the continent.

When we see before us the emerging new dynamics of the global economy, the agenda of a corporatist, big government Europe is exposed for the failed, passé obsession of yesteryear that it is. It is an entrapment of the past and it blocks the way to the new era. That is what makes the issue of choice and change in our relationship with the EU at once so compelling and so necessary.

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