The UK should throw its weight behind a Europe based on sound money

In today's Telegraph, we argue:

Whatever the future of the single currency – and the entire European project – it will largely be decided in Berlin. The most important relationship for David Cameron is therefore with the German Chancellor, Angela Merkel. But there is a risk that the Prime Minister will miss a vital chance to cement a new Anglo-German deal on the future of the European Union.

For years, the UK’s European diplomacy has been defined by its relations with the Élysée, but the eurozone crisis has demonstrated that Germany now stands alone as Europe’s leader, however reluctantly. Despite there being a great deal of cultural and political overlap, however, the basic problem is that Britain does not really understand Germany, and vice versa. Britain perceives itself as a seafaring country of traders, Germany as a continental land of engineers.

Much like the UK, Germany is undertaking a highly charged internal debate about its place in Europe. For the first time, the twin pillars of Germany’s extraordinarily successful post-war settlement are in conflict: its commitment to Europe, and its belief in sound money and stable budgets. Whatever the outcome of this debate, it will have a defining impact on the future of the EU.

The UK, however, risks ending up on the wrong side of the debate. To the great annoyance of Berlin, Cameron and George Osborne have developed a fondness for calling on the eurozone to move towards fiscal union, including eurobonds, and for the ECB to effectively start the printing presses. Britain has a right to voice its opinion – a full-scale crisis would have implications well beyond the eurozone – but its advice is misguided.

Eurobonds and cheap money create huge incentives for more spending, which is exactly what the Coalition is arguing against at home, and feel awfully like solving a debt crisis with more debt. Cameron has also stressed that “Europe’s lack of competitiveness remains its Achilles’ heel”. But, as Merkel has rightly countered, eurobonds do nothing to address this. If anything, allowing countries to piggyback on Germany’s credit rating takes away pressure for the vital reforms that many of these countries need.

After having spent a decade in opposition calling for a more dynamic European economy and a slimmed-down, more democratic EU, the Conservative leadership’s cocktail of Eurosceptic fiscal federalism is not only intellectually inconsistent but, in the key debate about the future of the EU, needlessly aligns the UK with European federalists and socialists such as François Hollande.

At the same time, it locks Britain into a weak negotiation position over future EU treaty changes – which will be needed if the eurozone is going to move to fiscal union – as Britain can hardly block the same treaty change that it has effectively argued for.

Instead of prejudging the eurozone’s future, Britain should spend all its political capital on convincing Merkel that Europe as a whole needs to move in the direction of free trade and structural reform. This means that, instead of talking about “digital government” as Cameron and Merkel did yesterday, Cameron should have said the following: “I will support the Chancellor’s vision for a Europe based on responsible spending, sound money, liberal cross-border trade and respect for the rule of law. Like the Chancellor, I believe that Europe must learn how to live within its means and reform itself if it is going to remain a vibrant economic actor on the world stage. But just as Germany will need to seek the right conditions to be comfortable with its new position in Europe, so must Britain. Since we cannot join the euro, Britain will need a different – and more flexible – set of arrangements under EU law than euro members. This is the only way to reconcile continued EU membership with UK public opinion.”

In the end, this would benefit Germany, Britain and Europe as a whole.

Hollande's victory is an opportunity for David Cameron to strengthen his position with German Chancellor Angela Merkel

In an op-ed for today's Telegraph, we argue:

"Viewed from London, the most interesting effect of François Hollande’s victory in Sunday’s French presidential elections may not be how it changes the UK’s relationship with France, or even how it could create tensions in the Franco-German axis. Rather, it is how it has the potential to strengthen ties between Berlin and London."

We note,  

"While the bickering between London and Paris will continue, Hollande simply rubs the Germans up the wrong way. His spending rhetoric is an outright challenge to German Chancellor Angela Merkel’s vision of a euro firmly grounded in Prussian budget discipline. Remember, this is a vision that has been presented as “non-negotiable” to the German electorate and which still draws support from a clear majority of voters there (only about one third of voters would prefer economic stimulus over austerity, even at home). Unsurprisingly, Hollande’s threat to veto the EU fiscal treaty – Merkel’s political cover for putting up German taxpayers’ cash – has caused dismay in Berlin and Frankfurt. As the German newspaper Die Welt put it: 'The fiscal pact is the best thing Europe has. Now it has come to an end even before its introduction. If it continues like this, that’s the end of the eurozone.'"

There may be plenty of empty election rhetoric in Hollande’s promises to take on Germany, and the most likely outcome is that Merkel and Hollande reach a deal on the fiscal treaty that does not involve outright renegotiation but that allows him to save face, perhaps by adding a fiscal stimulus clause, loosely attached to the treaty. The two have too much to lose from an almighty row. [But] at the same time, though, the Germans know that politics in the EU balances on a knife edge."

We go on to argue that,

"taken together, election results in 2012-13 could massively increase perceptions in Germany that either it is prepared – in the words of the German tabloid Bild – 'to stand alone' or accept being slowly but inexorably pushed into the arms of the spending- and inflation-prone Mediterranean bloc. Clearly, Germany wants neither. To escape this binary choice, it will need allies. And this is where Sunday’s election results really become interesting for Britain. With Berlin growing anxious, this is the perfect chance for No 10 to begin a concerted effort to lure Berlin in the direction of a more liberal, outward-looking Europe. Cameron won’t break the Franco-German axis – nor should he try to. But he could now create a lot of goodwill in Berlin by throwing his weight behind a Europe based on sound money and that lives within its means. As Merkel’s charm offensive following Cameron’s EU veto back in December illustrates, Berlin knows that it pushes Britain away at its own peril. Not only does it need the UK inside the EU tent to balance the less-disciplined southern bloc, London’s support will also be vital in upholding a rules-based system where goods and services can be traded across borders, as Europe goes through a highly unpredictable – and defensive – phase. A southern bloc led by Hollande may challenge austerity, but a northern bloc, containing the UK (if it can get its economy in order), the Scandinavians, and some of the new member states, would possess Europe’s economic fire power – and its Triple A ratings. Therefore, though it won’t be easy, the scope for a new bargain between London and Berlin – based on Britain needing new terms of EU engagement if it is to remain inside, and Germany needing the UK’s quiet support for a more economically sustainable euro – is possibly greater than ever.

So how should the UK respond? First, of course, get a working relationship going with Hollande – France remains a key partner and neither Britain nor Europe would be the same without it. Second, don’t give up on Spain and Italy – both governments contain plenty of good people who understand the need for structural reform. But in parallel, British EU diplomacy ought to be reoriented far more towards Berlin. Despite its importance, the UK far too often talks about the past or misunderstands Germany, as was made painfully obvious when Cameron thought he had Merkel’s support ahead of December’s EU council – a misunderstanding that triggered his veto.

A good place to start for the UK government would be to stop lecturing the Germans on the need for turning the eurozone into a debt union. Such lectures annoy Berlin in return for no apparent diplomatic benefit. What Britain can do, however, is set a good example by getting its own economy in order, while continuing to push for pro-growth and structural reforms at the EU level when this is within the UK’s mandate. And as Europe searches for cause and meaning, Britain can also set out an alternative vision for its place in the EU. While stressing the benefits of cross-border trade, such a vision should be based on the realisation that Britain cannot join the euro, and will therefore need a different – and looser – arrangement under EU law than euro members. This would provide a focal point for diplomatic relations with Germany in particular, but also other key allies that too often are left perplexed as to what Britain actually wants in Europe."

 We conclude - in a nod to those commentators who claim that Hollande's victory 'isolated' Cameron (whatever the event in Europe, the outcome is always that Cameron is isolated, have you noticed?):

"If Cameron can pull that off and cultivate relations with Berlin, Hollande’s victory – far from isolating the Prime Minister – may just have strengthened his hand."