If EU law is followed, Scotland will join the EU just before Serbia

Our Director Mats Persson writes on his Telegraph blog:

The UK must be the first country, with the forthcoming Scottish and EU referenda, to simultaneously have an intense political debate about the difficulty or otherwise of both joining and leaving the EU. Traditional assumptions are being bent in all sorts of directions, with senior UK politicians approvingly citing EU Commission President Jose Manuel Barroso for suggesting it would be “very difficult, if not impossible” for an independent Scotland to join the EU.

Like Catalonia in Spain, rightly or wrongly, Alex Salmond’s case rests in part on the argument that "if we leave one club, we can safely join another." It’s an insurance policy against the uncertainty which is a such a killer in any referendum to change the status quo. So is Barroso right?

Iceland’s accession talks with the EU – which were terminated since the Icelanders turned cold on the idea – would, in purely legal terms, come close to those of Scotland. Iceland is part of the European Economic Area, and therefore almost an EU member. Scotland has been an EU member for 40 years. Both would face tricky negotiations, like protecting their fishing industries.

There are basically six steps (by my rough categorisation). Salmond’s biggest problem is that for half of these, each of the 28 EU states, including rUK and Spain, has a veto:

Step 1 – Scotland applies to join the EU: Under EU law, it would have to be an independent country to apply.

Step 2 – The European Commission “screens” Scottish law to see if the country is compatible with EU membership – this won’t be an issue.

Step 3 – EU governments decide whether to approve Scotland’s EU application. All EU states have a veto.

Step 4 – The EU and Scotland begin negotiations over individual EU policy areas. There are now 35 so-called “accession chapters” covering everything from the euro to employment law to the EU budget. Each country has a veto over the decision to both open and then to close every single chapter – ask Turkey how easy that has proven (read: Cyprus and France). It’s in these talks that Salmond would need to deliver on his pledge to get an opt-out from the euro, as well as replicating the UK’s special deals on the EU budget, crime and immigration and passport controls.

Step 5 – When the 35th chapter is agreed, the Accession Treaty with the Scottish terms of entry is drafted.

Step 6 – This Treaty must then be ratified by the Parliaments of each EU country and the European Parliament. If one says no, the deal falls.

Iceland officially applied to the EU in June 2009. In 2013, when the bid was dropped, it had completed about a third of the negotiations. So if the letter of the law is followed, Scotland might join the EU just before Serbia, several years from now.

However, in the EU, political expediency tends to trump the letter of the law. I suspect that, given the stakes, if the Scots do pull the trigger, the EU will engage in the kind of legal acrobatics that it’s proven so good at in order to fast-track an independent Scotland to membership, with or without a euro opt-out (though, as Andrew Lilico has pointed out, there might be a range of practical currency issues).

No matter what, it would be a mess. In truth, we have little idea what’s going to happen if Scotland goes independent. And I suspect that in itself undermines Salmond’s case.

The stand-off in Kiev shows the EU's greatest weakness – and its greatest strength

Our Director Mats Persson writes on his Telegraph blog:

A deal between the EU and Ukraine involving a "deep and comprehensive" free trade area, finally seems to have the hit the wall, after weeks trying to reach an agreement.

Ukrainian president Viktor Yanukovich is now looking increasingly likely to sign a deal to join the Russian backed customs union instead. As the Russian deal is a customs union it is incompatible with Ukraine signing an individual agreement with the EU. Any further negotiations with Ukraine will therefore need to be jointly negotiated with Russia – something unlikely to prove easy.

Kiev (or its President) has chosen Russian over EU integration.

Ukraine is a big country and market, with 45 million people and substantial resources. It’s also a geopolitical hot spot, it looks both east and west, parts speak Ukrainian and are historically linked to existing EU members, Lithuania, Hungary, Austria and Poland. Other parts speak Russian and historically look to Moscow.

There are two ways of looking at this:

The EU’s “soft power” foreign policy – luring countries in by offering them gradual access to or membership of the EU’s zone of stability and trade – has hit its limits. EU enlargement as a foreign policy tool – betting on others voluntarily imitating the EU – worked as long as it could offer a haven to post-dictatorship countries in the Mediterranean and Eastern Europe, but without confronting the geopolitical orbit of hard power. With Ukraine, it has come up against precisely that in the form of Russia. Moscow offered its neighbour a binary choice: us or them. In a region still responding more to the whip than the carrot, the EU’s soft power proved highly limited. No amount of tweeting from constructivist-inclined EU foreign ministers will change that.

However, there’s a second way to look at it. The hundreds of thousands of pro-European protesters taking to Kiev’s streets show that, in fact, EU soft power is alive and well. Or at least, people in the EU’s neighbourhood still have a desire to join the club in some form. Therefore, and paradoxically, the stand-off between the EU and Russia over Ukraine simultaneously illustrates the EU’s greatest weakness and its greatest strength.

One final thought: I very much doubt that the protesters lining Kiev’s streets are voicing their support for the country joining the European Economic and Social Committee, or are particularly keen on plans to ban national flags (such as their own) from packs of meat, enforce quotas in boardrooms or prohibit refillable olive oil jugs in restaurants. They want to join a European club, broadly defined.

Those who press for more EU integration and increasingly want to make the EU an extension of the single currency should be aware that they’re also creating more hurdles for newcomers to join such a club. So far the “widening” of the EU has also led to “deepening”. With countries like Ukraine and Turkey in the game, that simply cannot continue. Scaling back the EU’s rulebook and allowing for differing levels of integration would lower the barrier to entry and therefore allow Europe to continue to use enlargement as a foreign policy tool.

The EU should want Ukraine and Turkey in but this won't happen as long as "ever closer union" is the mantra. A new flexible model of membership is needed. It is also one that may help to some existing members feel more at home in the club.

A revealing portrait of UK voters' scepticism about the EU

A cross-border poll by Opinium, due to be launched tomorrow, of voters in the UK, France, Germany and Poland, as well as British business executives, tells a familiar story about UK voters' attitudes to the EU: they feel the costs outweigh the benefits.

UK business respondents were more likely to say EU membership is a good thing (47% versus just 26% of UK adults generally) and that it has more benefits than drawbacks (40% saying more benefits versus 19% of UK adults). Although the picture is mixed. Business respondents were evenly split on whether to vote in or out in a referendum but 38% thought the UK economy would be better off if Britain left the EU versus 31% who said the economy would be worse off.

The pollsters note that, "While people in the UK see the benefits of some areas of EU membership (specifically the lack of customs duties or tariffs, easing restrictions for businesses, tourism and travel), these are all overshadowed by the overwhelming majority saying that EU membership has had a negative effect on immigration to the UK."

But perhaps the most striking comparison is how Brits and voters from the other countries polled emotionally or culturally identify with Europe. 50% of the British public feel the UK is "not European". In Germany the figure is just 11%:

This illustrates that, for the British public, the processes and mechanisms of the EU are as controversial as specific EU policies. This is why systemic change to the EU (such as an effective red card for national parliaments) is so important.

Despite these cultural differences, when asked how much or little EU integration they would like, the most popular option among voters in every country was: "Some matters are handled by the EU but countries are able to opt-out and use national vetoes to protect their interests":

In addition, all countries support the idea of different levels of EU membership "where there are policies that all countries have to be a part of (e.g. trade, the single market) but some which countries can opt-out of (e.g. criminal justice or Euro membership)." UK business respondents were particularly positive of this idea with 68% supportive of different levels of EU membership and just 12% opposed.

So there is support in the UK and some of the other key member states for a more flexible model of EU membership. However, the large number of 'don't knows' among UK voters and their emotional ambivalence about the European project would suggest that wining support for a new deal in a referendum won't be straightforward, particularly unless the reform is substantial.

Is Lord Lawson's intervention likely to be a game-changer?

The big political news of the day happens to be strongly EU related – former Chancellor Lord Lawson’s piece in the Times (£) in which he argues in favour of a UK exit from the EU. So what to make of the piece – is it a game-changer or just a Westminster village story?

Lord Lawson rightly sets out many of the flaws inherent in the status quo - which we have looked at in detail numerous times,  from the democratic deficit through to the economic cost of over-regulation and the wasteful EU budget. He also draws particular attention to the threat of onerous and disproportionate costs from impending EU financial services regulation, with particular focus on eurozone-tailored rules imposed through an inbuilt majority in the EU's decision-making process. Familiar stuff. The key question is whether the UK is better off fighting to address these issues from within the EU or leaving altogether? Lord Lawson argues that:

“The changes that Wilson was able to negotiate were so trivial that I doubt if anyone today can remember what they were… I have no doubt that any changes that Mr Cameron — or, for that matter, Ed Miliband — is able to secure will be equally inconsequential… That is why, while I voted “in” in 1975, I shall be voting “out” in 2017.” 

The media have really gone to town on this story - it’s an otherwise slow news day and everyone loves a good ‘Tory splits on Europe’ narrative. No doubt, it has further heated up an already hot debate - and if there's one consequence, it's that the intervention has made 'better off out' a slightly more respectable position. Lord Lawson remains a respectable figure.

But a game-changer, it is not. The responses to the article have conformed with already well marked-out positions: UKIP says its delighted, Dan Hannan tweeted that "we can really win this guys" while those who usually object to this kind of proposition, have objected.

Leaving aside his pessimism about a new EU deal (which we take major issues with), Lord Lawson - whose eurosceptic views are hardly a secret - actually doesn't really tell us anything new. In particular, like most others who say the UK should leave the EU, he completely dodges the most important question of all: what's the alternative? This is the weaker part of his piece:

“Over the past decade, UK exports to the EU have risen in cash terms by some 40 per cent. Over the same period, exports to the EU from those outside it have risen by 75 per cent. The heart of the matter is that the relevant economic context nowadays is not Europe but globalisation, including global free trade, with the World Trade Organisation as its monitor.”

“Today too much of British business and industry feels similarly secure in the warm embrace of the European single market and is failing to recognise that today’s great export opportunities lie in the developing world, particularly in Asia.” 

While Lord Lawson makes a fair point about British business not making the most of global opportunities, he creates a false choice between one or the other (we've been through this before). The point is not the global market place versus the European market, the point is to maximise the total volume of trade - this is what the Germans do very effectively.

While claims about 3 million jobs being at risk in the event of the UK leaving the single market are way overblown, the truth is, as we've pointed out numerous times, all the existing alternatives, from the Swiss and Norwegian models to the WTO-only model, suffer from major flaws. It is unclear which of these Lord Lawson proposes but, judging from the second paragraph above, he seems to suggest we fall back on the WTO regime. So he is arguing for a raft of extra costs slapped on UK exports, including a 10% tariff on car exports to the EU, in addition to barriers to market access for all UK financial firms (absent new deals, which Lord Lawson, again, doesn't mention)?

Until those who advocate the mythical "UK option" actually flesh this concept out into a concrete and sell-able policy proposal, interventions like Lord Lawson's will primarily be something that the Westminster chattering classes can have some fun with.

Will the pound really take a beating from the UK's debate on Europe?

Ahead of David Cameron's incredibly hyped speech, a bit of a foreign exchange side-debate has developed with some analysts suggesting that sterling could weaken significantly as talk of the UK leaving the EU increases uncertainty, while the eurozone starts to recover. Are such fears valid?

 

·         As we have pointed out repeatedly in recent days, the debate is not yet about a straight in or out - but whether the UK should seek new EU membership terms.Unfortunately, currency markets (notoriously volatile) may not capture that, even if businesses do.

·         In our view, if you're a currency analyst, there are more important issues that could drive sterling lower than the intensified EU debate, including the threat of a triple-dip recession, loss of the UK’s triple-A rating, continuing to miss debt and deficit targets and the election campaign in 2014/2015. Ultimately, we’d expect currency markets to take the lead from the UK’s wider economic policy than just the UK-EU issue.

·         As we discussed in detail in our outlook for2013, there is still a lot of uncertainty in the eurozone, particularly with the Italian elections and the fact that the structural flaws have not been solved. The ECB is also still providing copies amounts of liquidity with a very loose monetary policy. Although, the latter has helped strengthen the euro at times, we think there is a limit to how far this can go. During the crisis, the repatriation of assets from abroad by banks and firms in the eurozone has propped up the currency, as the situation improves slightly this may slow. These factors combined could cap any substantial strengthening of the euro.  

·         Although sterling has weakened in recent days, other indicators of safe haven flows, such as UK borrowing costs and the London property market, have continued to suggest that there is still very strong demand for UK assets.

·         Given that safe haven flows have continued for some time, sterling may be inflated above where it normally would have settled, as such any change may simply be a correction to the norm as markets turn more positive.

·         Currency strength is significantly determined by central bank action these days. With the US Fed planning to keep policy loose for the foreseeable future (and keen to have a weak dollar) and the ECB of the same mind-set, sterling may continue to be seen as an attractive option. The Swiss National Bank will also have to unwind its massive foreign currency reserves at some point, given that a significant amount of this is in euro it could weaken the currency.

·         In terms of impact on the UK, a weaker pound could aid the UK in terms of boosting exports. However, given our reliance on imports and the fact that a weaker currency could also see an increase in borrowing costs for the UK a decrease in foreign demand for our assets, the overall impact may not be positive. Sterling has devalued significantly since the start of the financial crisis with the boost to exports being minimal.

There is a good chance that sterling could weaken this year, which may not be good for the UK economy. However, the impact of a potential EU referendum in 2-3 years’ time on the currency should not be overstated. There are plenty of other more pertinent arguments to focus on both for the UK-EU debate and the analysis of sterling.

Who said EU federalists don't get headlines in UK media (but 'associate membership' for Britain is hardly a revolutionary thought)

The Union of European Federalists – an umbrella group of federalist organisations and lobby groups – got a pretty good hit in the UK media on New Year’s eve when the Times (and later other papers) picked up on a forthcoming paper by the group, which is expected to argue that the UK be granted “associate status” in the EU, a few days after Jacques Delors made similar comments.

So EU federalists can make headlines in the eurosceptic UK press after all, although we would hasten to add that an intervention by a few MEPs and retired politicians can’t qualify as a “Brussels plot” – you at least need to have some scheming Commission bureaucrats on-board for that. Apparently, the paper, which will come in the form of a draft “EU Treaty”, will be based on a report by Andrew Duff, the Lib Dem MEP.

According to Duff, the UK would be given “membership based on trade and the single market”, with a UK judge at the ECJ but no Commissioner and no MEPs. The objective is clear: Given that the UK is a perceived as a  “continual impediment” to greater EU integration, associate membership of the EU would be devised “to prevent a British veto of the constitutional evolution needed and desired by its partners”. Curiously, and perhaps testament to the world view of the author, there’s no mention of what would happen to the UK’s voting weight/rights in the Council of Ministers, the forum where national governments are represented. They might want to work that one out before publishing their draft EU treaty.

Either way the idea is for the UK to effectively be given access to the single market but with little say - like Norway but with some twists and without the EEA-wrapping. This is hardly revolutionary stuff and the author, though an interesting guy, isn’t exactly the go-to guy in key national capitals. So don’t expect this to become policy any time soon. To view the UK as an “impediment” - ignoring the moving goal posts created by the eurozone crisis - is also predictably simplistic.

In addition, there are massive obstacles to more EU integration also amongst “EU partners” and European public opinion – from joint and several liabilities in Germany, to Bundesbank-style budget controls in France to banking union in Sweden. But Duff’s contribution is nonetheless welcome as it does remind us of the need to develop a new model for EU integration in light of changing economic, political and economic circumstances – one that is better at reconciling different democratic decisions in member states with EU cooperation. This is a debate that should be in everyone’s interest to have under way.

Nick Clegg’s opposition to renegotiation could risk the UK’s EU membership

Following Nick Clegg's Europe speech at Chatham House yesterday, we argued on the Spectator's Coffee House blog,

Nick Clegg this morning fell into the usual ‘all or nothing’ fallacy on Europe. He said: ‘As soon as we start talking about repatriation, we descend into the in-versus-out debate.’ But the Deputy Prime Minister is wrong: the in/out debate is already underway, and rather than seek to defend the unpopular status quo, Nick Clegg should back renegotiation as the best option for those who wish to put the UK’s membership on a stable democratic footing.

But instead of attempting to address the causes for the EU’s unpopularity, the inflated budget, democracy deficit and bureaucracy etc. Nick Clegg sought to channel the debate into his own in/out debate where the problems of ‘out’ justify doing nothing about the problems of ‘in’.

Clegg said that UK can either be a full member of the EU or outside, like Norway and Switzerland. He is right that Norway as a member of the EEA does indeed implement a large proportion of EU law over which it has little influence and that Switzerland does not have full access for its services industries. He also pointed out that with no EU deal ‘firms who currently pay no import tariffs on the goods they send to the continent would be faced with taxes of up to 22 per cent’.  It is actually more like 10 per cent but the point is the same. However, protesting that no one is suggesting joining the EEA or not having a free trade deal with the EU is missing the point. Nick Clegg is presenting a false choice.

There is not one standard EU membership. The UK is not in the Schengen travel area, others are. The UK has a different deal on EU crime and police law than Denmark, which is fully opted out. There are neutral states and those involved in EU defence, there is the euro, the list goes on. But for Clegg there are only two types.

‘There’s the core: where the Eurozone countries are now pulling together more closely… Then there is the ring around that… And the outer circle… The UK is in the inner circle – but the terrain is shifting. The core is tightening – to what degree we don’t yet know.’

Clegg believes we should remain ‘a strong UK, influential in Europe’, but does not define what he wants to influence or convincingly explain why we should be in anything beyond the single market and some absolutely vital cross-border measures. Clegg’s reasoning:

‘What kind of club gives you a full pass, with all the perks, but doesn’t expect you to pay the full membership fee or abide by all the rules?’

This is an odd justification for the EU’s Common Agricultural Policy, Common Fisheries Policy, social and employment regulation, wasteful regional policy and unnecessary loss of democratic control. Are these accepted as some bizarre self-imposed flagellation for daring to desire free trade? If so, why not just accept a rise in the EU budget and get on with it? It’s the ‘subscription’ fee after all.

So what should the UK aim for? In a recent paper we set out that for now the UK benefits from being in the EU’s customs union and single market for good and services but that all other areas should be decided on a case by case basis. Is this pick -and-mix EU possible? Yes. The EU, as Clegg acknowledges, is changing. The eurozone is renegotiating its membership terms, and the treaties will need to be revisited sooner or later. This will present the UK with the opportunity to reform its membership terms and put it on a stable democratic foundation in line with public opinion.

A new eurozone parliament?

This morning, Handelsblatt is reporting that EU Council President Herman Van Rompuy, Commission President José Manuel Barroso, Eurogroup chief Jean-Claude Juncker, and ECB President Mario Draghi's plans to redesign the architecture of the economic and monetary union include the prospect of a new 'eurozone parliament'.

The details are understandably vague but, according the German daily's report, the new parliament, in which both MEPs and national parliamentarians would sit, would have powers over eurozone members’ fiscal and economic policy. Whether the EU will need yet another building for this is yet to be addressed...

Nevertheless, the proposal, if it ever sees the light of day, will be hugely controversial with both euro and non-euro members and would of course require Treaty change.

In addition, Van Rompuy and Barroso need reminding that they represent the 27 member EU and not simply the eurozone and that any brief to restructure the eurozone needs to square this with the EU as a whole and the requirements of the single market. Additionally, as we have argued, the UK must ensure that any grand eurozone plans such as these are a quid pro quo for establishing a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave.

This might then provide a new form of membership that the UK could live with in the long term.

Three big 'excepts'

Except for fishing, farming, and the euro, Norway is practically speaking already part of the EU’s inner market. The only thing it lacks is the right of co-determination.

- Norwegian Conservative MP Nikolai Astrup takes issue with polling-results showing that a record 65.9% of his fellow countrymen are giving thumbs down to Norway joining the EU (only 22.5% in favour).

There are arguments for and against Norway joining the EU. But fishing, farming and the euro are three pretty big 'excepts'...