Labour and ‘Europe’: substance or party politics?

Open Europe has just returned from holding two fringe events at the Labour Party Conference (write ups of these to follow here), an occasion that can be a useful barometer for assessing opinion within the party.

Shadow Foreign Secretary Douglas Alexander used our joint event with BNE and CER to state that “there is almost total unanimity for Britain’s continued membership in the European Union.” And, though Alexander made several valid points (including the Tories' poor handling of the announcement of the 2014 EU JHA block opt-out) it's clear that in large part, Europe simply remains a stick with which to beat the Tories. Shadow Cabinet Minister Jim Murphy’s suggestion that, “at some point, there will have to be a referendum on the EU” would seemingly fall into that category. Mr Murphy added "My preference would be an in-or-out referendum when the time comes” and that “almost everyone” in the Labour Party would campaign to stay in the EU, “because it is good for our economy and good for Britain”.

It must be extremely tempting for Labour to go for that in / out referendum and witness the Tories tearing themselves apart (or so the thinking goes). But a) that's hardly a noble motive for putting a hugely important issue to the people (Labour likes to talk about putting national interest before party) and b) it would be an absolutely massive gamble: if held now, the "in" side would almost certainly win, but in 2015-16, all kinds of unpredictable stuff could have happened in Europe that would change the equation. The dropping popularity of Hollande and Rajoy, just months after entering office, is a reminder that 'political honeymoons' are shortlived in European politics these days. Therefore, even calling a referendum right after being elected is no guarantee.

There was much talk of lost ‘influence’ at the conference but little of substance to suggest how Labour’s approach would be different to the current government on the fundamental issues such as the fiscal treaty (would the party opposed to 'mindless austerity' really want to sign a treaty enshrining the doctrine?), the EU budget (Labour recognise the need for reform as do the Lib Dems and the Conservatives), and banking union (Although it does not necessary like to admit it, a Labour government would need to go out to bat for the City in Europe).

However, encouragingly, there are some senior figures in the party who are willing to enter into a debate about the future of the EU. Shadow Treasury Minister Chris Leslie told our joint fringe meeting that the tensions between Eurozone-level decision making and national democracy were “at risk of undermining the European settlement.” He added that the Eurozone needed to find an answer to the question of how to “hold accountable those who make executive decisions in the Eurozone.”

He said that the continuing EU budget negotiations were the “next big diplomatic test” for the UK and that he was disappointed that there was not enough focus on the content of the budget – an argument we have made both of the CAP but also the Structural Funds, where a previous Labour Government policy would actually save the UK around £4bn over the budget period and better focus the remaining EU funds. In contrast, the current government has taken a somewhat less assertive approach (contrary to popular belief).

Cameron should veto the EU budget unless he gets a better deal

On the Telegraph blog, we argue:

At a meeting of Europe ministers today, the UK government is set to be outvoted on the size of the EU’s 2013 budget. Having pushed for a freeze without a last-minute deal, Britain will be forced to accept a 2.8 per cent increase. This is a compromise position that gives scant consolation to UK taxpayers who will have to fork out an additional £350 million for no good reason whatsoever. Unbelievably, the Commission and some member states were pushing for a 6.8 per cent increase.

Decisions on the annual budget are decided by so-called qualified majority voting system (QMV) with the European Parliament also having to give its assent. This is the issue on which the UK is set to get stuffed this week. However, each member state has a veto over the EU’s long-term budget – known in Brussels speak as a Multiannual Framework (MFF) – which usually covers a seven-year period.  This underlines how incredibly important it is for the UK government to utilise its veto to get the EU’s long-term budget right.
Unfortunately, in talks over the EU's long-term budget (set to run between 2014 and 2020) – also up for negotiation at the moment – the UK is merely pushing for a freeze to overall spending. While this strategy has some merits, it won’t achieve anything above and beyond what could be achieved by simply vetoing the MFF. This is because under EU rules, if a new deal over the MFF can’t be reached, the previous year’s budget is carried over, adjusted to inflation – exactly the real terms freeze that the government is currently pushing for. This is not a shrewd negotiating strategy.

So what should the UK government do instead?

There is no shortage of EU spending areas to reform. For example, it’s madness that, as Europe grapples with a solvency, competitiveness and banking crisis – all at once – around one-third of the EU budget still goes towards subsidising landowners, irrespective of whether they’re engaged in any meaningful economic activity.

But the UK government would secure a hugely disproportionate benefit by one simple move: repatriating the EU’s so-called structural funds back to Britain and other wealthy states. The structural funds are meant to help poorer regions catch up with richer ones, but in reality a large portion of the money is merely being recycled between some of Europe’s richer regions and countries, and spent on projects with little, no or negative comparable impact. Of the 37 regions under the EU’s classification system, 35 pay more in to the system than what they get back. This means that many disadvantaged UK regions – such as the West Midlands and Northern Ireland – end up as net contributors.

As argued for by the previous Labour government, and as recommended by the Commons Local Government Select Committee (alas, only from 2020), the UK should push for the repatriation of these funds for member states with a GDP of 90 per cent or above the EU average. This would achieve the following:
UK taxpayers could save almost £13 billion gross, and £4 billion net over seven years and the overall size of the EU budget is reduced by 15 per cent

-23 out of 27 EU member states would pay less into the EU budget, with France gaining the most (around €12 billion over seven years)
-All post-communist member states that joined in 2004 and 2007 would do better from the funds
-By streamlining and slimming down the funds, they could become far better tailored around regions’ individual needs
-The government, and Mr Cameron in particular, would get instant credibility on Europe

Those countries that would lose out – Spain, Italy and Greece –need a different kind of financial support to that currently is offered by the funds anyway. For example, 30 per cent of the funds in Spain still go towards roads and infrastructure – the opposite of what the country with its bust construction sector needs. This would be the best opportunity of putting this right.

In terms of a simple and easy to communicate policy proposal, this is an open goal. In terms of negotiation dynamics, despite it only ever being able to deliver a freeze, as opposed to an end to UK payments, Britain’s veto is still powerful. Not having a new MFF in place would be extremely messy and most member states, including the new ones that want a new deal to benefit from phased-in farm subsidies, have huge incentives to strike a new bargain. The UK will almost certainly get something substantial in return if it sticks to its guns.
Mr Cameron would waste a perfectly good EU veto – and a chance for a massive credibility boost on Europe – by letting this one slide.

Campaign to devolve EU regional policy gathers momentum

Last Friday, the Parliamentary Select Committee for Communities and Local Government's inquiry into the European Regional Development Fund, to which Open Europe submitted both written and oral evidence, published its final report. Among others, the report recommended that:

“We support the principle of repatriating regional policy funding, provided funding could be protected and ring-fenced over the long-term to ensure that the poorest English regions continued to receive the same level of support they would have received under the current system.” 

 In our recent report on the subject, Open Europe recommended that:

"Limiting EU regional spending to poorer countries [GDP below 90% of the EU average] would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.” 

We are therefore delighted that MPs accepted the central tenet of our recommendations, especially as Open Europe was the only organisation profoundly critical of the status quo to submit evidence. However, we consider that there is a realistic prospect of the government being able to secure this reform in 2014 – and that the government should be prepared to veto the next MFF, currently up for negotiation, in order to make this demand more credible – whereas the Committee sees this as an objective for 2020 and beyond.

Just to briefly recap the arguments why the reform would be a win-win for the UK and Europe:

• While it can generate added value in individual cases, involving all member states in EU regional spending, irrespective of their relative wealth, is economically irrational. In richer member states, the structural funds mostly serve to redistribute income within the same regions. As the Commission itself has admitted, this exercise creates “considerable administrative and opportunity costs”;
• Over the 2007-2013 EU budgetary period, the UK is contributing roughly £29.5bn to the funds, and getting back around £8.7bn. Of the 37 regions in Britain under the EU’s classification system, 35 are net contributors to the structural funds, with only West Wales and Cornwall net beneficiaries. Some relatively poor areas lose out substantially; for example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 to the structural funds for every £1 it gets back;
• Limiting the structural funds to poorer countries would result in 23 out of 27 EU countries paying less into the EU budget than at present. - all new EU member states would be better off. The UK would save around £4bn net over seven years in addition to the £8.7bn it currently gets back through the structural funds. This option could therefore attract strong political support in many capitals, especially given the current need for governments to make savings;
• Domestically, it could enjoy cross-party support given that it was originally a policy championed by the previous Labour government, and areas represented by Labour MPs stand to be the biggest winners under this reform. 

All in all, the campaign to reform EU regional policy is gathering momentum...

Britain should not ape Norway - but new EU membership terms are fully possible

In today's Telegraph, we argue,

During Prohibition in America, the bootleggers and Baptists found themselves in an unholy alliance. One liked Prohibition for commercial reasons, the other backed it due to religious conviction. The alliance proved short-lived. A similar union has now grown up between certain Europhiles and Eurosceptics. Both say that renegotiating new EU membership terms for Britain is impossible: one group because it thinks the status quo in Europe should prevail, the other because it thinks the UK should leave the EU altogether. Both positions miss the point.



From Open Europe "Trading Places" report.

The argument the Eurosceptics make is that Britain should “become like Norway”, i.e. leave the EU and join its more detached cousin, the European Economic Area. But this would actually be a much worse deal than the existing relationship. First, Norway is almost as much of an EU member as Britain is, implementing roughly 75 per cent of all EU laws, from labour market rules (such as the working time directive) to crime and policing measures.

Second, despite being forced to accept all these laws, Oslo has no representation in the EU’s institutions and virtually no way of influencing the decision-making process to reflect its national interests. Should Britain “become like Norway”, it would be home to 36 per cent of Europe’s retail finance market, but with no say over huge swathes of regulation governing that market. And it would have to accept EU employment law – currently costing UK employers £8.6 billion a year – but with no way of influencing it. The net effect would be less opportunity to hold Brussels to account, not more.

Finally, Norwegian companies face extra costs when selling manufactured goods to Europe, stemming from the EU’s arcane “Rules of Origin”, which impose a tariff on any imports that contain components from outside the EU, and lots of extra paperwork. This has been acceptable to Norway, since 62 per cent of its goods exports come in the form of fish or natural resources, which are not affected by these rules. Applied to the UK – its car manufacturing or pharmaceuticals industries – it would bring sudden additional costs and a competitive disadvantage.

In return for its deal, Norway gets control over its farming and fishing industries. This has economic benefits and helps the country manage and maintain its heritage. But fishing and farming only account for 0.7 per cent of UK GDP. As maddening as the EU’s policies covering these two areas are, would the trade-off really be in the UK’s interests? Pursuing a “Swiss model” – based on a cobweb of bilateral agreements – might be a slightly better fit, but it would present similar problems, for example limited access to the Single Market for the UK’s large services sector.

Europhiles are equally wrong in thinking that the status quo is an option. Whether the eurozone integrates further or breaks up, the rules of the game will change. It is clear that the British public will never accept being dragged deeper into a centralised EU.

As the newly launched Fresh Start group of Tory MPs argued yesterday, Britain should set out a new vision for its place in the EU. This should allow countries to integrate with each other to different degrees. To avoid the pitfalls of the Norwegian model, Britain must not only maintain access to the internal market for goods and services, but also a vote on making the rules, and therefore remain an EU member. But it could take a pick and mix approach in other areas, including retaining its opt-in arrangement on EU policing laws, while participating in a better-targeted EU budget and some environmental measures.

As Europe goes through profound political changes in the wake of the crisis, Britain will have plenty of opportunities to advance this position, including in budget talks and future treaty negotiations, over which it will have vetoes. Once new terms have been agreed, they could confidently be put to the electorate in a referendum.

But to show he can be trusted on Europe – and to avoid a stinging defeat at the 2014 European elections at the hands of Ukip – David Cameron must get to work right away. First, in the ongoing talks over the EU’s long-term budget, he should use his veto to insist on UK economic support being limited to the poorer member states, ending the irrational redistribution of money among richer countries. This would save taxpayers billions. Second, under a loophole in EU law, he could instantly bring more than 100 crime and policing laws back under the control of MPs. Last, as the eurozone presses ahead with a “banking union”, he is right to explore safeguards against its 17 members writing rules for all 27 EU states.

Contrary to what reform-sceptics on both sides say, Britain has leverage in Europe. If the choice is between the UK leaving or getting some powers back, liberal, northern EU countries in particular may – after a lot of posturing and negotiation – go for the latter. The alternative would be losing a key ally in upholding a rules-based system of liberal trade as Europe goes through a highly defensive phase. Germany fears a Mediterranean-dominated EU as much as anyone.

Britain is one of the world’s largest economies, and therefore a major market for other member states, a huge contributor to the EU budget, a powerful military force and a global leader in finance. It lends clout and reach to the EU in world affairs. If it makes the effort, it will most certainly achieve a better deal for both itself and for Europe as a whole.