Tim Congdon

The dawning of a new Europe

France and Germany have lost the war, says Tim Congdon, and it is now time for Britain to help create a new European Free Trade Area that includes Russia and Turkey

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By accident the war in Iraq has given Britain the opportunity to rethink and to recast its relationship with Europe. It has shown that an understanding between two nations provides and, since the mid-1950s, always has provided the emotional core of the European Union. This is an understanding between its two leading original members – France and Germany – to create a new power with a distinctive voice in world affairs.

For most of the last 45 years France and Germany have had the good sense to play second fiddle in world affairs to the United States of America and its close diplomatic and intelligence partner, the United Kingdom. But Chirac and Schröder, and their foreign ministers de Villepin and Fischer, have now committed a blunder of the first order. The USA and the UK have been joint sponsors of the hugely successful postwar international order they created in 1944 and 1945, even if their relationship has been largely tacit and not always cordial. By challenging the Anglo-American entente – which has been the key to the peace and prosperity of the postwar period – France and Germany have made themselves look shabby and unreliable.

It will take a few years before France and Germany are fully respectable again in Washington. Attitudes in London are more complex, but for the time being the notion of a common European foreign and defence policy is laughable. Even the most ardent Europhiles in Mr Blair's government have to agree that, as far as Britain is concerned, the goalposts have moved. European federalism is more distant and less attractive.

Yet Giscard d' Estaing's Convention has thrown down another challenge. Just as wider international events have made increased European integration less acceptable, the Convention has tried to move the goalposts in the opposite direction, towards an immediate and all-embracing federalism. If Britain were to endorse the new proposals for a European Constitution, it would cease to be an independent sovereign nation. In any meaningful sense its government would no longer have control of its own armed forces, its own intelligence capability and its own diplomatic destiny. One blessing from recent developments is that the Foreign Office – whose Europhilia has been so expensive to Britain over the last 40 years – must have seen that it would no longer have a job if the UK were to accept the Giscard d'Estaing scheme. Even Mr Blair has said that there will be a 'reckoning' between America and Europe after Iraq. He seems likely to say 'no' to the new European Constitution.

But whether Mr Blair's 'no' is loud and well expressed remains to be seen. It is time to go much further. Britain joined the European Economic Community or 'Common Market' (as it was then called) in 1973 because of economic weakness. Its national output had grown more slowly than that of its European neighbours for a generation, while many economists claimed that its laggard position stemmed from its failure to join the EEC. (The argument that non-membership of the EEC was the cause of the UK's slow growth was controversial and almost certainly wrong, but it was widely believed.) Advocates of EEC membership warned that, if the UK stayed outside, it risked becoming impoverished and marginal relative to an increasingly important Europe. At any rate, the UK joined, and it did not become impoverished and marginal. At the start of the 21st century its economy is the fourth largest in the world and the second largest in the EU, and its living standards are similar to or a shade higher than the EU average.

The truth is that the UK has never liked the idea of a European superstate in which its own national identity would be submerged. Most British people, and a clear majority of its political elite, regard themselves as British (or possibly English, Scottish or Welsh) first and foremost, and not as European. They have supported the EU because membership was seen as giving a larger market for UK industry, and so promoting trade and improving living standards.

But the world today is very different from 1973. Thirty years ago most of the industrial world and virtually all of the developing world had significant non-tariff barriers to trade and high import duties. The industrial free trade that was already far advanced in the EEC was exceptional and therefore very attractive to Britain's policy-makers. But nowadays both tariff and non-tariff barriers to trade have been largely eliminated in the industrial world (including North America, Japan and Australasia, as well as Europe), while many countries in the developing world – notably China – have made dramatic shifts towards trade liberalisation. The world as a whole is still far from being one huge industrial free-trade area, but a reasonable conjecture is that it will move closer to that over the next 20 or 30 years.

While industrial free trade is no longer a particular benefit of European involvement, the EU has kept two distinctive policies which the UK has never liked. The first – the Common Agricultural Policy – is almost universally judged to be inefficient and expensive for Europe's consumers, and to wreak havoc in the world market for agricultural produce. The second – the Common Fisheries Policy – is an even worse affront to British national pride. It was not part of the original Common Market in the 1960s, but was instead devised by the French in the negotiations in the early 1970s when they knew that the British government was too feeble to reject almost anything. With the longest coastline of any European nation, Britain had the most to lose from making fishing policy a competence of the EEC. Shamefully and unnecessarily, Britain has indeed lost the most.

But perhaps the most pressing reason for the UK to reassess the economic case for European involvement stems from the sharp change in its neighbours' performance. In the 1950s and 1960s output growth in most European countries was two or three times as fast as in the UK. But in the 1990s British growth was slightly higher, while Europe as a whole was outpaced by newly industrialising Asian countries, including China. Over the next 50 years the European share of world trade and output will shrink. Germany and Italy in particular are threatened by a poor demographic outlook, with rising numbers of elderly dependants and a declining population of working age. But all European nations (including the UK) face similar problems to some degree and have recorded mediocre productivity growth in recent years. The European model of a large welfare state, with high taxation, powerful trade unions and regulated labour markets, is a flop. The European share in British trade has started to decline and will keep on declining over the next few decades.

The question has to be asked, 'Why does the UK have to pay the costs of the CAP and suffer the indignities of the CFP in order to be associated with a group of nations which are both economically unsuccessful and will take a diminishing share of its exports over the next few decades?' It cannot be because Britain wants to participate in a common European defence and foreign policy, as the diplomatic shambles of recent weeks has discredited that option; it cannot be because Britain wants to abandon its currency and introduce the euro, as opinion polls show a decisive majority in favour of keeping the pound; and it cannot be because Britain wants to be absorbed into a European political superstate, as European federalism has been and remains unpopular at all levels.

The message has to be that – putting sentiment and treaty obligations to one side – the case for continued British membership of the EU is weaker today than it has ever been. The economic case has become less convincing and, crucially, will continue to lose ground; the political case never had many converts in the UK, and even they are likely to become more cautious after recent French and German conduct. The challenge is to propose a policy that will give the UK the benefits of distancing itself from further integration in the EU, while retaining those benefits of membership which really matter (i.e., industrial free trade). Of course, it should stay on friendly terms with all the nations of Europe. The proposal has to be positive, forward-looking and internationalist if it is to succeed in the public debate; it will get nowhere if it is small-minded, nostalgic and blimpish.

Back in the late 1950s the then members of the Organisation for European Economic Co-operation planned a free trade area to which all OEEC countries – both those within the European Common Market and those outside – could belong. (The Common Market countries would join, but would act as a single unit.) Unfortunately, negotiations broke down. The outside countries – including the UK – proceeded to form a separate free trade, the European Free Trade Area. Efta still exists, although today its membership consists of only four small countries: Switzerland, Norway, Iceland and Liechtenstein. These four members are much richer than the EU and have enjoyed higher economic growth over the last decade. They have lost nothing whatever from staying 'outside the club' and, bluntly, neither would have Britain if that had been its choice back in the 1970s.

The Giscard d'Estaing proposals are unacceptable to more than 80 per cent of so-called 'informed' British opinion and more than 90 per cent of the public at large. We have reached a critical moment. Britain should react in two ways. First, it should advocate a new Efta to include all the existing members of the EU and Efta, plus Russia and Turkey. The UK would belong to this new and much expanded Efta which would have no ambitions to be anything more than a customs union. Second, it should make clear to other members of the EU that free trade and economic interaction are the purposes of its involvement with them, and that it is not interested in political union. Britain therefore proposes to renegotiate the existing treaties, and to withdraw as soon as practicable from the CAP and the CFP, and from the financing of the Structural Funds. (It goes without saying that the repeal of the Single European Act, and of the legislation relating to the Maastricht, Amsterdam and Nice treaties, would be part of the process of renegotiation. The 1972 legislation on the UK's accession to the Common Market might remain on the statute book while the renegotiation was under way, although this would be largely a matter of form.)

Europhiles – although now outnumbered and embarrassed – might say that these proposals are extreme. After all, they amount to 'withdrawal from Europe'. The answer is that they would indeed amount to the ending of the UK's involvement in European political integration under EU auspices; they would be a withdrawal from that aspect of 'Europe'. But will the Europhiles (or rather the EU-ophiles) never understand that the EU is not the same thing as Europe? The truth is that the EU is only part of Europe. France and Germany would resist political integration if that were to involve Russia and Turkey, because they have too many people and, potentially, too much economic power. The EU will never embrace the whole of Europe.

The UK can never 'withdraw from Europe', just as it can never withdraw from planet Earth. Europe is our neighbour, and the British government can no more curtail economic and financial contact with the Continent than it can move the land-mass of the British Isles to somewhere in the Caribbean or the Indian Ocean. But it can try to ensure that these inevitably extensive contacts take place in a form that respects its national interests. The objective of a new European Free Trade Area – to which Russia and Turkey would be invited – would be a better and larger Europe. British economic integration with the rest of Europe could be taken further than ever before, but the UK would retain its political independence, its cultural identity, its own constitution, and its separate diplomatic and military capability.