This is the text of a talk given by Dan Atkinson to the Economic Research Council on 7 November 2016.
David Cameron’s January 2013 offer of an in/out referendum did not arrive out of the blue. Rather, it was the result of two intertwined developments that added up to British disillusionment with European Union membership.
The first was the tarnishing of the European ‘economic miracle’ in the wake of the launch of the single currency in January 1999. No longer were the continent’s major economies self-evidently superior to Britain.
The second was what we believe was the growing realisation that the constitutional arrangements of the EU, as they had developed from the mid 1980s onwards, did not suit either the mood or the mechanisms of British politics and the British people.
To start with the economic point. It is hard from the perspective of 2016 to recall that, very recently, membership of the single currency was being sold to the British on the same basis as had been membership of the European Community, later European Union, and the European Exchange Rate Mechanism: that it was an opportunity to import wholesale the winning ways of continental economies, specifically Germany.
Rather as ready-made ‘Irish pubs’ can be assembled from kits delivered to anywhere in the world, German-style industrial and economic success could be transmitted to the United Kingdom through the medium of the single currency.
This argument had worked in 1973 and 1975, in relation to Community membership. It had worked in 1990 with regard to joining the ERM. It did not work at the turn of the Millennium in relation to joining the euro.
A couple of reasons, I would argue. First, Britain’s decision to sit out the ‘first wave’ of membership created the space in which the public could observe that the ‘miracle’ economies were looking somewhat less miraculous. Slow growth in the ‘core’ euro-zone was matched by wild booms in the periphery, notably Spain, Ireland and Greece, the inevitable product of a single interest rate that was appropriate for no country in particular.
By the time of Tony Blair’s third election victory, in 2005, it had become clear that the predictions of disaster in the event that Britain failed to sign up for economic and monetary union had been wide of the mark. What had in fact taken place was the conventional opening up of an exchange rate between sterling and the euro. Trade and investment had taken place across that exchange rate, in the normal way.
The City had not decamped to Frankfurt. The big motor companies that had moved into the UK in recent years such as Nissan and Toyota had not upped sticks for the single currency bloc. Britain’s place on the world stage had not been hopelessly compromised by its miserable failure to apply to join this chic new international club or, to mix metaphors, to take its seat at the top table.
Indeed, the UK’s highly controversial involvement in the March 2003 invasion of Iraq and subsequent occupation suggested no connection between a high-profile international role and membership of the single-currency bloc.
We argue, in fact, that Mr Blair, aware that even he enjoyed only a limited amount of political capital, chose to spend it on Iraq rather than what would probably have been an unsuccessful attempt to persuade the British to vote in a referendum to join the euro. Apart from anything else, the Iraq war needed only a simple vote in Parliament – the public’s consent was not required.
During the run-up to the financial crisis and Great Recession, the set-piece example of the euro-zone’s difficulties was its number-two economy, France. Presidents Chirac and Sarkozy, accounting between them for seventeen years of centre-right rule, seemed unable to decide whether they were tough-minded reformers or preservers of ‘Republican values’ and the French social model.
Strikes and riots at the mere suggestion of the trimming of long-established entitlements gave the British a picture of France that was doubtless as misleading as the view abroad of 1970s Britain as a strike-bound basket case. But it was hard to square Gaullist dithering on the economy with the much-admired country whose superb express trains, hyper-productive industries, ungrudging arts subsidies and peerless education system were held up in the 1980s as an example for Britain to follow – not least by emulating France’s full-hearted commitment to European integration.
Germany, the other engine of European integration, pressed ahead with the sort of labour-market reforms that France, rightly or wrongly, ducked. But freeing up employment regulations and making out-of-work benefits less attractive was unlikely to prove particularly inspiring in the UK, which had very much been there and done that already.
Britain, of course, had its own very serious economic weaknesses at this time: a huge build-up of private debt, an over-reliance on financial services and property speculation, and a chronic current-account deficit, this last still very much with us. The point is not that Britain was a shining example of economic probity, but rather that when it came to ways and means by which the weaknesses could be addressed, there was little inspiration on the other side of the Channel.
In fact, there was a blink-and-you-miss-it revival of the old-time euro-religion in the immediate wake of the August 2007 credit crunch and subsequent financial crisis, when it was suggested that the issue of UK euro membership could be back on the agenda. The credit crunch, we were told, had exposed the flaws of Anglo-Saxon capitalism. This was very much a British and American-incubated crisis.
Such a line of argument rather overlooked the fact that the credit crunch was triggered on 9 August 2007 by the distinctly non Anglo-Saxon BNP Paribas suspending three of its investment funds. And talk of the superiority of continental financial arrangements faded after huge problems were disclosed in French, German and Italian banks.
Once the ructions in the single currency bloc started to gain traction at the start of the current decade, it became painfully clear that those of us who had argued all along that the euro was not – and never could be – a progressive project were being proved right.
Furthermore, as the crisis in the euro-zone ground on, year after year, with bailout and austerity regimes for Ireland, Portugal, Cyprus and, infamously, Greece, the now-dormant issue of British membership of the single currency gave way to the – from the point of view of the British establishment – more ominous question of whether the UK would remain an EU member at all.
Before moving into the current decade and the road to the June 23 referendum result, I’d like to pause a moment and look beyond the proximate cause of the euro-zone’s lack of appeal in Britain at this time – its economic sluggishness and mishandling of the financial crisis – and go briefly back to what may have proved to be a decisive factor in both keeping Britain out of the single currency: the ERM experience.
The point about Britain’s experience of the ERM is that the consequent unemployment, house repossessions and business failures effectively inoculated huge swathes of the public against arguments for more European integration. Precisely the same people who had enthused about ERM membership were now either openly extolling the benefits of abolishing the pound and joining the single currency, or were calling for the option to ‘remain on the table’ and for the country to ‘prepare and decide’.
This time round, however (in the phrase later to be made famous by Michael Gove) people had had enough of experts.
I ought to say at this point that my co-author and fellow speaker tonight [Larry Elliott of the Guardian] spotted the long-run impact of the ERM experience well before I did. Unlike him, I assumed the pro-euro lobby would be able to rely on fading memories to have at least a fighting chance of bamboozling Britain into the single currency.
After all, joining the ERM was quite popular in October 1990 when we signed up. Less than a year after the fall of the Berlin Wall it seemed the tide of history was carrying us in one direction only.
Nor was there any guarantee that the unpopularity of the European project in the wake of the ERM recession would not be replaced by renewed public enthusiasm, especially if articulated by a charismatic leader such as Tony Blair.
As it happened, I was wrong – and am pleased to have been so.
This, then, is the economic background to David Cameron’s January 2013 referendum pledge and beyond. But there is, I believe, a constitutional background as well.
Prior to the 1986 Single European Act, which brought about the single-market regime, the mechanisms of the European Community were of little interest to most people. Deliberations in Brussels about the ‘green pound’ and pig-meat subsidies were a guaranteed turn-off.
More to the point, the machinery of Community decision-making seemed to impinge little on either the government or the people of Britain. Elections to the European Parliament attracted low voter turnout and most people neither knew nor cared about the identity of their MEP. Such controversy as was generated by Community membership sprang from two sources: the unfairness of Britain’s club membership fees and figures purporting to show that ‘the housewife’ was being rooked on her shopping bills thanks to ‘the Common Market’.
All that changed from the late eighties onwards and, for all the talk of ‘subsidiarity’, it changed in one direction only. Those [2010-15] coalition ministers who had served in government in the John Major years were reportedly astonished as to the extent to which the EU had inserted itself into Whitehall decision-making in the intervening 13 years.
This may have mattered less had the machinery of EU government resembled more closely the UK’s constitutional arrangements. Instead, British observers were confronted with quite alien structures – a parliament that is not really a parliament; five presidents, none of whom is actually a president; a council of ministers that is rather more like a parliament than is the parliament itself, although it meets behind closed doors, and ‘trialogues’ among the various rival power centres.
All this without mentioning either the Court of Justice that is charged with always finding in favour of ‘more Europe’ rather than less, and the Commission, a sort-of civil service with a monopoly on proposing legislation.
Just as by 2016, the economics of the EU’s flagship project, the euro, were shown to have had dire consequences, quite at odds with the talk of shiny progressive internationalism that had accompanied its launch, so by the time of the referendum had the endlessly-repeated promises that the EU was ‘going to do less and do it better’ been shown to be utterly false.
For example, the programme of the current Slovakian presidency of the EU runs to 34 pages. Its ‘priorities’ include the following: ‘developing the talent and potential of young people by introducing attractive approaches in youth work’; ‘the mutual recognition of qualifications of workers’ on inland waterways, and ‘measures to support young researchers with a focus on increasing the attractiveness of scientific careers’.
As with the euro, the EU’s governance cannot be reformed. Sufficient numbers of people recognised this on 23 Jun. Years of lies about how ‘the argument in Brussels is going Britain’s way’ would no longer wash.
Now the EU is to lose one of its four members of the Group of Seven rich nations and one of its two nuclear powers.
What happens now?
Shorn of nay-saying Britain, the EU could seek to put the single market under a single government, to create a new state with its own armed forces, cabinet, welfare system, a parliament that really is a parliament and a president who really is a president.
Such a course would hit the immediate obstacle of the redundancy of 27 heads of government and heads of state, many of whom are likely to object to the indignity of being bundled out of the exit. More profoundly, the negotiations needed to create such an entity would be tortuous in the extreme.
An alternative would be to devolve into a looser grouping, to ditch the EU’s federalist pretensions and instead focus on three or four core areas in which Brussels would have deep but limited powers. Perhaps trade, the environment and competition policy. The euro would have to be one of those areas, but the euro is at the heart of the EU’s crisis.
It may, of course, be possible to do both, with a core group of countries pressing ahead with political integration and the periphery remaining outside. Already there are the six east-European countries that are obliged to join the euro at some point but which show no sign of doing so, and two countries (Denmark and Sweden) that have chosen not to join.
The trouble is that this eight-strong periphery would leave Greece, Italy and other countries that have shown themselves unsuited to membership inside the ‘core’.
There are no easy solutions. There may ultimately prove to be no difficult ones either. The single currency was the most obvious manifestation of a huge wrong turning after the events of 1989. Now the people of the euro-zone are crawling from the wreckage.