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IEP Lunch Debate with Ian Begg and Lord Flight: “The United Kingdom and a Genuine Economic and Monetary Union”

Within the framework of the IEP lunch debates Professor Iain Begg from the London School of Economics and Lord Howard Flight, Conser­v­ative member of the House of Lords and the EU Sub-Committee A — Economic and Financial Affairs, discussed “The United Kingdom and a Genuine Economic and Monetary Union” at the Repre­sen­tation of the European Commission in Berlin on 7 November 2013. Lord Viscount Brooke­borough and Lord Davies of Stamford contributed to the subse­quent discus­sions since they altogether formed part of a delegation of the House of Lords’ EU Sub Committee Economic and Financial Affairs to Berlin. Prof. Dr. Mathias Jopp, director of the Institut für Europäische Politik, moderated the event.

Professor Iain Begg summa­rized the key messages of the British debate on the Ecomonic and Monetary Union (EMU). In the UK’s opinion, the EU needed to improve its strategy to resolve the current crisis. However, since the UK was not part of the Eurzone where the main problems have taken their origin the UK was not prepared to contribute to nor willing to pay the price of necessary reforms. Partic­u­larly, large parts of the British economy opposed new rules that could lead to regulation of the City and weakening of the Single Market.

From the British perspective, the output legit­imacy of the EMU was being under­mined. Hence, the British advice to Brussels would be to “do less more effec­tively” rather than to regulate too much too strongly. This would include taking new global challenges and partic­u­larly China seriously. According to Professor Begg, this British position regarding the need for reforming the EU’s economic gover­nance was shared by German opinions.

For a deeper under­standing of the British perception of a Genuine Economic and Monetary Union, Professor Begg summa­rized the opinions voiced by different economic groups, i.e. the City of London, big exporters and smaller domestic companies, as well as by the government and tax payers. 84% of CEOs in the City of London were in favor of the UK remaining part of the European Union without a specific opinion on British partic­i­pation in EMU: the City would do well inside or outside the GEMU, according to Professor Begg. However, repre­sen­ta­tives of the City realized the need for the UK to increase its engagement in the EU. By contrast, the big exporters worried about new rules that could affect the UK, and smaller domestic enter­prises wished for a harder line of the British government towards the EU in order to protect them against excessive inter­ference by Brussels, especially on employment rules. The Government as well as tax payers were in favor of the euro-zone, but they did not want to pay for it. Hence, there was a strong resis­tance towards more financial burdens.

In Professor Begg’s opinion, the British Prime Minister David Cameron was very successful in recon­ciling these different positions in the speech on Europe that he delivered in January 2013. While he subdued euro-sceptics he also appeared constructive to the other EU member states. His focus on reforming the EU was favorably received in Berlin, although he attempted to define the single market as core of the EU. The refer­endum that he proposed, however, might actually backfire because it might lead to a British exit – a ‘brexit’ in Professor Begg’s words. Partic­u­larly, the deeper integration in the eurozone and the fiscal compact might motivate the British population to vote for such a ‘brexit’. Professor Begg concluded by pointing out that the UK’s European fate would also depend on the possi­bil­ities to negotiate further conces­sions for the UK (such as the question of repatri­ation of competences).

Lord Flight highlighted the diffi­culty of a single currency involving different countries and different cultures. He alluded to the German chancellor Helmut Kohl’s remark to French president Francois Mitterrand that the creation of a single currency without a political union would be a mistake. Lord Flight suggested the creation of a northern Euro – a hard Euro – and a southern Euro, which should be a softer currency and should include France.

If the euro-zone was committed to the Euro, then it should be resolute in its demand for reforms and deeper integration by following the example of the United States of America. Otherwise it would be impos­sible to sustain the single currency. Lord Flight did not think that the UK was likely to introduce the single currency in the foreseeable future but stated that that the UK would stay a semi-detached member of the EU. The UK wanted free-trade and friendly cooper­ation with its European neighbors.

He suggested that for the sake of the single currency’s future, a deval­u­ation of the Euro should be considered. In Lord Flight’s opinion, without this deval­u­ation, risks of desta­bi­lization and dangerous regimes coming into power might become reality. Especially countries like Italy, Spain and Portugal would not resolve the crisis without deval­u­ation – a situation like in the 1930s would be possible. The real problem of southern Europe was not its debts but rather the high compet­i­tiveness of Germany. Currently, Germany played a similar role in the Eurozone as China played in the world economy. Conse­quently, austerity policies could not be the solution. According to Lord Flight, these policies multi­plied the effects of the crisis on the government debt ratio. Instead, deval­u­ation, like previ­ously imple­mented in Italy, as well as lowering exchange rates, transfer payments and a relaxed monetary policy were the linchpin of the solution. However, such actions could no longer be taken individ­ually by states. In Lord Flight’s opinion, Germany needed to shift its focus and adopt a southern European perspective if Berlin wanted the euro to survive and to promote deeper integration. Otherwise, the great pressure on countries like Italy might force them to leave the euro-zone. In spite of the diffi­culties arising from the construction faults in the Eurozone, the EU would be very well advised to remain fully committed to this integration project.

In the following discussion, Lord Davies of Stamford, likewise member of the EU Sub-Committee A – Economic and Financial Affairs, stated from the audience that the whole debate followed a false premise. The Euro crisis did not exist, he said, since the Euro had maintained its value over the years. Furthermore, with regard to wages and GDP, the UK would be better off with the Euro. In his opinion, Europe did not face a currency but rather a debt and banking crisis. Lord Davies demanded therefore a search for solutions, i.e. reforming banks and adopting a trans­action tax instead of overem­pha­sizing the word “crisis”.

Lord Flight disagreed with Lord Davies as he saw the Euro as the principal source of Europe’s problems. He recog­nized similar­ities between the actual Euro crisis and the gold standard crisis in the 1930s. In his opinion, trans­action taxes would raise unreal­istic expec­ta­tions and present a major risk for the City. The latter would lose most of its business to Singapore.

To conclude, Dr. Mathias Jopp, Director of the Institute for European Politics asked the discus­sants how many jobs would be at risk if the UK left the European Union. According to Professor Begg up to 2.5 million jobs could be lost. Also he acknowl­edged a defin­ition of the options for or the conse­quences of an EU-exit was missing. While Lord Flight stated that no one knew the answer to this question, Lord Davies affirmed that if the UK would leave the EU, European invest­ments would decrease immensely.

By Jéronimo Barbin