The Core That Wasn't

Martin Hutchinson

British Prime Minister Tony Blair's Berlin summit last week with French president Jacques Chirac and German chancellor Gerhard Schroeder raised the fears of other European Union members that the three leaders were about to form a "super-core" that could preserve Franco-German dominance of the EU's agenda even after the EU expands to 25 members in May. When looked at closely, however, there is no economic basis for more than occasional agreement between the three countries. It's clear why a closer alliance is attractive for all three leaders.  For Chirac and Schroeder, the entry into the EU of ten new countries, albeit mostly small ones, changes the dynamics of the EU and reduces their ability to dominate the process.

Under the current voting structure, Germany and France together have 20 of the 87 votes in the Council of the European Union, but in their statist, Federalist moments, even when Spain and Italy are ruled by the right, they can usually rely on additional votes from Belgium (5), Greece (5), the Netherlands (5), Portugal (5), Sweden (4), Ireland (3), Finland (3) and Luxembourg (2) for a total of 52 votes out of 87, enough to preserve dominance even if a smaller ally defects on a particular issue.  (While 62 votes out of 87 are required to take a formal decision, the ability to control a simple majority is crucial in day to day activities.)

After November 2004 (there is a 6 month transitional delay), the above coalition could muster only 135 of the 321 votes at stake, nowhere near a majority. Even if you add reliable statist allies Cyprus (4) and Malta (3), together with Hungary's current leftist government (12), you get a total of 154, still less than the 161 needed for a majority.  Hence they need to add another big member to the coalition.  Poland (27 votes) would do it, but it is too unreliable and apparently heading into financial crisis, while Italy and Spain remain ruled by the right (Spain might change sides in its upcoming April election, but probably won't.)  So the ideal solution is to add Britain, which with 29 votes gives the core coalition 183 votes, enough to keep a majority even if a minor ally or two defects, although short of the 232 needed to make a formal decision.

For Tony Blair, the calculus is a little different, but also favors a close working arrangement.  While coming from a country that (at least since Margaret Thatcher's reforms of the 1980s) is rather more free-market oriented than its Continental neighbors, Blair leads the more statist of the two major parties and is under criticism from the left wing of his large parliamentary majority for not being statist enough. Further, the rapid rise in public spending under Blair and his chancellor of the exchequer Gordon Brown has produced large British budget deficits, which in turn have required and will require tax rises that converge lighter-taxed Britain towards the overtaxed Continental countries, thus reducing the element of "destructive competition" in tax systems.

Most important, since the new EU constitution may well be presented to national parliaments for ratification later in 2004, before the next British election, Blair wants to avoid any disputes with the EU core in the run-up to the election, in the hope that he can ratify the constitution without holding a referendum (which the constitution would almost certainly lose) and without the opposition Conservatives having a major populist election issue with which to beat him.  Hence Schroeder and Chirac's commitment to greater "reform" (which they need to carry out anyway to prevent their economies falling into a black pit of public spending as their baby boomers retire and claim generous state pensions) can be presented to the gullible mushy middle of the British electorate as a genuine conversion by our friends in Europe to the greater free market openness and economic liberalism that is supposedly Britain's gift to the EU.

 In the long run, it won't work.  When dealing with the 10 new members of the EU, particularly the 8 from Eastern Europe, and with the next 2 members, Bulgaria and Romania, scheduled to join the EU in 2007, Britain's interests and those of France and Germany diverge, because of the different natures of their economies.

Germany, and to a lesser extent France, are primarily manufacturing nations, whose economic strength derives from the great efficiency and superb quality of their manufacturing workforce.  Automation has reduced this advantage somewhat (as young and cynical London merchant bankers, we used to joke that the German economy had problems because "robots are even better at being Germans than are Germans themselves.") Nevertheless, as the painful process of integrating the former East Germany has demonstrated, the principal threat to German manufacturing capability is a cheaper workforce with educational and quality standards similar to those in Germany itself. In other words, after 10 years of post-Communist restructuring, the workforces of the Czech Republic, Slovakia, Slovenia, the Baltic States and to a lesser extent Poland and Hungary compete directly with Germany’s.

Britain isn't like this.  The British automobile industry isn't threatened by East European competition, it disappeared two decades ago after Britain entered the EU (given its inefficiency, poor quality and appalling labor relations, it would probably have been devastated by a customs union with Haiti!)  Britain is pre-eminently an entrepot economy, with trading links worldwide rather than merely in Europe, and with skills in banking, insurance and consultancy for which the East European countries continue to have a large appetite.

This difference has already been demonstrated in the different attitudes of the three countries to East European immigration after May 2004. France and Germany have long made it clear that such immigration, the "free movement of labor" that is supposed to be a central principle of the EU, would be prohibited until after a transition period of close to a decade.  They're right; East European skilled labor represents a threat to the highly skilled but heavily unionized manufacturing labor of France and Germany. 

Britain, on the other hand, initially took the position that East European immigrants would be welcomed.  Again, this was rational; East European immigrants in Britain's internationally trading service industries would simply make it easier for such industries to get business in Eastern Europe -- a win/win proposition if ever there was one.

Regrettably, the politics of immigration have intervened.  The new EU entrants of Eastern Europe naturally have a high percentage of the impoverished; in particular, a total of around 1.5 million Roma, communities that are poorly integrated into local society, and that tend not to have taken advantage of the educational opportunities available.  Moreover, Britain in the last decade has suffered a huge influx of "asylum seekers" --around 500,000 per year, 1 percent of the population, mostly from countries far poorer than the new EU entrants -- which the government, hampered by "politically correct" and naive EU legislation, has proved unwilling or unable to control. There is thus a natural fear that allowing free entry to a new wave of the impoverished will put inordinate further strain on Britain's welfare and education systems, and further immiserate the less skilled of the British themselves.

The fear is legitimate, but overstated.  The problem can be resolved simply by barring the welfare and free education systems to new East European immigrants for a moderate period (say 3 years) while allowing the immigration itself.  That way, the immigration will be moderate in volume, and biased towards the highly skilled immigrants which any sensible society wants. The best solution for Britain in relation to East European immigration is not the restrictionary system imposed by France and Germany, but moderate liberalism guided by enlightened national self-interest.

There is a further potential for friction, in the area of financial services.  The indigenous British financial services capability was devastated by misguided legislation in the 1980s, and now exists only within the bowels of enormous foreign banks, several of them German.  However, the removal in January 2006 of the implicit state guarantee for the German Landesbanks is likely to cause a major financial crisis in Germany, adversely impacting the credit-worthiness and hence transaction capability of the very London bankers that are the core of British economic success. With numerous high-paid and influential Britons losing their jobs owing to German financial ineptitude, you can expect a serious deterioration in Anglo-German economic relations, which must inevitably have political ramifications.

Therefore, while it is in Blair's natural political interest to establish closer relations with France and Germany, it is in Britain's natural economic interest to establish closer links with the new EU members from Eastern Europe, which will inevitably be in economic conflict with the EU's Franco-German core.  The new core "troika" will last only until this divergence becomes obvious to all concerned.

Martin Hutchinson is the author of "Great Conservatives" (Academica press, April 2004) -- details can be found on the Web site greatconservatives.com.  This piece is re-printed with the permission of United Press International.