A new strategy for Britain in Europe

At the same time, the EU’s economic crisis and general malaise have highlighted an imperative: pro-market reforms to arrest Eurosclerosis and ever-faster decline -- not to mention global marginalisation, squeezed between the USA and rising emerging powers. Time, therefore, for a new, pragmatic British government to fashion a reform agenda for the EU and build alliances with like-minded partners, especially in northern and eastern Europe -- and even with a Germany tired of bankrolling slouches and spendthrifts elsewhere in Europe.

Britain has long been failing in Europe. Under the Labour government, it punched well below its weight, especially on core UK priorities such as the Single Market and trade policy. The British economy is inseparable from the Single Market. And the EU’s trade policy is the main commercial artery that links Britain through Europe to the wider world. Yet there was no political leadership from Westminster, and the UK was virtually absent from key decisions. Worse, New Labour returned to Old Labour instincts to tax, spend and intervene left, right and centre. And Lord Mandelson indulged in silly talk about “industrial activism” and learning lessons from the French, which harked back to the disastrous industrial policies of a bygone era. This negated Britain’s ability to promote pro-market and free-trade policies in Europe.

Britain’s passivity means EU policy slides in a protectionist direction, to the detriment of the UK economy and Britain’s standing in the world – even more so in the wake of the global economic crisis. The Single Market is undermined by the relaxation of state-aid rules during the crisis, and intrusive, discriminatory financial-market regulation in the Brussels pipeline. There is no agenda for market-oriented structural reforms – the biggest casualty of the crisis. The “2020 strategy” for increased competitiveness is so weak on pro-growth reforms that it will be more quickly forgotten than its predecessor, the Lisbon Agenda. That augurs badly for recovery from the crisis.

Externally, trade policy is defensive. With the exception of the (yet to be ratified) free trade agreement with South Korea, trade negotiations are stuck. Worse, there is creeping regulatory protectionism against third countries. True, the EU has not escalated up-front protectionism in response to the crisis. Traditional obstacles to trade such as tariffs and quotas have not increased. But the EU is resorting to more onerous standards requirements on products and production processes that threaten to restrict low-cost imports from developing countries in particular. That now includes “green protectionism” on the climate-change agenda, with threats of carbon tariffs and a raft of discriminatory subsidies and standards. For example, the new Renewable Energy Directive is an industrial-policy stunt to protect French and Spanish rapeseed farmers against lower-cost Asian competition. This will keep biofuel prices high, slowing down the shift away from fossil fuels.

What can the new British government do? It should set out a strategy for an open Europe, within and without, and with Britain’s full commitment to work for this goal inside the EU. We suggest six economic priorities, four on the Single Market and two on external trade.

Start with the Single Market. First, there will have to be stronger disciplines against state aids in future, and subsidies dished out during the crisis should be eliminated right away. Second, prevent over-intrusive and discriminatory financial-market regulations – not simply to defend the City’s narrow interests, but as an imperative for British and European competitiveness. The UK, rightly, agreed to set up common EU financial supervisory bodies, but it must campaign more vigorously against Brussels’ untargeted and costly proposals to micro-regulate, such as the new move to control, and even ban, some derivatives.

Third, focus on the liberalisation of services and energy. The former is needed to reform low-performing services and ossified public sectors; the latter to lower energy costs and lessen Europe’s vulnerability to erratic Russian gas supplies and predatory pipeline politics. Fourth, reduce spending on agriculture. An unreformed Common Agricultural Policy is bad for European consumers and developing countries, and will not help reduce greenhouse-gas emissions.

In EU trade policy the UK should, firstly, fight to contain creeping protectionism, including green protectionism and financial-market regulations that restrict competition from outside Europe. Such measures would increase costs for consumers at home and trigger tit-for-tat protectionism abroad.

Second, it should take the lead in shaping a new global liberalisation agenda. This will not be possible through the WTO and existing bilateral negotiations. Rather the focus should turn to the EU’s three key bilateral relationships – with the United States, China and Japan. New market-opening initiatives should be considered on all three fronts. That could be a Transatlantic Free Trade Area, a new framework for EU-China relations (not least to improve access to China’s protected services markets, e.g. financial and telecom services), and a free trade agreement with Japan.

Many pro-market forces on the continent are crying out for British activism. The new British government should be ready for the challenge. The alternative is a myopic non-strategy, resulting in constant defence and attrition. That will cost Britain – and Europe -- dearly.

Fredrik Erixon and Razeen Sally