Denmark grows up

Denmark is likely to hold a referendum on its relationship with the European Union.  The referendum proposed by Anders Fogh Rasmussen, its newly re-elected prime minister, is not a referendum on the EU Reform Treaty (aka Constitution-lite), although it is possible that Denmark will also hold a separate referendum on the EU Reform Treaty. Instead, the Referendum proposed by Rasmussen concerns the four opt-outs Denmark negotiated as part of the Maastricht Treaty.  The four opt-outs concern Denmark’s participation in  (1) the common currency (full EMU membership); (2) EU defence policy; (3) EU cooperation on justice and home affairs and (4) EU citizenship.

The reasons for Denmark’s change of heart are obvious.  As regards Eurozone membership, the Danish currency is umbilically linked to the euro via a fixed exchange rate.  Danish interest rates follow those set in Frankfurt for the Eurozone with a lag of a few hours.  Might as well save the transaction costs of converting Danish kroner into euros, get a voice in setting monetary policy for the Eurozone (and for Denmark) and have access to a serious lender of last resort, rather than one which can only issue kroner.

Non-participation in EU defence policy means that Denmark has to stand on the sidelines with military actions it approves of, and even feels strongly about, such as the EU presence in Bosnia-Herzegovina, Macedonia and probably soon also in Kosovo.  Since 2002, the EU has engaged in sixteen operations outside the EU, using civilian and military instruments in several countries in three continents (Europe, Africa and Asia).

Justice and home affairs concerns issues like immigration, asylum and external border controls, and the European Arrest Warrant.  With free mobility of persons among the Nordic countries, Denmark of course had little capacity for a national immigration and asylum policy.

The European Citizenship exemption is of symbolic significance only.  I wonder how many British citizens realise that they are citizens of the European Union as well as of the UK.

The Danish prime minister wants Denmark to be a full player in the EU.  The only way to achieve that is to be a full member.  The opt-outs stand in the way.  Therefore, they have to go.

Are there lessons here for the UK?

Time for the UK to grow up

Under the existing Treaty, the UK has two opt-outs.  It is not required to join the common currency and it does not participate in the Schengen Agreement, which abolished border controls between member states (currently 13 EU members plus Iceland and Norway), and created the Schengen Information System for the purpose of maintaining and distributing information related to border security and law enforcement.

The Reform Treaty will, if ratified, add a number of further UK opt-outs, the famous ‘red lines’. They are:

• Defence: the UK want to remain in control of its  defence and foreign policy; there must be no European defence cooperation which weakens NATO.

• Treaty changes: the UK opposes the removal of the national veto for major decisions on the EU’s future.

• Tax: the UK wants to retain the national veto on taxation mattes, including such matters as  cross-border tax fraud.

• Justice and home affairs: the UK does not want majority voting to undermine its common law system. It also wants to continue to be able to carry out frontier patrols.

• Social Security: the UK wants the national veto to be retained for changes in social security systems.

• European resources: the UK wants any changes to the EU’s right to raise certain funds to be agreed by unanimity alone. This protects the British annual EU budget rebate, secured by Margaret Thatcher in the 1980s.

The UK is punching far below its weight in the European Union.  It is not listened to, has very little influence on the decision-making processes of the Commission or the Council of Ministers, and is not taken seriously most of the time.  The prevailing attitude of the other European members states varies between amusement, bemusement and irritation.

Reasons for giving up the two existing UK opt-outs

Some examples.  Ecofin, the council of the ministers of finance or of the economy of the 27 EU member states, has become an insignificant rubber-stamping body for decisions made by the Eurogroup, the council of the minsters of finance and the economy of the Eurozone members, currently 13 in number, with Cyprus and Malta joining on January 2008.  The Eurogroup doesn’t formally exist in the European Treaties to date.  The Reform Treaty will be the first ‘constitutional’ EU document to recognise its existence and to specify its competencies.  It will continue to do the job Ecofin did before the common currency was created, on January 1, 1999.  The EU is not an EMU member; it does therefore not participate in the Eurogroup meetings.  After January 2008, the UK’s influence on EU decisions in the monetary, fiscal, financial and macroeconomic areas will be less than that of Malta.  The only way to pull your weight in the EU is by belonging to the Eurozone.

This argument for the UK joining the Eurozone is reinforced by the growing recognition that there are no real benefits and some real costs to the UK of monetary independence. The notion that a small open economy like the UK, with unrestricted international mobility of financial capital, could use national monetary policy actively to stabilise the real economy, is a prime example of the ‘fine tuning fallacy’.  In addition, the manifest incompetence of the Bank of England in its liquidity management (both at its discount window (the standing lending facility) and through its open market operations), and the far superior, albeit still imperfect, liquidity management policies and practices of the ECB, suggest that it makes sense also from a financial stability perspective for the UK to contract out monetary policy to the ECB. 

The Bank of England’s superior procedural transparency and accountability would not necessarily be lost as a result of the UK joining the Eurosystem.  The Governor of the Bank of England could, as a member of the Governing Council of the ECB, insist on a vote being taken on the ECB’s interest rate decision (there never has been a vote on monetary policy at the ECB since it was created).  Failure to accommodate this request would result in a public statement by the Bank of England Governor expressing his/her belief that the reported interest rate decision was null and void because of procedural irregularities. 

When votes are taken, the UK Governor could and should make public his/her own vote.  Indeed, I would recommend that a UK Governor make public his/her recollection of all votes cast, and that he/she publish his/her version of the minutes of the Governing Council meetings.  It would not be long before the Governing Council would (a) vote, (b) publish the individual votes and (c) publish the minutes of the meeting.

The UK’s failure to join the Schengen agreement is an example of costly xenophobia.  With more than thirty million tourists each year making visits to the UK and with free mobility within the EU for citizens of all EU member states in no more than five years, it is clear that any hope of effective border control has gone out the window.  Freeing resources currently wasted on checking arrivals from the Schengen Area and allocating these resources intelligently and selectively (using Bayesian profiling) to vetting entrants from outside the Schengen Area would in all likelihood enhance national security, especially if it were accompanied by the effective sharing of information and joint policies drawn up and agreed by majority voting on selected justice and home affairs issues.

Reasons for giving up the proposed new UK opt-outs

The decision on how to assign political competencies - at the supranational level, at the national level or at the sub-national level - has been approached in two complementary ways.  The legal-constitutional-political science approach appeals to the principles of Federalism which, in the case of the EU, was renamed and given the rather unappealing sobriquet of ‘principle of subsididiarity’.  This means that a political competency is assigned to the lower level unless there are significant benefits from assigning it to the higher level.  This applies to the allocation of competencies between the supranational European authorities and the national authorities.  It also applies to the allocation of competencies between the national authorities and the sub-national authorities, provinces/counties/cantons and municipalities.  It applies to the allocation of competencies between a municipality and its wards.  Most importantly, it applies to the allocation of competencies between any of the organs of the state and the individual citizens: when in doubt, leave the government out.

The economic approach applies cost-benefit analysis to the assignment of functions and competencies to the different tiers of the state.  Economies of scale and externalities will favour centralisation of decision making and (possibly) of provision, that is, assigning a function or competency to a higher tier of government.  Diversity of views, preferences, interests and tastes and the speed with which the quality of information about all these relevant characteristics deteriorates as the government agency is further removed from the citizen or interest group (that is, heterogeneity and lack of information), will favour decentralisation - assigning that function or competency to a lower level of government.

For example, boundary-crossing environmental externalities should be handled at the level closest to the domain of the externality.  In the case of greenhouse gases, this is the world, but since the EU is as close as Europe gets to world government, the EU is the natural level at which decisions should be taken. Other environmental externalities are national or subnational (ground water pollution, cleanliness of beaches etc.). Border-crossing public health issues (foot and mouth disease, bird flu, CJD etc.) should be handled at the EU level.  Occupational health and safety issues should be left to the national authorities, as are most, but not all, social security issues and most tax matters.  Defence and foreign policy are obvious EU competencies.  Education is a national or subnational compentency etc. etc.  It is clear that, from this perspective there have been both Type 1 and Type 2 errors in the assignement as tasks to the EU level.  Working hours (as per the Working Time Directive) are not an example of returns to scale or border-crossing externalities.  They should be repatriated to the national level.   

Following this economic logic, foreign policy and defence should be the first EU member state competencies to be assigned to a supranational authority. This makes sense for the UK also. The last time any European nation (not counting Russia) tried to pursue an independent national foreign and defence policy was in 1956, when the UK and France undertook their last colonial adventure in Suez (the Falklands War falls into ‘The Mouse that Roared’ category and does not count). Since then, only Germany among European nations has had a foreign policy that matters at all.  And Germany has no military presence or significance.  Today, the nations whose foreign and defence policies make a difference are the US, Russia (much diminished but still  somewhat relevant to the many countries it borders) and, coming up fast, China and India.  Despite having but the most anaemic version of a foreign and defence policy, the (mainly) soft power of the EU is already more significant regionally and globally than the foreign and defence policies of the UK, France or Germany individually. 

Outside Whitehall, no-one much cares about or pays attention to UK foreign policy, and the UK’s armed forces are no  longer capable of independent action anywhere that matters.  When we try to visualise a indicator of  international political and military power that spans the range from the US down to,say, Denmark, the UK and France will be much closer to the Denmark end than to the US end. So the choice for the UK, as for the other European nation states, is either no foreign or defence policy, or an EU foreign and defence policy.  An independent national foreign or defence policy in Europe is an extreme example of a buck-naked emperor.

I am not sure what I prefer: no foreign or defence policy in Europe or an EU foreign and defence policy.  The last time foreign and defence policies mattered in Europe - in the first half of the 20^th century, the European nation states made the most dreadful mess of it, bringing humanity two World Wars and unimaginable horrors. Perhaps soft power is all that Europe can be trusted with.  But regardless of whether one prefers an EU foreign and defence policy or no foreign and defence policy in Europe, it is key to recognise that even for the UK, France and Germany, the time of being significant players in the global diplomatic, military and economic arenas are gone.  They have become small countries.

As regards future Treaty changes, I believe the days of national vetoes are gone.  But so are the days of national votes or national referenda.  Future Treaty changes should be decided by the European Parliament (with a suitably qualified majority) and/or by a referendum of the EU electorate in a single Europe-wide referendum.  If national votes are to play a role in this (either at the national parliamentary level or through national referenda), the requirement should be that a qualified majority of the member countries vote in favour (say two third plus 1).  But no national vetos in European matters.

As regards taxes and social security, the economic principles of economies of scale and externalities on the one hand and of heterogeneity and incomplete information on the other hand, suggest that no blanket statements like: ‘all tax measures to be subject to national veto’ are likely to be wrong.  Most of social security should clearly remain at the national level.  But the cross-border portability of past national contributions and/or acquired national entitlements has to be ensured.  Otherwise we all will end up working in the country with the lowest takes and retiring in the country with the highest benefits.

Clearly, tackling tax evasion and avoidance will require supranational decision making that cannot be vetoed by tax havens like Luxembourg. Indeed, where the EU has the power, it should compel the co-operation even of non-EU member states like the Switzerland or strange entities like the Channel Islands, the Isle of Man and Monaco.

Justice and home affairs are an area where I very much hope the UK will rethink its opt-out.  Without a written constitution, with no separation of powers, and with probably the most toothless Parliament in the EU, the Executive branch of government in the UK has greater power than the Executive in any other European Country; indeed the UK government is not subject to any effective checks and balances except the blessed bloodymindedness of the British people.  I very much appreciate having the European Court of Justice between me and a UK government that emasculates the right not to make self-incriminatory statements to the police or in court, and that does more damage to habeas corpus than any government since Magna Carta was signed.  The notion that the UK will continue pre-1973-style border checks on visitors to the UK from other EU member states, when within 5 years we will have unrestricted mobility of people within the EU (and probably around 35 million visitors yearly to the UK) is extraordinary.  Even if the authorities were to be willing and able to inflict these indignities on the travelling public (British and non-British), such national control measures would be woefully ineffective.

Last and definitely least, the British Rebate.  Why the other EU members allowed Mrs. Thatcher to get away with that outrageous bit of cheek, I have never understood.  There is no justification for continuing it even for just another year.  If that means a larger net UK contribution to the British budget, so be it.  The reason for this increased budgetary burden will be that the UK government didn’t have the guts to veto the Common Agricultural policy compromise.  You break it, you own it, is a good principle.

Conclusion

It is time for the UK government (and a large part of the British public) to grow up and start making a difference in Europe.  Sure, the UK is unique and different.  So are the other 26 EU members.  The UK has much to offer the EU.  It has sidelined itself for too long.

A short list of dos and don’ts for the government to consider.

• Adopt the euro as soon as you can.

• Join the Schengen agreement immediately

• Forget about the British rebate.  Veto the CAP budget instead, at the earliest opportunity.

• Make up your mind as to whether you want a European foreign and defence policy or no foreign and defence policy.  Don’t daydream about an independent national foreign and defence policy.

• As regards taxation and social security, apply the economic criteria of economies of scale and externalities vs. heterogeneity and incomplete information.

• Let future changes in European constitutional arrangements be jointly decided by (1) the European Parliament and/or the European electorate (through EU-wide referenda), and (2) national parliaments an/or national referenda, with support of a qualified majority of the member states required for ratification.

November 26th, 2007 in Culture, Economics, Environment, European Union, International Trade, Monetary Policy, Politics | Permalink