INTRODUCTION

1. THE POLITICAL CONTEXT

• The Government
  • Relations with Britain’s European Partners
  • Trouble and Strife – the government’s battles with the media and business
• The Conservative Party
• The Liberal Democrats and the smaller parties

2. THE POLICY DEBATE

• The Euro
• Economic Reform
• Foreign Policy and Defence
• Justice and Home Affairs
• Institutional Reform
• Beef and other policy headaches

CONCLUSIONS

INTRODUCTION

It is impossible to escape the spectre of the Euro in any discussion of Britain’s European policy. As this paper was being prepared in June 2000, the debate over if, and when, Britain should join the single currency had burst into life again and was threatening to become the defining debate within British politics. More than any other issue, the Euro question has the ability to expose the differences not just between the Labour government and the main Conservative opposition but the internal divisions within the parties themselves.

The battle over British membership of the Euro is also increasingly colouring attitudes towards the EU in general. On paper, both main political parties remain committed to British membership of the EU. But this conceals a growing gulf in the approach of the two main parties. The British government is working hard to try and establish its pro-EU credentials, confident that this will send a message to its European partners that it is committed to the long-term future of the Union. In contrast, the Conservative Party’s scepticism over the Euro appears to be increasingly spilling over into a hard-line anti-EU stance.

As a result, other parts of the broader European debate – such as defence, institutional and economic reform – have moved from fringe interests to also play an increasingly central role in the British political debate. The government weighs up every stance it takes within the EU for its perceived impact on the popularity of the Euro. In particular, Tony Blair’s advocacy of economic reform across Europe is an attempt to nullify one of the Euro-sceptic’s chief weapons. It is seeking to reassure the British electorate that joining the Euro zone would not result in Britain having to adopt bad economic policies. The Conservatives, meanwhile, are beginning to treat every European policy issue as if, like the Euro, it represents a fundamental challenge to British sovereignty.

The first part of this paper will consider the current political context in more detail.

The second part will examine the major European policy issues before taking a look at the likely evolution of the European debate within Britain.

1. THE POLITICAL CONTEXT

The Government

The Labour government which took power in 1997 is that rare thing in recent British history – instinctively pro-European. It arrived with a commitment to ensure Britain took up its 'rightful' place at the heart of Europe. In an effort to remove the single currency as an election issue, the Labour Party adopted the previous Conservative government’s policy of 'wait and see' and promised a referendum ahead of Euro entry. However, it did not conceal a far more positive tone towards EMU, suggesting that it was inclined in favour of Euro membership and would attempt to guide the country’s economy and the electorate in the right direction. Indeed, in the autumn of 1997 an unsourced 'leak' to a British newspaper, which suggested the government was close to announcing a date for Euro entry, was greeted with euphoria in the London markets. At that stage it seemed likely that Britain would join the single currency in tandem with the other Euro 'outs' in around 2003.

However, the apparently pro-Euro thrust hid some real differences within the new cabinet about the best approach to the single currency. On the strongly pro-Euro side are ministers such as Peter Mandelson – a close confidant of Tony Blair –, Robin Cook, the Foreign Minister, and Stephen Byers, the Secretary of State for Trade and Industry. These ministers remain inclined to announce a referendum date as soon as politically possible and would like to be able to campaign more vigorously on behalf of British Euro membership.

But a much more cautious approach has been adopted by the powerful figure of Gordon Brown, the Chancellor of the Exchequer. Mr Brown is desperate to try and avoid any substantive discussion of the single currency ahead of the election. While the government’s internal differences are minor compared to the crippling divisions of the Conservatives under John Major, they do in part explain its apparent timidity over the Euro issue during the last year.

Mr Brown’s motives have never been entirely explained and it remains uncertain whether he is more philosophically dubious about the Euro or is simply making a series of tactical political judgements about the timing of a referendum. There is a suspicion that he is distancing himself from the Euro project in an effort to pick up the pieces should Tony Blair come unstuck following a referendum. It should also be noted that Mr Brown’s chief adviser, Ed Balls, is something of a Euro-sceptic and that Mr Brown seems to seek inspiration from American rather than European economic models. The Chancellor also possesses one major advantage over his colleagues having ensured he is the guardian of the five economic 'tests' which will determine whether Britain is ready to enter the Euro (see Section 2).

For much of the last year, the government has tried hard to avoid discussion of the Euro issue. The highly image-conscious Prime Minister has been stung by the press criticism which has greeted every previous pronouncement on the Euro and has been anxious to play down talk of cabinet policy splits. As a result Mr Blair has made a concerted effort to talk up other aspects of the government’s European policy. The logic is that the government will find it much easier to sell the Euro membership if it can persuade the electorate Europe is moving in Britain’s direction.

There is little doubt that the government has made good progress in some key EU policy areas. The new Prodi Commission has a strongly British flavour and the government has been unusually successful at securing senior positions for its own highfliers within the Commission apparatus. The Lisbon Summit also provided a notable triumph for the British approach to Europe with its emphasis on liberal economic reforms and 'soft' methods of enforcement such as benchmarking and peer pressure. But it is questionable whether in the short term these developments have had any noticeable impact on public opinion. Instead, the protracted crisis over British beef exports has attracted much more media excitement.

In recent months the strongly pro-Euro camp within government has become restless as each new opinion poll suggests opposition to Britain joining the EMU is hardening. Peter Mandelson, the Northern Ireland Secretary, reopened the internal debate in May 2000. Despite having his hands full trying to implement the latest Northern Ireland peace deal, Mr Mandelson made a speech arguing the economy would suffer if the government continued to sit on the fence. The Chancellor was reported to be furious that the speech was not cleared with him first while the Prime Minister appeared unhappy that the internal cabinet disputes was surfacing in public again. Stephen Byers – apparently with the tacit approval of Number 10 – then picked up the pro-Euro baton, although the tone of his comments appears to have been watered down.

The pro-Europeans scored a minor political coup of their own when it emerged in June that the Treasury had tried to tone down an independent report from the Organisation of Economic Co-operation and Development which suggested on many counts Britain had already converged with Europe.

At the time of writing, however, it was not clear whether Tony Blair would finally end his self-imposed silence and come out strongly in favour of the Euro or continue emphasising other aspects of Britain’s EU policy. The hint from Downing Street was that Mr Blair was inclined to continue with the latter strategy this side of the election.

Relations with Britain’s European Partners

An essential part of the government’s pro-European approach has been its efforts to build alliances within the EU. The government has been determined to shake the traditional perception that Britain is only capable of adopting a negative position within the new EU – at best reluctantly accepting its partners’ ideas, at worst holding out alone against any new EU development.

This government has been aided in its alliance- building by the credibility bestowed by Labour’s large majority and Tony Blair’s warm personal relationship with a number of European leaders. The government has also shown the flexibility needed to deal with different allies on separate issues. Mr Blair, for instance, worked very hard in cultivating the support of Guy Verhofstadt, the Belgian Prime Minister, ahead of the Lisbon Summit, although the two leaders are poles apart on issues such as institutional reform.

However, it is fair to say that the relationship with Spain is perhaps the single most successful to date, despite the fact that Mr Blair and Jose-Maria Aznar, the Spanish Prime Minister, represent parties from the opposite sides of the political spectrum. Most recently, the two leaders penned a joint article for the Financial Times newspaper in an effort to keep the economic reform debate alive ahead of the French EU Presidency.

Relations with the two traditional heavyweights of EU affairs – France and Germany – have not been so smooth. There is a huge gulf in style between the moderniser Blair and the more traditional socialist rhetoric of French Prime Minister Lionel Jospin and a consequent lack of personal rapport. The French remain suspicious that Britain’s new found enthusiasm for the EU is simply an attempt to arrest the pace of integration. Relations have also been damaged by specific issues such as the French ban on British beef and its reluctance to open its electricity market to competition. However, the British government’s flexible approach is demonstrated by the fact that the two countries have pushed forward with the creation of a European Defence Force – a key French demand that Britain had always previously resisted.

A strong Anglo-German alliance initially seemed a much more promising prospect. German Chancellor Gerhard Schroeder arrived in office with a modernising reputation and a style that owed much to New Labour. Peter Mandelson acted as an unofficial envoy in an effort to build bridges between the two governments. However, relations have become increasingly fraught in the last year. Herr Schroeder appears to have resorted to a more traditional economic approach in an effort to shore up his party’s poor poll ratings. The British government was less than pleased by the German Chancellor’s intervention in the Vodafone/Mannesman take-over battle. Joschka Fischer’s recent advocacy of a 'federal' system for Europe also caused palpitations in Downing Street. For its part, the British government’s concerted opposition to a European Withholding Tax, which it fears will destroy the Eurobond market in London, has also soured relations. France appears to have taken advantage of these difficulties to reactivate the Franco-German axis, with the two countries now busy developing a common approach ahead of the Nice Intergovernmental Conference at the end of the year.

Trouble and Strife – the government’s battles with the media and business

The vast bulk of British print media is hostile to the Euro. Of the main national newspapers only the Financial Times, Independent, Express and the Mirror can be said to be consistently pro-EMU. Even the centre-left Guardian has been wavering on this issue in recent months, although it remains broadly pro-European. In contrast, the Times, Telegraph, Mail and Sun newspapers – which dominate the market in terms of sales – are strongly Euro-sceptic and increasingly anti-EU in tone.

This has presented the government with a major challenge which it has so far failed to resolve. The Labour Party remains scarred by the legacy of its poor relations with the press during the 1980s. It is this fact which seems to be at the root of the Prime Minister’s timidity on the issue of the Euro. Yet Mr Blair’s alternative strategy – of flagging up positive developments within the EU in general – can hardly be termed a success. The quality of British reporting of the EU is in general poor and most newspapers prefer to bury EU developments deep within the foreign pages.

However, in recent weeks there have been a few indications that this 'softly softly' approach to the print media may be shifting. The long period of almost uniformly positive coverage of the government has drawn to a close and normal service – which in Britain means government bashing – has resumed. There are signs that, in turn, the government may be beginning to worry less about every article and will be prepared to swallow some bad headlines on the Euro and Europe.

It should also be noted that the extent to which newspapers influence their readers has long been a matter for debate. Most British voters receive the bulk of their news from the broadcast media which has tight rules about impartiality.

The government had hoped an alliance with the business sector over the Euro would help neutralise some of the press criticism. Many of Britain’s biggest businesses are keenly pro-Euro (and pro-European). Some are becoming increasingly exasperated at the government’s refusal to provide a clear lead, worried that late entry could cost their companies dear. Individual businesses also loathe sticking their heads above the parapet until it is clear the government will provide a lead. The Confederation of British Industry, the pro-Euro representative organisation for major employers, has also taken the decision to try and avoid the debate after some of its members objected to it taking an overtly political stance. The government now appears unlikely to receive any significant support from business and industry until a Euro referendum is finally announced.

It should also be noted that there are important elements of the business sector which are opposed to the Euro. Small businesses, in particular, are worried by the costs of conversion. But a number of senior corporate figures, generally with Conservative Party links, are also vocally opposed. The anti-Euro group, Business for Sterling, has cleverly mustered these forces.

The Conservative Party

When William Hague assumed the Conservative Party leadership in 1997, he was determined to end the infighting over Europe which had been a prime cause of his party’s heavy defeat in the election. He chose to harden the previous government’s 'wait and see' line on the Euro by insisting the Conservatives would now not join the Euro until it had seen the single currency deal with "bad times as well as good". This new line effectively ruled out membership for at least two full terms of government.

The policy was ruthlessly enforced, leaving pro-European Conservatives the choice of keeping quiet or quitting the Party – an option taken by a handful of current and former MPs. The pro-European left is now all but silent, with many of its heavyweight supporters such as Michael Heseltine heading into retirement after the next election. Only Kenneth Clarke, the popular former Chancellor, has suggested he will remain to fight the pro-European cause.

There is little doubt that the policy has proved effective in curbing much of the dissent within the party over the Euro. It has also proved electorally popular and was part of the reason the Conservatives achieved an unexpected level of success in the 1999 European elections.

On the broader issues of EU policy there have been few clear policy moves, although, opportunistically, the Conservatives have generally taken a hard line – encapsulated in the vacuous slogan "In Europe, but not run by Europe". Francis Maude, the Shadow Foreign Secretary, has offered support for an idea floated by John Redwood, a hardcore Euro-sceptic MP and former cabinet minister, that all future issues of 'major' constitutional importance should be submitted to a referendum. This would mean the outcome of the Nice Intergovernmental Conference, for instance, would have to be submitted to a national vote.

However, even this hardening of anti-EU tone has failed to appease parts of the Conservative party. In fact, each sop to the right by Mr Hague seems to embolden the Euro-sceptics to demand more. There is talk of some prospective MPs running on a "never" to the Euro at the next election in defiance of official party policy. A hardcore of Conservative MPs are also campaigning for renegotiations of all EU treaties – tantamount to full withdrawal.

Michael Portillo, the Shadow Chancellor and chief rival to Mr Hague for the leadership, appears to have recognised the dangers and has adopted a markedly more pragmatic tone in recent speeches. Without departing from official policy, Mr Portillo has emphasised in recent speeches that the Conservatives should "never say never" to the Euro, and suggested that a future Conservative Chancellor would not take Britain out of EMU if it is already a member. While this to some extent merely represents a pragmatic grasp of reality, it is a considerable softening of tone by a politician criticised in the past for the xenophobic tone of some of his speeches.

The Liberal Democrats and the smaller parties

The Liberal Democrat party is the most overtly pro-Euro political grouping in Britain. While it has only a limited impact on policy at present, it could play a pivotal role if Labour was re-elected with a heavily reduced majority. The various nationalist parties are also pro-Euro – viewing Europe as an escape from the clutches of Westminster – and could prove useful allies for the government in a referendum campaign. It is also worth noting that the UK Independence Party is likely to field a large number of candidates at the next election and, although unlikely to win any seats, will pressurise Conservative candidates to take a more hostile stance against the EU.

2. THE POLICY DEBATE

The Euro

This paper has already looked in detail at the politics of the current Euro debate in Britain. However, it is worth outlining in more detail the practical policy.

The government’s overall position has changed little since the last election, when it declared that it was inclined to join the Euro "when" the economic conditions are right and after it has received the backing of the electorate via a referendum. Since this point, however, there have been two important qualifications.

Firstly, Gordon Brown, the Chancellor of the Exchequer, has stated that Britain will need to pass five 'economic tests' before it is ready for Euro entry. These include:

Evidence that the UK’s business cycle is moving into line with that of the core Euro area.;

An indication that the economy is sufficiently flexible to deal with any future economic shocks;

Evidence that Euro membership will create better conditions for long term investment;

Indications that the financial services sector and, in particular, the City of London are suffering from being outside the Euro;

Confirmation that joining the Euro will be good for employment.

The Conservatives claim that these tests are too vague – a view shared in part by the financial community in Britain – and the decision to enter EMU will be political not economic. The suspicion also remains that the Chancellor is inclined to use the tests as a reason to delay Euro entry, a view given credence by Mr Brown’s robust defence of a cautious approach to Euro entry at the annual Mansion House Speech in June. The government’s sensitivity on the issue of the tests was further demonstrated when the Treasury took the unusual step of issuing an outright denial to a report in the Financial Times suggesting an internal review had concluded Britain was close to meeting the five criteria.

In 1999, the government also put in place a National Changeover plan outlining the practical steps that would be needed to make the transition to the Euro. The media initially greeted the plan, which includes a provisional timetable for adoption of the Euro but no firm start date, as firm evidence of its Euro intentions. The Conservatives, meanwhile, sought to play up the costs which will be incurred by both the public and private sector during the transition period. However, the government’s prevarication on the Euro issue since the release of the Changeover Plan has diminished its political significance.

Economic Reform

In an effort to side-step the Euro debate, the government has deliberately focused much of its European strategy since the beginning of the year on promoting economic reform within EU. Tony Blair has undertaken a series of trips around Europe, proselytising the virtues of structural reform and seeking like-minded allies to help push forward a series of bogged-down liberalising measures.

This culminated in the Lisbon Summit in March. The Summit conclusions – which concentrate on structural reform measures and advocate employing 'soft' measures, such as benchmarking and peer pressure, to achieve policy goals – have a distinctive 'Anglo-Saxon' flavour. There is a strong emphasis on the completion of the single market in areas such as financial services and energy, where the relatively liberalised British economy should benefit. The British government has also raised the need for European-wide reforms in pensions and the labour market. The EU has rarely tried to tackle these issues before, regarding them as the preserve of national politics. France and Germany remain extremely politically sensitive to any suggestions that they must adopt an Anglo-American economic model. However, Mr Blair has insisted these measures are vital for the Euro to work effectively – a suggestion that has led some commentators to dub the EU’s willingness to embrace reform as the "sixth economic test" for British membership of the single currency.

However, Britain now faces a major challenge on economic policy from within the EU. The French government, which is widely perceived as less than enthusiastic for widespread structural reform, assumes the EU Presidency in the latter half of 2000. There have been suggestions that some European countries may try and hamper reform moves unless Britain relents on the EU Withholding Tax Directive. Many of the Lisbon conclusions are also vague aspirations rather than firm commitments, and it seems certain that Britain will need to work hard ahead of the economic summit next Spring to ensure further progress is made. An indication that the British government intends to pursue this strategy came recently, when Mr Blair teamed up with Jose-Maria Aznar, the Spanish Prime Minister, to reiterate the need for economic reform if the Euro is to function properly.

Foreign Policy and Defence

Surprisingly, the Labour government has also been keen to take a leading role in the previously taboo areas of defence and foreign policy. Britain had in the past resisted any moves to establish an independent EU defence entity, fearing it could undermine NATO and damage the 'special relationship' with the United States. However, by the end of 1998 it had radically altered its line, concluding that some form of independent European defence capability would help spread the burden of paying for the EU’s security more fairly. The government argued that, if EU member states could be persuaded to spend more on their common defence, the US would be more likely to remain fully engaged in Europe.

The government reached a pivotal agreement with the French at St Malo in December 1998 which laid the foundations for the EU to begin developing its own military capacity. Unexpectedly, it also bowed to a key French demand that this force could act 'autonomously' where necessary and would not need NATO to take the lead. Since this point, the government has pressed ahead with the creation of a rapid reaction force of around 50,000 men. The Conservatives appear much more sceptical on this issue and Iain Duncan Smith, the Shadow Defence Secretary, has indicated that if the party takes office it will reverse any moves already made to establish the defence force.

The British government has also thrown its weight behind Javier Solana, the EU’s High Representative who is charged with developing a coherent EU foreign policy. A number of Senor Solana’s senior advisers are British and the government was a strong supporter of his attempts to create a strategy for future EU/Russian relations. The government is convinced that the High Representative role is necessary if the failures in the Balkans, where EU money and support was often slow to arrive, are not to be repeated.

Justice and Home Affairs

Another clear sign of the shift in British European policy is the government’s evolving attitude towards justice and home affairs. Britain may still possess an opt-out from the Schengen Agreement on free movement, but this has not prevented the government from taking an increasingly active policy role on justice and home affairs issues. Jack Straw, the Home Secretary, was once considered the most Euro-sceptic member of the Cabinet. But he has become a committed and influential member of the Justice and Home Affairs (JHA) Council of Ministers.

The Home Office devoted a lot of energy in preparations for the special summit in Tampere in October 1999 which focused on the issues of immigration, asylum and the fight against crime. Although the government made clear that it is committed to maintaining border controls, it has begun to opt into aspects of the EU’s free movement policies. Ahead of the Tampere Summit, the UK issued a joint paper with the French and German governments on the future of EU immigration and asylum policy. It has applied to join the Schengen Information System, a cross-border police database. It has quietly indicated that it would be prepared to take part in a future EU asylum policy. By early 2000, Britain ranked alongside Germany as the main target for asylum-seekers, leading the government to conclude that other EU countries need to share the burden. However, the government remains opposed to any formal quota system, arguing that each case should be dealt with individually and should take into account other national contributions to crisis management.

Britain has also been at the forefront of the campaign to speed up the process of European justice through mutual recognition of court orders and judgements. It argues that the federalist dream of harmonising legal systems will prove an impossibly complex and ultimately unnecessary task. Instead, it believes that a mutual recognition system – although in itself a major undertaking – will enable governments to cope with diversity and avoid wasting decades in fruitless arguments.

Institutional Reform

While the British government has been able to take the lead on a surprisingly wide range of European issues, the lead up to the Nice Intergovernmental Conference has found it once again on the defensive. In particular, it is worried by Franco-German plans to remove the veto on tax issues and the possibility that the European Charter will enshrine new, legally binding social and economic rights within British law. The Conservative opposition is already highlighting both issues as a major threat, not just to British sovereignty but to the "superior" performance of the British economy.

Although the British government has yet to clarify its full position on the Nice institutional reforms, there is little doubt it is looking for a 'minimal' treaty. It accepts the need to expand Qualified Majority Voting (QMV) to prevent policy blockage in an enlarged EU. But, like the other large member states, will want a re-weighting of the voting powers of the member states in return. It is desperate to avoid QMV being introduced in highly sensitive areas such as tax, and is seeking support on this issue from countries such as Spain, Finland and Ireland. The government has also begun to campaign against the Charter being anything other than a broad statement of principles with no legal implications. It has appealed to like-minded states such as Portugal and Finland to support its position.

The French plans to increase the powers of the Euro-11 group of finance ministers have also presented Britain with a challenge. It arguably provides the clearest indication yet of the willingness of 'core' members of the EU to move forward without Britain. The government naturally fears that a beefed-up Euro-11 could lead to a downgrading in the importance of Ecofin and in the future effectively leave Britain outside the loop on major economic decisions. Pro-Euro elements of the government are already seizing on the Euro-11 move as fresh evidence that Britain must join the single currency sooner rather than later.

For the moment, the government seems certain to block any attempts to formalise the Euro-11 arrangements. However, there are those close to the government who suggest that Britain will have to learn accept a more flexible approach to EU policy-making and that this can often work in Britain’s favour – for instance in defence, where they can clearly take a policy lead.

Beef and other policy headaches

For all the government’s largely positive European stance in the major policy areas, it remains bedevilled by a series of minor issues which have at times dominated the headlines in the UK media. The ban on British beef exports looms large in this context, providing evidence that even this most pro-European of governments can still resort to a more populist anti-Europeanism when under political pressure. The government initially took a moderate line on the French decision to refuse to lift the ban, insisting it was a matter for the EU to resolve. However, with the British media building itself into a frenzy of righteous indignation, the government’s handling of the problem became increasingly tetchy and erratic.

Another case in point is the battle over the Withholding Tax Directive, where Britain has often appeared to stand alone in its opposition. The Treasury probably has not helped its cause by initially hinting it was prepared to reach a compromise on the directive and then hardening its tone as the issue became more widely reported in Britain. The government has now boxed itself in by its apparent promise to defend the London Eurobond market at all costs. It is hard to see how it can now reach any agreement that does not clearly exempt the Eurobond market without being accused of "caving in" to Brussels. The Treasury’s latest proposal – to encourage the exchange of information on savings rather than directly impose the tax – may play well in Europe but is likely to come under fire domestically.

But this is not to argue that the government’s pro-Europeanism is only skin deep. Rather it stresses the difficulties faced by any UK government in presenting the normal give-and-take of EU politics as anything other than Britain versus the rest.

CONCLUSIONS

British European Policy is at a crossroads. If the government consolidates its position as the most pro-European force in British political history it could play a lead role in the future evolution of the EU. However, the government’s own reticence over the Euro means there is a risk that anti-single currency sentiment could become entrenched within the electorate and even spill over into a more general anti-EU tone.

In five years time it is possible to foresee two starkly different scenarios. Tony Blair could successfully steer the country through the Euro referendum and Britain would be on the verge of finally joining the EMU. The government’s credibility with its European partners would be further enhanced, ensuring it could take the lead in its favoured policy areas. The government’s dream of placing Britain at the heart of the Europe would be on the verge of becoming a reality.

However, there is also a real chance that Britain may face a more prolonged absence from the Euro. Other European countries would rapidly lose patience and push ahead with their own agendas, placing Britain constantly on the defensive. A reviving Conservative Party may even follow the logic of its recent European pronouncements and begin to campaign for outright withdrawal. The policy battle would no longer be about the pros and cons of the Euro or how Britain can best play a creative European role, but whether the country has any future in the EU at all.

Alasdair Murray is the Economist at the Centre for European Reform, London

The views and opinions expressed in publications of the Friedrich-Ebert-Stiftung London Office do not necessarily represent the views of the Foundation.