David Cameron and the EU’s Waterloo

by Ashoka Mody Ashoka Mody, a former mission chief for Germany and Ireland at the International Monetary Fund, is currently Visiting Professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs, Princeton University. 12.06.2015

PRINCETON – Two hundred years ago this month, at the Battle of Waterloo, Napoleon Bonaparte’s defeat at the hands of an allied army, led by the Duke of Wellington, reshaped Europe’s future. Britain may now be poised to do so once again.

The United Kingdom, whose new majority Conservative government has pledged to hold a referendum on European Union membership by the end of 2017, perhaps even next year, is not the outlier that it is often portrayed as being. Indeed, it is at the vanguard of the EU’s institutional atrophy. Even if it does retain its EU membership, the UK will continue to move steadily away from Europe. With more attractive commercial opportunities elsewhere, most European countries will follow suit.

For the EU, meeting the UK’s demands – to restrict benefits for migrant workers, limit financial regulation that could hurt the City of London, and disavow the goal of “ever closer union” – would require a fundamental transformation, including utterly unfeasible changes to the treaties that underpin European institutions. The discussion has thus turned to the possibility of providing the UK with a special status or allowing it to opt out of more EU provisions.

But, given intensifying doubts about the benefits of integration, even that solution would risk unraveling the EU. By emphasizing that Europe no longer offers an economic dividend, the UK’s move away from the EU will spur ever louder calls for change elsewhere. Simply put, talk of “Brexit” has exposed Europe’s economic and political fault lines – and there is no going back.

Robert Peston, in his 2005 biography of then-Chancellor of the Exchequer Gordon Brown, described Brown’s “pragmatic view that the EU was a good thing only insofar as it delivered practical benefits of peace and prosperity to Britain.” While the British have been particularly open about the nationalist nature of their support for European integration, other EU members have been no less mindful of their domestic interests.

In the wake of World War II, European countries’ national interests were aligned. Nonetheless, efforts to establish political unity through a common army failed in 1954, highlighting that economic common ground was the key to European integration. And, indeed, the 1957 Treaty of Rome, which opened national borders within the new European Economic Community, enabled the rapid proliferation of intra-European trade, thereby contributing to a shared economic recovery. The material gains of these commercial relationships fostered empathy among Europeans, fueling increased support for – and trust in – shared institutions.

This process began later for the UK, which joined the community in 1973; but it followed a similar trajectory, with British citizens responding to economic gains by supporting increased integration. Prime Minister Margaret Thatcher, by advocating the 1986 Single European Act, sought to maximize those gains. In the spirit of the Treaty of Rome, she ensured that the act focused on developing an open and competitive common market, in which all members participated on equal terms.

By contrast, her German counterpart, Chancellor Helmut Kohl, often regarded as one of that generation’s preeminent European champions, offered only lukewarm support for the Single European Act. He preferred to help steer Europe toward monetary and political union, just when its economy had begun to fall behind the rest of the world.

The result was the 1991 Maastricht Treaty – the point when European integration went into overdrive. But the Treaty’s architects were so busy playing internal power games that they failed to recognize that monetary union could not stem Europe’s decline, especially as the United States was experiencing rapid productivity growth and Asia’s economic rise had begun. With Europe’s post-war recovery long complete, the logic of integration had to be rethought. Unfortunately, that did not happen.

As a result, intra-European trade and support for European institutions, having soared in the previous two decades, began to decline practically before the ink on the Maastricht Treaty was dry. The eurozone’s protracted crisis, which began in 2008, has exacerbated this trend, with member countries still struggling to restore economic and financial stability – and likely to continue to lag behind the rest of the world in terms of GDP growth.

No institutional framework can survive unless it serves the material interests of its constituency. In the nineteenth century, when the Tunisian craft guilds failed to adapt to industrialization, they became irrelevant, and the amins, or guild masters, were left as figureheads in shell institutions. Today, European institutions could face the same fate.

Unencumbered by the euro, and benefiting from long-standing commercial relationships beyond Europe, Britain is in a particularly strong position to push back against EU institutions. This may be self-serving, but it should not be a surprise; in fact, with businesses throughout Europe seeking markets elsewhere, Britain’s approach may well herald similar developments elsewhere.

European integration in the shadow of WWII was a wise and magnificent achievement. But, with that historic task now complete, European institutions need a new rationale. And with the EU, unlike other federations, lacking a common political destiny, that rationale must center on material benefits.

The EU must return to the fundamental driver of its success, pursuing a renewed single-market agenda that reflects the rationale of the Treaty of Rome. Unfortunately, Europe is so divided nowadays that the ability to achieve such an outcome is not promising, with new initiatives along these lines facing “increasing political resistance.”

If Europeans merely invoke the lofty mantra of “an ever closer union,” their institutions will atrophy. Without a new unifying objective – one based on shared material gains, not on fear of Vladimir Putin’s resurgent Russia – the European amins will soon be out of business.

Copyright: Project Syndicate, 2015.

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