UK renegotiation and the European Social Contract: Free-rider Status?

Today Open Europe argues, on their blog and in The Telegraph, that the Norwegian model is a bad model for the UK to pursue, and that the British government should try to negotiate better terms within the EU rather than leaving to join the looser EEA. In arguing this, Open Europe take the argument of those who support either the status quo or further integration - that EEA membership or a Swiss model relationship with the EU would lead to a loss of political influence but require high levels of acceptance of rules decided in Brussels - and uses it to support the argument that the UK can get a special relationship within the EU. The UK, the argument goes, is such an important market, and Germany and other northern countries want the UK to remain inside the EU as part of a market-liberal alliance, that the UK can win a place as a member of the internal market, but opt-out of pretty much everything else.

This misses the point of what the internal market - and the EU - actually means to the rest of the Member States.

Back in the winter, when David Cameron wielded the British veto on treaty change, there was a political storm over whether Cameron negotiated well or not, but also a wide acceptance that what the UK asked for was reasonable. I argued that it wasn't, given that it was reversing integration in the internal market and that it would run counter to even the interests of the more traditionally UK-aligned Member States. In the UK the EU is portrayed as a free trading agreement that has run out of control, but the internal market itself is more than that, and the fact is that the rest of the EU needs to exist to politically support the internal market.

The internal market goes beyond a free trade agreement and a customs union because it's not just about getting rid of tariffs at the borders, but about creating an economic and legal space where businesses and people can move and work and provide goods and services without obstacles being thrown up by different regulatory systems. This means that there needs to be some harmonisation and some mutual recognition of rules and standards.

Which brings us to the "European Social Contract". Yes, despite all the fallout and arguments of the Eurozone crisis, I would argue that there is a basic social contract at the heart of the EU, which is also important to ensuring that the internal market has the political legitimacy to exist. The internal market covers a massive economic space and its regulation has social, economic and environmental consequences. Given the post-war social contract in Europe - essentially that the state has a place in ensuring the social welfare of the people both as a moral duty (it's seen as part of "what the government does", and in order to provide a bulwark against extremism and social instability - and a crude deregulation of markets within a European space would threaten national societies and their identities. The social and environmental legislation and the elements of redistribution that exist in the EU are an attempt to preserve this social settlement while unlocking the economic potential of such a large continental market (we'll ignore the history of integration being seen as a way of ensuring peace).

While the internal/single/common market has been elevated to an article of faith in the UK, really it relies on the social, regional developmental, redistribution-orientated and environmental faces for its political legitimacy. Would the other Member States not only be willing to give the UK full access to the internal market and let it leave the areas that sustain its political legitimacy, but also let it retain its political influence in votes in Brussels? It's a hard bargain to drive to say that you will have full benefits in the areas you like, but opt out of all other obligations. I don't think other Member States would be willing to open up their markets fully to a country that will not accept its part of the European Social Contract. It's up to Britain if it wants to reduce workers rights and social and environmental protection, but why should the other Member States provide the UK with unfettered access to the internal market if it does?

This is not asking for second or third tier membership, this is asking for Free-Rider Status.

The argument that the UK is too important to the more market liberal Member States to let Britain leave - as has been argued elsewhere too - also forgets to touch on the UK's political weight and influence as a Free-Rider Nation. The UK - and probably its MEPs - would not have a say in the areas that the UK opts out of. What use is the UK as an ally here if it doesn't have a vote? This is another aspect of the UK's negotiating position that is just not recognised in the British debate: the more the UK opts out or talks about opting out, the less valuable and reliable it is as an ally for the other Member States. After all, why should you put your political capital on the line for a country that's half out the door and in little position to help you in return?

There's no such thing as a free lunch, and in the EU there can be no such thing as a Free-Rider Nation.


UPDATE: The Centre for European Reform explores the Norwegian and Swiss options in more detail.

Financial Transaction Tax and Multispeed Europe

The UK government's stated opposition to the FTT was hardly unexpected. With the City of London acting as the financial heart of the EU, and a sacred (cash) cow for the UK government in terms of tax receipts, the UK was always going to be resistant to the idea. Barroso, in his State of the Union speech, seemed to recognise this and generally supported a two-speed (or multi-speed) EU.

When the national interest is invoked as a reason for a policy position, it shuts down debate. However, while national interest is part of it, since the UK government supports the idea of FTT in principle, provided it is applied globally, there has been a bit more debate on the idea. I have to admit that I don't fully understand the mechanics of how the tax would puch financial businesses outside the EU and outside the UK: my understanding is that the proposed tax would be applied to transactions where one side of the transaction was in the EU - so even if the financial businesses and banks moved outside the EU, they would have to pay the tax if they wanted to do business in the EU. It would only make sense to move if the business did most or all of its business outside the EU. However there are good points on the fact that a large proportion of the tax would be collected from the City of London, and this would be unfair if the Eurozone mainly benefited. If the income was used to build a safety net for the banking and financial system across the EU (to reduce the burden on taxpayers in the real economy), than that would probably be fairer.

While the Labour party in the UK will probably support the government's resistance, it would be interesting if they decided to support an EU FTT in some form - after all, their leader Ed Miliband has referred to businesses which were "bad" for the economy: would the FTT not make sense in rebalancing these ethical issues by making the financial industry pay a bit more tax to insure against the danger of being (ultimately) underwritten by the taxpayer? The BBC's Robert Peston has an interesting take on the FTT here.

In any case Member States have a veto on the matter, so the UK can block it. But the implications for the EU of a Eurozone FTT haven't received much attention. We already have a multi-speed EU, with some countries in or out of the Euro, the Schengen Zone, the EEA but not EU Members, etc, but these have been in different areas of integration. If you start to adopt different speeds to the internal market in a way that affects the four freedoms, then it could cause some political headaches. It would raise the EU's West Lothian Question. Why should MEPs from the slower countries have votes in areas where their countries aren't affected? Already the British Commissioner couldn't (politically) be the Commissioner for monetary policy since the UK is not a Eurozone member. The more the Eurozone countries pull ahead, the less influence those outside Euroland will have.