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BRITISH MANAGEMENT DATA FOUNDATION



'DEMOCRATIC VALUES AND THE CURRENCY'

Speech by the Rt Hon Michael Portillo - 14 Jan 1998

Part 3




Why democracy won't work at the European level

Some who know these arguments will object that democratic accountability for the European central bank's decisions could and should be established at European level through the European parliament. The point demonstrates the success that Monnet and his successors have had over the years. In the period following the war it was impossible to find many followers for the visionary notion of a United States of Europe. But the pioneers of European integration patiently made what progress they could with smaller scale projects in the economic field, leading in due course to the idea of a single currency. The single currency. however, requires the centralisation of decision making on issues that are so very important, that even those who oppose the whole idea may cry out for the creation of centralised democratic institutions to provide some element of people's control.

The creation of the European state has been approached in reverse order to the creation of almost any other. Normally, a new, state establishes its institutions of government first, and goes on to create its policies and its currency. In this case, the common European policies and the currency are being created first, with the intention that that should lead to demands, in the names of logic and of democracy, for the formation of the institutions of centralised European government.

The European parliament is not presently perceived by the British people. perhaps not by any other population either, as a representative body invested with much democratic trust and authority.

That is not merely because it is in its infancy. Democracy requires not only the cracy but also the demos, not only the state but also the people. You can create the apparatus of a state at European level, with a common frontier, a single immigration policy, a common foreign and defence policy, and a single currency. All the attributes of the nation state, all its functions, can be transferred to the European level along the Monnet functionalist model. But what we do not have and what we cannot conjure up is a demos, that is a single European people.

If the Scots are now doubting that a democracy spanning from John o' Groats to Land's End is capable of making every part of the country feel properly represented, then certainly no parliament spanning from Dublin to Athens, and being, charged with the critical decisions affecting our lives and livelihoods, is capable of satisfying the democratic requirements and aspirations of each of our populations.

The peoples of Europe are too different from one another, their histories, cultures and values are too diverse, for them to be brought together into one state. We can work together and co-operate for mutual benefit, but Europeans do not have a common identity, or view of their role in world affairs. They do not constitute a nation, and since they do not we should not try to create a European nation state. We should not try to do at European level things that nation states should do. Nation states should take the most sensitive policy decisions, because they require democratic control, and democracy can work only with a nation state where people share values, history and cultural tradition.

Looking back instead of forward

One of the boldest efforts of propaganda by the enthusiasts for European integration, is the attempt to portray themselves as modem and forwardlooking. They are the opposite. They are mainly motivated by a fear that the past may repeat itself, that is that Franco-German rivalry or rampant German nationalism may re-awaken. They propose a centralisation of power that runs flatly in the opposite direction to the march of history. We can see around us that the old empires or unions of states have collapsed in failure. The Soviet Union and Yugoslavia both failed in their attempts, even using coercion, to sustain a centralised system of governmental control over a wide area, covering many diverse peoples and nations.

The European integrationists are out-of-date in another way too. They see a European political union as a necessary response to global competition, believing that we must react to the challenge posed by the industrial and trading giants, like the USA and Japan by creating a giant Europe. Chancellor Kohl has claimed that 'the nation-state ... cannot solve the great problems of the twenty-first century- and that Europe has to 'assert itself '. Dr Helmut Hesse has said that ' a multiplicity of small states is not suitable for the world economy today'.

Global competition is indeed between industrial giants, but they are companies, not nation states. There may well be an argument for industrial mergers in Europe, for example between defence contractors in France, Germany and Britain. But that is a completely separate agenda from political integration. Paradoxically, some of the people who are spurring us on towards political union are also those who still believe in national protectionism, and therefore refuse to implement policies that would bring about European industrial rationalisation.

Some of those who think that the right response to global competition is to create a bigger state, also believe in a bigger state in the other sense, meaning a bigger role for the state, through more interference and regulation. That frame of mind has produced the social chapter, and is a strong influence within New Labour. Such people believe that global competition will whittle away worker protection and social standards in the developed world, and that we must create a large European corral in which they can be defended against the pressures from outside. New Labour, however, also spends a part of its time arguing against that, advocating the spread of flexible labour markets instead. In that second view they are right. Flexibility, along with rising educational standards, will enable us to compete and to improve our social standards. Excessive interference by governments, whether at national or European level, is clumsy and unresponsive, and has already played a large part in creating, unemploym ent levels in Europe well above those of the USA.

We are being led towards a Europe which displays many of the characteristics of Britain twenty years ago. It is populated with overmanned and protected nationalised industries. In many places private sector managers are in thrall to trade unions. Business is tied down by government bureaucracy and interventionism. Public spending is appallingly high. There persists the belief that Europe can go its own sweet way, unaffected by the assault from international competition, provided that the fortress walls are built high enough. Twenty million unemployed Europeans give mute testimony to the failure of those policies.

To present any of that as forward-looking is indeed a triumph for the spin doctors.

Will the single currency be an economic success for Britain

There are those, no doubt, who would argue that even if it is true that the single currency requires the centralisation of important policy-making, and even if you cannot re-create at European level the sort of representative democracy to which we have become accustomed in our nation states, we are likely to get better decisions from a European central bank than we have had from governments in the past, and that will make people happier.

That is hard to believe. Unaccountable bureaucracy does not produce better decisions than democracy. The corruption and inefficiency in the CAP sufficiently tells us that. Furthermore there is no evidence that a single currency will lead to better policies, greater stability or greater economic success for its members. It is pure conjecture. The single currency will be traded in world markets against other currencies. Whether it is more stable than the national the national currencies it replaces will depend on how good are the policies of those who control it.

There has been no stability between the currencies of the USA and Japan - the world's largest and second largest economies. Currency stability is an illusion, and in Asia there is now on display many a scalp of men who declared that their currencies would hold their values.

The case for Britain Joining a single currency has lost whatever appeal it might have had when first presented a few years back. Five or ten years ago it was plausible to argue that Britain was forever dogged by inflation, and doomed continually to resort to devaluation in order to maintain competitiveness. Unemployment in the UK was stubbornly high. By contrast, Germany appeared to have discovered the secret of non- inflationary growth, and was able to compete successfully in the world on the basis of quality, despite the strength of its currency. How much better, the argument went, for Britain to give up control over its own economy in order to reap the benefits of the German economic miracle.

Things look rather different now. Britain has gained control of inflation by its own efforts. Britain has lower unemployment than most of its European neighbours, and that is Just one of many indicators that it is competing successfully. The current concern is not with devaluation, but with the strength of the pound.

Mr Blair has said that he wishes to decide whether to enter a single currency solely according to an assessment of whether it is in Britain's economic interest to do so. As will be clear from what 1 have said already. 1 think that misses the point of what is really involved in the decision. But anyway, the economic case appears very weak. It has been argued that the single currency is the logical completion of the single market. It is not. The greatest trading partners in the world, Canada and the USA do not have a common currency and have no plans to establish one. At present, none of the countries with which Britain trades has the same currency as we do, and yet our trade with them goes on rising. 1 can see that there will be a small saving on transaction costs for companies trading with Europe if we all have the same currency, but it will be marginal. Against that, British industry has to ask itself whether it really wishes to enter the next recession with the currency locked at its present le vel, and with the British government powerless to vary interest rates.

The grave danger for Europe, economically speaking, is to introduce a single currency where no single labour market exists. A single currency means that, in future, variations in economic performance between one region and another cannot result, as they do today, in a downward adjustment of the currency in the less successful areas, and interest rates must reflect policy established at the centre, not local conditions. The full impact of recession will therefore fall on unemployment.

In the USA, a vast area covered by a single currency, people who lose their jobs in a depressed area can move to another state in search of a job, however inconvenient it may be. But people cannot move at will within our continent to find new work. They face barriers related to language, qualifications,, local culture and plain prejudice. Some of those can be reduced with the passage of time, but most will prove intractable. Indeed, with the so-called Posted Workers Directive, approved under the Social Chapter, European Union labour ministers seem determined to reduce labour mobility across borders.

There is another danger. Britain presently receives a notably high proportion of the inward investment attracted into Europe. Those investors clearly see value in Britain's membership of the EU and free access to its markets. But they also see it as an advantage that the British economy is more flexible and de-regulated than some others in Europe. In other words, Britain derives an advantage from not embracing all European economic policy. Investors know that wherever they invest there is an exchange rate risk. But British economic policy over the last 18 years has offered them stability and reassurance.

But if we Join the Euro, economic policy in Britain will be determined principally by events in the geographical centre of the European Union. There may well be a mismatch between conditions in Britain and Germany. Interest rates could be inappropriate to British economic circumstances, as they were when we were in the ERM That represents a bad risk for investors. It may then make more sense for them to invest where local economic conditions and interest rates are-most closely related, that is, in Germany.

Imagine the impact upon British public opinion if unemployment is high, and inward investors are drifting away, the government is powerless to vary interest rates, and the electorate is unable to change anything by electing a new one.

The real questions of security

I began this lecture by recognising the importance of European security. All other objectives are secondary. The principal guarantor of peace in Europe has been NATO. It has provided a wholly credible deterrent against attack. With American troops positioned in Europe, any potential adversary was wise to believe that America really would go to war to preserve the territory of its European allies. America's awesome military capability was evident.

Incidentally, the establishment of NATO did not infringe the sovereignty of its members. Its Treaty is explicitly an agreement of sovereign states who undertake under Article 5 to regard the violation of the territory of another member state as though it were a violation of their own and to respond with such action as they deem necessary. NATO has no federalist destiny. In the near half century since it was founded, unlike the EU, it has passed no laws that bind its member states, and no court has extended its influence. In no way has it increased its powers since 1948. The democratic accountability of governments has not been affected.

NATO is now responding to the new situation created since the end of the cold war, recognising that the greatest contribution it can make to security is to strengthen the new democracies of Europe. Membership of either NATO or the EU or of both can help underpin those democracies. The EU should follow NATO's example. It should be trying to lower the barriers for entry by the countries of Eastern Europe, rather than creating an inner core which requires qualifications that they cannot hope to attain. Negotiating admission for new members looks like being a protracted, and maybe cantankerous, business.

The EU must also address itself to the remaining security issues in our continent. We need to do all we can to make Russia feel welcome in the family of western democracies. Membership of either NATO or the EU is impractical, not least because Russia is a vast Asian as well as European power. But again the EU ought to be demolishing fences rather than continuing to develop its fortress.

In the case of Turkey, the EU seems to be almost careless in its relations. The EU has made it clear to Turkey that although it applied for membership years ago, there is no early prospect of admission. Meanwhile countries that have only recently become democratic and pro-western are politely ushered to positions higher up the queue. Few things could be more important for our security than that Turkey should remain democratic and well-disposed towards the West. Turkey is being kept at bay, partly because some European leaders apparently see the EU as a subset of Christendom; and partly because with its manifest social problems, Turkey's inclusion certainly would create substantial problems of integration. We have had to put heavy reliance on Turkey as a NATO ally during our conflicts with Iraq. It is difficult for the Turkish government to sell to its people the merits of being a good member of NATO, and it is difficult for us to persuade Turkey to be reasonable over the Cyprus problem, if it is off ered so little by the EU.

Here is an instance where the EU has a clear choice between on the one hand maintaining its preoccupation with achieving 'ever closer European union', and on the other hand using its enlargement to enhance the security of its members. It appears to have made the wrong choice. It falls to think strategically.

Conclusion

This case serves to illustrate a broader truth. Those who are most influencing the progress of Europe have become dreadfully confused. They believe that European integration is the only guarantee of future security, and they are pursuing the objective with a single-mindedness that borders on fanaticism.

They are wrong. It is democracy that provides our greatest hope of future peace and prosperity. We should use our Atlantic and European institutions in every way we can to spread democracy and nurture it where it takes root.

The European Union is entirely made up of member states that are democracies. But the European Union itself is not democratic. Neither the Commission, nor the Council of Ministers nor the European central bank is democratically accountable, and neither can they be made so because Europe is not a nation. It follows that the more we transfer decision-making away from the democratic member states to the undemocratic European Union, the less shall we enjoy democratic accountability.

Moving away from democratic control is retrograde in itself, but it is also highly dangerous, because disillusion and grievance provide a breeding, ground for nationalism and extremism. In the interests of security, of tolerance and harmony between nations. in the interests of preserving the most valued gain of the post-war period which is democracy, we should turn from the headlong rush towards European political integration, in which the single currency is a decisive step.




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For the synopsis and the first two parts of this speech, please see Synopsis and Part 1 and Part 2




Last update: 25 March 1999

© Copyright Anthony Cowgill and Andrew Cowgill, 1999

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