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EU: from substitute Empire to German protectorate
In the original film, recorded in 1963, Miss Sophie, an aristocratic old lady, persists in holding an annual dinner for her gentleman friends, although they all died many years ago. Despite their absence, her butler has set their places at the table, fills (and then drinks from) their glasses, and plays their parts in conversation. In the new spoof version, the opening commentary informs us that “every month, Miss Merkel holds a rescue summit for the euro. Her guests are the most important statesmen of Europe...” But the statesmen’s chairs at the dinner table are empty, and Angela Merkel’s hapless butler, who she mercilessly bullies, is Nicholas Sarkozy. The eventual consummation of the relationship between employer and servant, will, as we discover as the video ends, be conducted “without eurobonds”.
The absent guests in the spoof video, made by the German public broadcasting corporation ARD, include José Zapatero of Spain and George Papandreou of Greece; Italy’s Silvio Berlusconi appears in the form of a tiger-skin rug. These three, of course, are ex-statesmen, dumped after having become surplus to the requirements of the austerity programme imposed by Germany and the bond markets- in the cases of Italy and Greece, their places taken by EU-appointed ‘technocratic’ governments with strict orders to intensify the cuts in wages, pensions and services. According to the spoof, ‘the devoted servant Sarko’ has to pay attention to Merkel’s orders lest he end up as a rug on the floor like Berlusconi.
David Cameron also has an empty chair in the video. Despite what the British Conservative Party and its right wing press portray as his triumph at the actual December 2011 EU summit in Brussels, he is represented in the spoof as having the same status as the deposed former leaders who are in turn teased and belittled by Merkel. Cameron at one point is reprimanded: “Don’t forget, in Europe we speak German now!”
Veni, vidi, veto
As far as UK public politics and ideology goes, Cameron’s veto in Brussels and its justification did turn out to be, at the very least, serendipitous for him, merging a doughty resistance to foreign domination with the interests of the speculative side of financial capitalism; thus not only gaining a boost in popularity for himself but winning support for a principle of government based on a British version of an old US adage: what’s good for the Square Mile is good for the UK.
But for a right-wing head of government to boldly declare that he acted to protect a parasitic clique of financiers is so much of a rare event that when a moment of such brazen honesty occurs, as in the case of David Cameron's announcement of his EU veto as a move to defend the City of London, one is entitled to wonder if the issues were quite so straightforward.
As noted by several sources including the Huffington Post and Robert Peston on his BBC blog, the ‘working’ upper levels of UK-based big business including finance (as distinct from the political vanguard of big business, the Conservative Party) were not united in jubilation about the Prime Minister’s opt-out. Indeed, following the EU summit a kind of duel was conducted in the letters columns of the Daily Telegraph and the Financial Times, with the ‘europhile’ and ‘eurosceptic’ factions each trying to show that they represented the opinions of the nation’s top capitalists.
On 20th December 2011, a letter appeared in the Daily Telegraph warning that “It is vital that the [British] Government remains at the heart of Europe”; it was signed by twenty senior corporate figures, six of whom preside over hedge funds, private equity and other financial services firms. Two days later, a letter was sent to the Financial Times, over the names of twenty other senior businessmen including also a half-dozen or so financial speculators, countering that Cameron “deserves the full support of the business community” and opposing “a more centralised and over-regulated EU with ambitions to become a political union”.
The same day, the Institute of Directors announced that a survey of its members (who, according to the organisation’s website, range from “CEOs of large corporations” to “entrepreneurial directors of start-up companies”) showed that:
77% of IoD members agree with the Prime Minister’s use of the veto at the EU summit, including 46% strongly agreeing. 19% disagree, including 11% strongly disagreeing.
Which, affirmed the Daily Mail and the IoD themselves, settles the matter; but to a differently phrased question in the survey, the CEOs and entrepreneurs replied in a way that strikes a rather different note:
77% think that David Cameron’s use of the veto has changed the UK’s relationship with the EU, compared with 18% who think that it hasn’t. Of those who think there has been a change in the UK’s relationship with the EU, 53% think it will be negative for the UK and 33% think it will be positive for the UK, while 10% think it will be neither negative nor positive.
So while agreeing with the Prime Minister’s decision, the largest proportion of these business persons believe that the effect of that decision will be bad for the UK. Such apparently contradictory thinking is reflective of the complexities and contradictions in the relationship between British capitalism and the European Union.
Also of the view that Cameron’s veto will have a negative outcome was The Economist, that reliable champion of financial capitalism and vehement opponent of the proposed Tobin tax on speculative transactions. An editorial in the magazine, while strongly criticising the German position of refusing to shore up the Eurozone by the issue of ‘eurobonds’ or support to states via the European Central Bank (ECB), savaged David Cameron’s performance at the meeting of EU leaders:
However did David Cameron, Britain’s prime minister, manage to unite them all [against him]? The answer is through a combination of political expediency, inept tactics and fumbled diplomacy. Mr Cameron’s plan was to seek safeguards for the single market and to subject some parts of financial regulation to unanimous approval, in exchange for backing a new treaty. When he failed to get what he wanted, he withheld his support.
In Mr Cameron’s defence, he has to contend not only with Conservative Eurosceptic backbenchers, but also a Eurosceptic public—just as Germany’s Angela Merkel and France’s Nicolas Sarkozy also have domestic political constraints. Furthermore, Britain has real cause to worry about financial regulation. London is host to by far the biggest financial-services industry in Europe—in some areas it has as much as 90% of the EU’s business. The European Commission, egged on by the French and others, has produced many daft proposals to regulate it, as well as suggesting a financial-transactions tax.
But if the politics was expedient, the tactics and the diplomacy were not. Mr Cameron knew what he wanted, but went about getting it the wrong way. He presented a last-minute unilateral demand that would have partially overturned the principle of majority voting on single-market rules, which Britain itself first put forward under Margaret Thatcher over 20 years ago. Had he prepared the ground with other governments in advance he might have succeeded. Had he talked to fellow centre-right leaders on the summit’s eve instead of staying out of their political group, he would have known that he could not.
Mr Cameron’s veto was self-defeating. He may have briefly basked in his backbenchers’ praise, but if his aim was to protect the City and the single market, he has failed. Both are threatened more by Britain’s absence from the summits of up to 26 leaders that will now take place than by Britain’s participation in a treaty of 27 that placed no constraints on it. For decades, British diplomacy has been guided by a determination to keep a seat at the table. It has worked: Britain has not been outvoted on a serious piece of financial-services legislation.
However, while mentioning the political constraints on Cameron, the Economist editors do not comprehend the full force of these factors; hence their analysis relies on a recourse to Mr Cameron’s supposed ineptness. When those domestic contraints are considered, particularly those imposed by the forces expressed within the Conservative Party, it can be seen that Cameron had no viable option but to proceed as he did.
Politics of support, politics of power
The UK Conservative Party, while it is the most direct political vehicle of the top echelons of British capitalism, is not purely a direct incarnation, in the form of a political organisation, of the immediate economic interests of UK-based corporations and the very rich. It has social bases of membership and support to which it must appeal, and which are wider than the wealthiest 1% of society, and its ideology and practice has several competing and even apparently irreconcilable strands.
For example, the party has usually sought to mobilise anti-immigrant sentiment, although big business benefits greatly from the additional professional skills, and willingness to do very hard work for low wages, provided by migrant workers at either end of the labour market.
On the overlapping issue of the EU, it is notable that it was a Conservative government under Harold Macmillan that applied for British membership in 1961, under Edward Heath the party took Britain into the European Union (then called the European Economic Community) in 1973; while out of power in 1975, under its newly elected leader Margaret Thatcher the Conservative Party campaigned in the referendum held that year for the UK to stay in the EEC; subsequently under Prime Minister Thatcher, Britain acceded to the Single European Act and under her successor John Major it ratified the Maastricht Treaty. On the contradiction between this process and the rising nationalistic rhetoric emanating from the Conservative Party, Professor Tim Bale (an academic expert on the British Conservative Party) observed:
...it has always been the genius (and the task) of Tory leaders to reconcile what Andrew Gamble, writing back in the early seventies, called ‘the politics of power’ and ‘the politics of support.’
But- and unfortunately, in Prof. Bale’s opinion- the rank and file of the Conservative Party has since the 1990s been shifting further and further in an anti-EU direction, culminating in the Cameron veto:
A combination of generational replacement and constituency associations unwilling even to consider candidates who are anything other than thoroughgoing Eurosceptics has ensured that the parliamentary party led by David Cameron is not only overwhelmingly opposed to further integration, but contains front- as well as back-benchers who believe that Britain would ultimately be ‘better off out’.
As a result, there is arguably fundamental mismatch between what the Conservative Party (and, to be fair, many voters) want and what the country needs...
This weekend's bust-up in Brussels [ie, at the EU summit on 8th-9th December] is the logical outcome of these longer-term developments. It is also the product of a disconnect between what has become an article of faith for most Conservatives - the idea that anything coming out of the EU is inimical to Britain - and the reality that we are a medium-sized power whose trade and diplomacy is largely with continental Europe.
Tim Bale’s view that the British Prime Minister’s action in Brussels was driven by developments within the Conservative Party (ie, rather than by an immediate need to defend the City of London) is borne out by a consideration of the pressing ‘domestic political contraints’ on Mr Cameron.
By the spring of 2011 it had become clear that Germany was preparing the ground for a new or amended EU treaty in order to enforce fiscal discipline on the other Eurozone countries by means of a ‘European Stability Mechanism’ ; and it was becoming just as clear that the majority of the Tory party were gearing up to refuse to accept EU treaty change (even one with changes that directly affected only the Eurozone) without it being put to a referendum. On the eve of the December meeting of EU leaders, that position had been voiced openly in statements to the media by prominent Conservatives including cabinet ministers Ian Duncan-Smith and Owen Paterson, the leader of the Tory MEPs Martin Callanan, former Tory leadership candidate David Davis, and London Mayor Boris Johnson, thus effectively issuing a public ultimatum to Cameron. But were a referendum to be held, that would almost certainly have calamitous outcomes for the Tories and the interests they represent. As Conservative Home columnist Andrew Lilico remarked:
...a referendum would be likely to produce the triple result of (a) leaving the EU; (b) splitting the Coalition; (c) splitting the Conservative Party.
David Cameron could not, and indeed would not, respond to the pressure from his own party by opposing the treaty change proposals as such. After all, his government espouses the same austerity policy which is enshrined in the European Stability Mechanism, and his chancellor George Osborne had been urging the Eurozone leaders to take “decisive action” on the same lines as the UK’s (ie, to intensify the austerity drive, which is precisely what the proposed treaty amendments would enforce). Cameron himself was to say in his article in The Times on 7th December:
“...as Germany has argued — there needs to be much tighter fiscal discipline and closer fiscal co-ordination within the eurozone to restore market confidence and stop unmanageable debt and deficits occurring all over again...
“One way of introducing stronger rules for the eurozone — which of course wouldn’t apply to Britain — would be a change in the treaty governing all 27 members of the European Union. This is the most comprehensive and credible way to provide tough sanctions to ensure that eurozone countries stick to the rules on debt.”
So while he agreed with it both in principle and practice, David Cameron opted to seek a price in return for acceding to the European Stability Mechanism, a concession to British capitalism which if agreed by the other EU countries would be presented as a strategic victory for the UK, of sufficient importance to obviate his party’s demand for a referendum. The Guardian reported on 21st July 2011:
In his meeting with the 1922 committee of Tory backbenchers on Wednesday night, the prime minister echoed a two-pronged message he delivered in a recent interview with the Spectator. Cameron told the magazine on 7 July that Britain accepted the eurozone would move “towards much more single economic government”. But he added that Britain should use the negotiations to win concessions.
The prime minister said: “There will be opportunities for Britain to maximise what we want in terms of our engagement with Europe … I got us out of the [euro] bailout mechanism which has been used repeatedly and from 2013 cannot be used again, so I think I exacted a good and fair price for Britain going ahead with this treaty change.
“Are there more things we're going to be able to do? Yes, I think there will be opportunities.”
As the December 2011 summit approached, this ‘price’ was variously mooted as a repatriation of powers to the UK, an opt-out from EU employment legislation, and then rather less ambitiously as the preservation of Britain’s existing partial opt-out from the European Working Time Directive (which allows employers to pressurise individuals to work longer than a 48-hour week). Negotiations on the latter issue were reported in the press in November, with claims made that Germany would concede, or had conceded, to the British Prime Minister’s request. But the word got out among Members of Parliament that the previous Labour Government, while still in office, had already agreed such a concession with the Germans- and in any case it hardly amounted to a repatriation of powers.
The Working Time Directive issue was then quietly dropped. Instead, Cameron decided to make his stand on the demand to ‘protect the single market’, specifically by seeking a guarantee that changes to regulations on financial services should require unanimous agreement by member states. Oddly though, in respect of the bête noire of those who aim to protect the City of London, the envisaged Tobin Tax on financial transactions, such a guarantee was already in place because all EU-wide tax changes currently require unanimity.
The particular example given by David Cameron of how new EU regulations could hinder the UK in regard to the financial sector was that forthcoming European rules on bank capital requirements would set those lower than the level proposed for British-based banks by the Vickers Commission; this issue was no doubt selected to create the impression that the British government was taking a more responsible and less financially risky position than European regulation would allow. This, however, was simply untrue- the European Commission proposals already included the provision that the UK would have the facility to set higher capital ratios. As the Financial Times reported in July 2011:
The UK would still be able to ringfence its retail banks and impose extra capital requirements on them under the proposed European Union regulations that seek to harmonise capital rules across the 27-member bloc, Michel Barnier, EU’s internal market commissioner, told the Financial Times.
Mr Barnier said he had split his new capital requirements proposal, unveiled on Wednesday, into two to give jurisdictions such as the UK and Spain more flexibility to impose additional demands on particular parts of their banking sectors to improve financial stability.
...Mr Barnier said: “It seems [the Vickers Commission] may be proposing 10 per cent for retail banks. That would be possible in my proposal. We think we have the flexibility we need,” he said. “We do think the [Vickers] proposals can be integrated into our framework.
Following the December EU summit, the FT reported again:
Brussels insisted on Sunday it would not stand in the way of a tough new capital regime for Britain’s banks, in spite of claims by David Cameron that the implementation of the Vickers banking reforms could be impeded by EU law. Mr Cameron demanded reassurances that Britain could go beyond European capital standards in the EU summit of December 8-9, but his demands were left on the table as the other 26 member states simply side-stepped the prime minister's veto [...]
Michel Barnier, the EU internal market commissioner, insists that proposed new EU rules enacting the Basel III minimum of 7 per cent of high quality capital would not stop Britain piling on additional capital requirements for its banks, reflecting the systemic threat they pose to the UK economy.
A spokeswoman for Mr Barnier said: “Vickers can be implemented fully in the UK in a way that is compatible with EU law.” She said EU rules would be designed to allow countries including Britain to go further, with capital ratios of 10 per cent proposed for UK retail operations.
Nevertheless, on the day of the summit, David Cameron presented his list of special protections which, if accepted, would shield the financial services sector from changes in regulation except by unanimous agreement, coupled with the demand for the European Banking Authority to remain sited in London. The Financial Times noted:
His [Cameron’s] ultimatum on the European Stability Mechanism, which the prime minister agrees is crucial to resolving the sovereign debt crisis, reflects Downing Street’s fears of losing control of the Conservative backbenches by falling short of the high expectations of Eurosceptics.
The FT report on 8th December also indicated that Liberal Democrat leader Nick Clegg was actively involved in supporting Cameron’s position:
Nick Clegg, the deputy prime minister, hinted that the outlines of the strategy would push for safeguards to ensure “that the single market is not fragmented” and “important industries” are protected. “Not exceptional treatment, but are just simply treated fairly, on a level playing field within Europe,” said Mr Clegg.
As part of an diplomatic offensive ahead of the summit, Mr Clegg called Michel Barnier, the European commissioner overseeing financial regulation. Mr Barnier told the Financial Times he enjoyed a “constructive dialogue” with Mr Clegg.
The French government, however, was not interested in making any concessions to the UK. As the Financial Times observed:
European officials fear the demands [by Cameron] will play into the hands of Nicolas Sarkozy, president of France, who will cast them as the perfect reason for bypassing Britain with an independent agreement of 17 eurozone states, a pact British diplomats fear will endanger UK interests.
Cameron granted Sarkozy’s wish. After the summit, the German magazine Der Spiegel examined the geo-political consequences:
What has emerged is a construct that most closely resembles the ideas of the French. Paris always wanted to keep the group of decision-makers as small as possible and limit the European institutions’ powers. This was meant to prevent encroachment on national sovereignty and make the EU’s famous Franco-German motor indispensable.
Great Britain is now largely isolated. As a result, it needs to ask itself what role, if any, it still plays in this new Europe.
Merkel, for her part, wants to prevent Britain and the euro zone from drifting further and further apart. She recently told confidants that it is important to give the British the feeling that they are still part of Europe. But the French see it differently, hoping that they will carry more weight in a union that does not include Britain.
Despite all their differences, Germany has always seen the EU as a political partner of the United States. The French, however, want to establish Europe as an independent power bloc in competition with the Americans. One reason this has not happened so far is that the British have fought to maintain the EU's close trans-Atlantic ties. This dispute will now flare up once again.
But irrespective; by wielding his veto David Cameron not only escaped from the otherwise impossible position that his party had put him in, but mightily impressed his party and, for good measure, much of the British public. Those were the particular circumstances of Mr Cameron’s European ‘triumph’, but underlying them there were, and are, more fundamental processes at work; which require a deeper consideration than can be provided by looking at internal Conservative Party mechanisms and the resonance with the public of nationalist rhetoric, important though those are.
A sinking Atlantis
What lies behind the convolutions of Britain’s ruling party on the EU? The UK’s ‘Atlantic’ status, holding crucial relationships with both the USA and continental Europe, is recognised by all to be a key factor; however when looking at the economic and strategic interests of British capitalism, it is an over-simplification to represent the standpoint of the UK business and political elites as conflicted between the opposing attractiveness of the United States on the one hand and continental Europe on the other. The US worked actively for the creation of the European Economic Community, as it was then called, in the 1950s, as a key economic and political bastion against communism alongside the military bastion of NATO- the European arm of the US-dominated advanced capitalist ‘triad’ (the Eastern arm being Japan). US administrations subsequently encouraged Britain in applying for EEC membership.
Aligned with this United States position, British Conservatives from the early 1960s onwards had their own reasons for seeking UK membership of the EEC. Dr Martin Holmes, a Conservative academic, has observed that following Britain’s loss of most of its empire:
He [Conservative Prime Minister Harold Macmillan] and his generation of Conservatives wanted to find a way in which British power could be rekindled, a way in which our influence could continue to spread beneficially beyond Britain's borders.
Essentially the European Community was to that generation of Conservatives an ideal substitute Empire.
Why not join the European Community? Why not provide it with leadership? If Britain could join Europe, then surely our diplomatic experience, our skills in negotiation, our special relationship with the United States and with the successful transformation of Empire to Commonwealth as a model of peaceful evolution, we could provide the Europeans with political leadership? The Conservatives essentially saw the European Community as a fledgling, young organisation which British leadership could shape and mould. In the process British power would be revived and the trauma of the end of Empire and the Suez humiliation surmounted.
There was also another very important factor, that of the perceived threat of socialism. Dr Holmes adds:
The fear of Socialism was very important in pushing many Conservatives, not only in the early sixties but also in the early seventies, towards a European destination. They saw in the Treaty of Rome a capitalist club; they saw in membership of the European Economic Community a barrier to Socialism. That this view was expressed primarily in private makes it no less significant.
It was not of course a barrier which would prevent Socialism completely, especially if the British people were to keep voting Labour, but at least it would slow down the process. The rules and regulations of the Treaty of Rome, for example on subsidies and nationalisation, would make it more difficult for Labour governments.
For sure, and as amended by Maastricht, the EU treaty explicitly enshrines capitalism as the system by which states must conduct their economic affairs, internally and with each other, requiring:
[T]he adoption of an economic policy which is based on the close coordination of Member States' economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.
Martin Holmes continues:
Indeed, Labour's own doubts about the European Economic Community hastened Conservative enthusiasm. In 1962 [Labour leader] Hugh Gaitskell, in his famous conference speech, opposed EEC entry, castigated the CAP [Common Agricultural Policy] and spoke of the threat to parliamentary sovereignty so graphically that he feared the end of 1000 years of British history. The British parliament, he declared, would have no more power in relation to a federal Europe than California had in relation to a federal United States of America. Those to the left of Gaitskell objected to the EEC as a “capitalist club” thus confirming the view among Conservatives that it must be a good thing. Many Conservatives from Macmillan to Heath, from Howe to Heseltine, were to link Labour's opposition to the EEC with Labour's ideological predilection for state control, nationalisation and planning. And when the Soviet Union attacked the EEC what more proof was required that Britain would be safer and more prosperous within it?
Dr Holmes, who is a eurosceptic, regards Macmillan, Heath and other previous Conservative luminaries as having been misguided in these assessments. But Germany, at that time only relatively recently defeated in World War Two and still split into two states, was not then regarded as an insuperable obstacle to Britain playing a leading role in the European Community.
The power balance within Western Europe was centred on the triangular relationship between Britain, France and West Germany, each roughly equal in population and economic size and each with a colonialist heritage. The relationship between them hinged to a great extent on the relationship of each to the overall kingpin of the ‘free world’, the USA. Among these three major West European powers, the one enjoying the closest links to the USA, not only economic but cultural and of course linguistic, was the UK.
Furthermore, France and the Federal Republic of Germany (FRG) were far from united on the key issue of Europe’s relationship with the USA- the West Germans generally seeking to ensure that the EU remained anchored to the United States, as distinct from a French position which envisaged the emergence of Europe as an independent power bloc; an issue on which Britain aligned with the FRG against France. In passing, however, it should be remarked that the alignment of Germany, after the UK, as America’s second major ally in Europe, is a post WW2 arrangement which was demonstrably not previously the case; the perpetuation of that arrangement rests on structural factors which although until recently regarded as firm foundations, now begin to resemble shifting sands.
Britain’s EEC membership proved to be politlcally helpful to Margaret Thatcher’s Tory government during the 1983 general election campaign, when facing a Labour Party with an explicitly left-wing programme. It was acknowleged that the socialist measures proposed in Labour’s 1983 manifesto would be incompatible with membership of the European Community- contributing not only to the characterisation of that Labour Party programme as unrealistic, but to the party’s ongoing move to the right, culminating in the New Labour project, following that 1983 defeat.
Meanwhile in its Atlanticist role, Britain enhanced its own economic and political power by acting as a conduit for US interests within Europe; for which EU membership has been highly valuable. For example, non-European firms use Britain as a platform from which to access the markets of other European Union countries, a factor which accounts for a high proportion of foreign direct investment (FDI) in the UK. As a 2005 HM Treasury paper indicates:
...membership of the EU is a key factor in attracting investment to the UK, and demonstrates the importance of this investment for the UK. EU membership has contributed to FDI growth in the UK by reducing access costs to a larger market, enabling greater economies of scale and returns on investment, increasing competition and facilitating agglomeration. The UK has been a major beneficiary of FDI flows in the EU, but integration has also enabled growth in outward FDI to EU countries, and increasing returns on this investment.
By far the greatest proportion of FDI in Britain comes from the USA, with other non-EU sources led by Japan, Australia, India and Canada accounting for a lesser but significant share of FDI flows to the UK.
Despite Britain’s latecomer and non-continental position in the EU, it nevertheless played a powerful role among the EU countries during the Thatcher, Major and Blair years. Not only was the UK one of the three big advanced economies (along with Germany and France) in Europe; its status was enhanced because in its version of capitalism- the so called ‘Anglo-Saxon model’- it represented not merely itself but also the USA.
Notably, due to the deregulation of the City of London begun under Margaret Thatcher, UK financial services scooped up speculative money originating not only from the USA but also, facilitated by the EU Single Market, from the European Union countries.
Related to this, until the start of the credit crunch in 2007 the British economy had the added cache that it was, in terms of GDP, growing more dynamically than those of Germany, France and the other advanced continental states.
Thus the UK could get its own way on the key issues in the EU, and when it could not get its way it could quite amicably arrange the facility to opt-out. Crucially also, the EU was proving to be a framework through which economic systems could be pushed further towards pure capitalism, eg via European Union legislation and directives restricting industrial subsidies and enforcing commercialisation and privatisation, and in the recruitment of former East European socialist countries to the ‘capitalist club’. The latter, it should be added, appeared to further enhance Britain’s US-associated influence, as indicated by the fact that the governments of what George W. Bush fatuously called ‘the new Europe’ (ie, the ex-socialist new members of the EU) gave their support to the invasion of Iraq in 2003 despite German and French opposition.
Communist defeat, capitalist fallout
Meanwhile however, factors were emerging and gathering strength that undermined these positive aspects for British capitalism. UK Conservatives could face playing second fiddle to the USA. They could even cope with dealing within the EU with the French and Germans as one of a ‘threesome’. But to be part of a club where one ranks as a poor third in power and influence, well behind France which itself serves Germany, would be an almost unbearable prospect.
The seeds of this trend were sown by the defeat of communism in the Cold War, which softened the necessity for solidarity between the developed European capitalist countries. It also had another crucial effect- uniting Germany. This, by making the German Federal Republic by a considerable margin the largest EU country in population and economy, created the potential for an upset in the triangular balance between it and Britain and France; hence the privately expressed opposition to German re-unification by both Margaret Thatcher and French President Francois Mitterrand.
That potential is still being realised in an ongoing process, assisted by connected developments which have greatly boosted German economic and political power. As an example of the impact of these changes, the alignment of Poland vis-a-vis the USA, Britain and Germany is indicative. As The Economist reported in May 2011:
...behind the headlines the mood is shifting. Warsaw these days seems a lot closer to Brussels and Berlin than it does to Washington, DC. America is in the unusual position of fanning the embers of Polish atlanticism, rather than trying to dodge their heated expectations. One reason is commercial. Poland did not gain the contracts it was expecting in post-war Iraq; nor has its aviation industry benefited from F-16 offset work to the extent that some hoped for. The success of the Polish economy in its trade with Germany makes America proportionately less important [...]
The idea of a Washington-London-Warsaw axis has faded too. Britain (at least viewed from Warsaw) seems a marginal force in Europe.
Among the relevant factors, a key one has been the creation and extension of the Eurozone, in which the UK opted not to participate thus giving the Germans preponderant influence- not merely among the countries which have abandoned their national currencies in favour of the euro, but in anticipation of doing this by the other EU countries, including the former socialist states, who are all committed to joining the Eurozone. Conversely, as a non Eurozone member, Britain’s influence in the EU has diminished.
Another is the rise of Germany’s economic position as the manufacturing powerhouse of Europe, its surging exports going mainly to the rest of the EU but including a very significant increase in the sale of industrial equipment to China and the other BRIC countries.
In contrast to the UK, the Germans had been concentrating their expertise more on engineering technology than on financial speculation; and the credit crunch beginning in 2007 revealed the extent to which the British economy was (and still is) dependent on values fictitiously produced or skimmed off from the real economy, and dispelled the illusion that the City of London actually creates any wealth.
Also, unlike in the rest of the EU (and the USA) there was no property boom in Germany in the 2000s and hence no subsequent property crash; therefore Germany was only positively and not negatively affected by the steep property-based increase in household debt in the rest of Europe and in the US, and on which was founded much of the rise in consumer spending (a significant part of that spending going on high-tech German-made products, or products made in factories equipped with high-tech German-made machinery).
That the crisis emerged in the US financial sector was another factor which helped to wipe the shine off ‘Anglo-Saxon capitalism’, and since then Germany has taken a lead in identifying speculative finance as a source, not of genuine economic dynamism, but of instability and unacceptable risk; hence it should be regulated more strictly and subjected to a Tobin-type transaction tax. Notably, the German government, with France in support, was already accusing Britain of blocking necessary regulation and taxation of hedge funds and other aspects of the shadow banking system, well before David Cameron became British Prime Minister.
Germany has also been foremost in challenging those EU countries which have substantially cut their levels of corporation tax in order to attract foriegn investment, on the basis that this is a ‘beggar thy neighbour’ policy which rather than creating new investment overall, merely entices it from higher to lower tax countries while reducing the potential to maintain taxation income- and thereby the ability to balance the government’s books- in the EU as a whole. The FRG, again resisted by the UK (but also by Ireland and other ultra-low corporate tax economies) has alongside France been pressing for the harmonisation of corporate tax rates.
Berlin’s case on both these issues is unimpeacheable, lending a moralistic hue to the German stance. Nevertheless, in the relative economic position of the three major developed European economies, the imposition of a Financial Transaction Tax would boost Germany the most, followed by France, to the clear detriment of UK capitalism- the reverse of the proportional order in which speculative trading currently takes place.
This is hardly a coincidence, and it is also the case that Germany, unlike small countries like Ireland and even a fairly major one such as the UK, has no possibility of gaining any sustained advantage by entering the competitive game of significantly cutting corporate tax rates. Were Germany to do so, because of its pivotal position in the EU and because its economy is by far the largest in the EU, it would very rapidly speed up the international tax-cutting spiral and thus dramatically reduce tax revenues in Europe including without doubt, by the medium term, its own tax revenues. Thus German morality is tied closely to German self-interest.
Lohndumping uber alles
However, the means by which Germany, following the adoption of the euro in 1999 to 2002, became sans pareil the industrial supremo of Europe included a key aspect which although conventionally described in terms of thrift, was an aggressively competitive ‘beggar thy neighbour’ policy in which the benefits to German capitalism could come only at the expense of other countries- the policy which has come to be known as internal devaluation. Within Germany, the tactic is referred to rather less politely as Lohndumping (wage dumping).
In a capitalist global economy, a key factor in the success or otherwise of a country in selling its goods abroad is the vaue of its currency. In order to increase exports, a country can allow or try to arrange a fall in the value of its currency, thus undercutting competitors by making its manufactured goods and exportable services cheaper for foriegners to buy. This of course is a zero-sum game, as currencies are valued against each other- so when some currencies go down, other currencies go up.
Devaluation as such, however, is not possible when a country does not have its own currency denomination, as in the case of Germany which shares its currency with France, Belgium, Italy, Spain etc. Instead the FRG has been successfully suppressing workers’ pay rises, so that wages in Germany fell in real terms after the creation of the euro, and have fallen even further relative to the pay of workers in many other countries. This austerity in wage costs (accompanied by the ‘Hartz 4’ programme of cuts in social benefits) led to a very significant cheapening of Germany’s products, equivalent to a series of currency devaluations to the competitive disadvantage of its fellow Eurozone members, particularly Greece, Ireland, Italy, Spain and Portugal- but also even France. As Der Spiegel reported in September 2010:
“The Greek crisis has German roots,” says Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development (UNCTAD), in Geneva. It was German wage dumping that got the country’s European neighbors in trouble, he says.
It remains to be added that, although its financial sector is not as prominent as the UK’s, Germany does do banking, and the growing private and public sector debt of the peripheral Eurozone countries was facilitated by money lent by German banks, along with banks in France and the UK, and is owed to banks in Germany, along with French and British banks.
Paradoxically, the current Eurozone debacle has not reduced but enhanced, or perhaps more accurately, more sharply revealed German power. If the euro ship sinks, all hands will supposedly go down with it and the resultant whirlpool will submerge non-European economies as well; only Germany can save it, and can dictate the terms on which it will consider doing so. Supplicants, from Barack Obama to EU Commission President Jose Manuel Barroso and even David Cameron, pester Angela Merkel to agree to the so-called ‘bazooka’ - an effective pooling of sovereign debt in the European Union by means of the creation of ‘eurobonds’ and / or a ‘transfer union’ for the Eurozone. As Reuters reported:
...in the days leading up to the summit, top U.S. officials, including President Obama and Treasury Secretary Timothy F. Geithner, were publicly and privately urging the Europeans to deliver a massive, immediate and direct response - “the bazooka” - to the financial markets’ concerns that are currently strangling the ability to fund EU sovereign and banking debt. To those who share the view articulated by the administration, Mrs. Merkel’s management of last week’s summit seemed like Nero watching Rome burn.
Germany prefers to risk Eurozone meltdown, and furthermore enforces austerity- a form of the internal devaluation which it already achieved, on other European countries. Given that the majority of EU trade takes place within the EU, austerity if carried out by all or most countries leads to reduced demand, and therefore causes a likelihood of further economic collapse. This point has not escaped eurosceptic UK Conservatives, including John Redwood and David Davis. The latter pointed out that the EU austerity pact, “will not deal with their deficits or restore growth”, and worse, will cause “for the eurozone’s most fragile economies, a downturn that makes the cure as bad as the disease”.
Unsurprisingly, the Tory eurosceptics thought it better not to raise the matter of what that same policy, carried out by their own party, is expected to achieve in Britain- apart from the ubiquitous effect of protecting and enriching the rich at the expense of the workers and the poor.
A crisis too good to waste
So why does Germany, against all advice, refuse to agree a reprieve to the Eurozone crisis- is it merely the home-grown political contraints imposed on Angela Merkel by German voters? Two weeks before its editorial quoted earlier in this article, The Economist published a report from Berlin which referred to Angela Merkel in its title as ‘The new iron chancellor’. It noted:
Mrs Merkel is aware of the talk of catastrophe, but evidently not listening—even after market nerves led this week to a failed German bund auction. In any case, she sees the crisis as too good to waste. No fewer than five euro-zone governments have been toppled but their successors are committed to sounder budgeting and structural reforms. Mrs Merkel wants the euro zone to be a “stability union”, but this understates her ambition.
In an interview with ABC, Hamish Douglass, who is the Australian-based CEO of boutique investment company Magellan Financial Group, was more emphatic that Germany is acting with intent- it does not, as yet, want an end to the European debt crisis:
It’s our judgement that the Germans are actually fully in control of this situation. At the moment the markets don't like it; they would like an instant solution and there are some instant solutions that are being pushed by the French and actually by the UK, being pushed by the Americans to try and put an end to this uncertainty. But I don't think the Germans want an end to the uncertainty at the moment. They don't want to pull the triggers to take the pressure off countries like Greece and Italy and Spain and even France for forcing through measures that are going to put Europe on a more stable footing for the long term. Germany, I believe knows when it comes to the crunch there are options if it really blew up into a full-scale catastrophe. And many people have put these options on the table. I think Merkel has been very careful in the words. While they're ruling them out, she is ruling them out for the time being, such as the ECB intervening in markets in an unlimited way to put a cap on bond rates. The Germans don't like it, but she's used language “for the time being”.
But the Germans must be pretty pleased with the political change in Italy. They must be pretty pleased with the austerity programs being forced through in France and I think they must be pleased with what's going on in Greece, because if Europe is going to be stable in the long term, they need to change the policies and the fiscal policies within the centre of the union.
Hamish Douglass added:
We've talked about the rise of China, maybe the demise of the United States, but still the superpower - we are seeing the rise of Germany, which is dictating policy in Europe. [...] I think it's very painful for the Europeans. It's incredibly frustrating for financial markets who would love a more definitive solution to end the bond crisis in countries like Spain and Italy. I think the Germans believe they have time on their side and by allowing bond yields to go up is putting so much pressure for change to happen politically and economically within other large countries in Europe, and Germany has realised this is fundamentally in their interests.
What terminology is appropriate for a state of affairs where one country is not only economically superior and employs that superiority to its own advantage and the detriment of others, but also has gained the power- and uses it- to topple other governments and to dictate the policies carried out in the greater part of a continent? Following the December summit in Brussels, the Spanish newspaper El Pais published an article by Josep Ramoneda which made a suggestion. Entitled ‘A German protectorate’. It noted:
The last word, we have always been given to understand, belongs to the possessor of sovereignty. But to give the last word to one government - in this case, the German - is not to transfer sovereignty to a higher instance. It is to return to the past, to accept the protectorate idea characteristic of the era of colonialism.
[...] the novelty of this crisis is that it is devouring the EU institutions in favor of certain national powers: Germany, with France in a subaltern role. And when the greatest sacrifices of national sovereignty are demanded, it is to transfer power not to supranational EU institutions, validated by the voters, but to the unequal Franco-German pair, in which Sarkozy has already accepted the supremacy of his colleague Merkel. Europe as a German protectorate, exactly contrary to what the EU was invented for.
Will this ‘protectorate’ be a temporary imposition, for however many years this crisis is going to last? If, rather, it is envisaged as an even longer term arrangement, the harsh and protracted austerity being enforced in the EU makes more sense. After all, if most of Europe is to be Germany’s hinterland both economically and politically, then in order to compete with- for example- a technologically improving China (where standards of living, though rising, will for decades to come remain much lower than in the West) and to make higher profits for German companies, it is imperative that the zone which Germany dominates must be ever more ‘efficient’ in terms of labour and social costs; ie, living standards (for all but the very rich) must be driven down to much lower levels.
The dinner at Europe’s table, it will increasingly be feared, is for one.