A history of Brexit

Published on the website of The Conservative as well as 1828.

Auf Deutsch: Achgut.com und Teil 2

In 1988, British Prime Minister Margaret Thatcher was invited to the West-Flemish city of Bruges, home to the world’s first stock exchange, which emerged to facilitate trade between England and the European mainland. She was there to deliver a speech for the College of Europe, a university which has been training many of the European Union’s top officials. In that speech, she warned: “We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising a new dominance from Brussels.”

She praised the “Treaty of Rome” as “intended as a Charter for Economic Liberty”, however adding: “but that it is not how it has always been read, still less applied.”, explaining that “the lesson of the economic history of Europe in the 70's and 80's is that central planning and detailed control do not work and that personal endeavour and initiative do.”

This British warning was ignored.

EU Commission President Jacques Delors simply continued his efforts for the creation of a common European currency. Its creation would be the first big step for the UK to leave the EU project, so this deserves to be studied in more detail.

The euro’s creation was mainly the result of longstanding French frustration with the supremacy of Germany’s Central Bank, the Bundesbank, which had been conducting monetary policies that can be considered pretty hawkish, to central banking standards, originating in Germany’s hyperinflation trauma earlier in the 20^th century.

During the 1980s, France, Belgium and other European countries had no other option than to peg with Germany’s currency, so these countries had to follow whatever the Bundesbank decided in terms of loosening or tightening monetary conditions. The French establishment, which included Jean-Claude Trichet, a future ECB President, was simply horrified that the presence of a hard currency in Europe limited the room for artificially boosting the French economy through devaluation of the national currency. Thanks to the D-Mark, savers and investors had a stable alternative to the French franc, in case the French establishment would go too far.

French strategic thinking then was to create a common European currency, so to eliminate Germany’s monetary sovereignty. Compare that to today’s complaints in Southern Europe how the euro has supposedly benefited Germany. In my view, it hasn’t. Instead, it has impoverished German savers, at the expense of exporters who have been lacking incentives to innovate, as for example Germany’s car industry. Then it’s true that the euro has strengthened Germany politically, as the German economy is the bedrock upon which the credibility of the common currency rests. When bailouts are needed to kick the can once again down the road, the voice of the German Bundesbank is key. When expansionist monetary policies are needed for the same purpose, the tacit support of the German Chancellor to debase German savings is needed. The French establishment was correct to assume that the creation of the euro would enable looser monetary policies, which help to avoid reforms to the welfare state, but it was wrong to assume it would weaken Germany politically.

In its quest for the euro, German unification provided an opportunity for France. A few years ago, Der Spiegel unearthed secret papers showing that Germany was strong-armed by France into swapping its Deutschmark for the euro as the price of reunification. French President “Mitterrand did not want a reunification without progress with European integration and the acceptance of the euro,” former Mitterand adviser and later minister of foreign affairs Hubert Védrine has confirmed. Also Karl Otto Pöhl, who was Bundesbank President at the time, has said the story is accurate.

Ironically, Margaret Thatcher herself was an opponent of German unification, which should be considered a strategic error, as it gave the French more leverage to force Germany into accepting the euro. A stronger Anglo-German bond could have been a force for good.

According to some, an important reason France was holding up the United Kingdom’s accession to the European Economic Community (EEC) in the 1906’s was to extract more concessions from Germany on agriculture. The French were apparently afraid Germany would link up with the free market loving British in obstructing what would end up as an epic failure of central economic planning: the EU’s morally and financially corrupt “Common Agricultural Policy”.  

Despite the fact that Britain and other countries were forced to leave the euro’s predecessor, the “European Exchange Rate Mechanism (ERM)”, in the autumn of 1992, the common currency was created anyway. The Treaty of Maastricht, which had been signed in February 1992, provided the legal basis for this. During the negotiations, the UK had secured an “opt-out”, which can be considered the first big British deviation from the EU project.

The same year, the Danish poplation rejected the Maastricht Treaty in a referendum, resulting in a Danish euro opt-out, and in France only 51.1 percent of the public voted in favour. Many prominent economists had warned against creating the common currency, something that wasdocumented by the EU Commission itself, just before the start of eurocrisis at the end of 2009, in a bid to mock them. In the early 1990s, Delors and his companions wouldn’t listen. The project had to be realised.

The decision to create the euro was ultimately taken at the Madrid Summit on 16 December 1995, when Spanish Prime Minister Felipe Gonzalezmanaged to dismiss French President Jacques Chirac's demand for national referendums on the euro. Even doubts coming from the French President himself couldn’t stop it. Kohl had been sold on it. German officials warned him in 1997, 1998 and 1999 that Italy posed “a special risk” to the euro because of its refusal to reduce its huge debts and its accounting tricks. Joachim Bitterlich, Mr Kohl’s former foreign policy adviser, wrote in a memo in January 1998 that Italy’s deficit reduction was based mainly on a dubious “tax for Europe” and on unusually low market interest rates. In 2012, Bitterlich revealed that everyone knew Italy would be included from the start, for political reasons, as he described the mood at the time: “Not without the Italians, please. That was the political motto.

The desire of Helmut Kohl alone to continue with it wasn’t sufficient. After the fateful decision in December 1995 to actually introduce the euro, Italy saw its 10 year borrowing rates drop under 12% again. Markets had rationally concluded that despite Italy’s massive debt burden, the country would be more sustainable as a member of the Eurozone, despite the so-called “no bailout” pledge.

This truly was the first European bailout of Italy, which was going straight to default levels at the time. from 1996 on, due to the political decision to create the common currency.  Also Belgium, Portugal and Spain experienced a similar rapid decline in their borrowing cost from 1996 on until 1999, when the euro was formally introduced.  

In short, Britain’s first schism from the European project was due to the German concession to France to give up its D-Mark, combined with the incentive for European governments to create a common currency, so to help finance their welfare states, with the greater capacity for unsustainable debt creation enabled by the common currency.

A final attempt to lodge Britain into the euro was prevented, partly thanks to the efforts of “Business for Sterling”, an influential group of British business people led by Rodney Leach, the late Chairman of Open Europe. As a businessman he was one of the most influential figures from the City of London. With his exceptional experience in finance, he understood the profound implications of Britain giving up its own currency. The group managed to convince the Confederation of British Industry (CBI) to abandon their support for the euro, taking a neutral stance instead. It was a great victory in preventing British accession to the euro, which would have made Brexit much more complicated, but also enormously more painful, as it would have entailed the break-up of a monetary union, something that is hard to do in an orderly fashion. British discontent with EU membership would have been much harder to channel. Few in the EU realise the service done to the EU by Britain declining to join the euro.  

Nevertheless, it didn’t stop there.

Consecutive EU Treaties, signed in Amsterdam, Nice and Lisbon involved ever greater transfers of power and money to the EU level, either in the form of scrapping vetoes or in the form of the development of new supranational bureaucracies, such as an “EU Foreign Ministry” or “EU Council Presidency”.

Referendums were held on the Nice Treaty, rejected by the Irish in 2001, the “European Constitution”, rejected by the French and the Dutch in 2005, and its reworked version, the Lisbon Treaty, rejected again by the Irish in 2008, who were asked to vote a second time on both Nice and Lisbon.

It must be said all of these Treaties had been agreed by consecutive British – Labour – governments as well. Tony Blair had first promised a referendum on the “European Constitution”, but then when this project had been killed by French and Dutch voters, his successor Gordon Brown didn’t submit the Lisbon Treaty to a popular vote, even if he made up an excuse to miss the signing ceremony in December 2007.

As Conservative opposition leader, David Cameron told Czech President Klaus, the last leader needed to sign the Lisbon Treaty in 2009, to hold on and not to sign, but by the time Cameron entered office as British PM in May 2010, Klaus had folded for the pressure.

The financial crisis, the eurocrisis and the chaos of the migration crisis would further embolden Eurosceptic sentiment, not only in the UK, but across Europe, with referendums going against the EU’s preferred outcome in Denmark, Greece, the Netherlands and Hungary.

Britain’s eurosceptics had been craving for a referendum on anything EU-related, so to stem the rise of UKIP, Cameron offered a referendum on EU-membership in January 2013. The rest is history.

People criticizing Cameron for submitting such an important decision to a referendum should understand the following. It’s fair to be against direct democracy – Thatcher was opposed, for one – but also without a referendum, Brexit may well have emerged as official Conservative policy in its election manifesto, at one point. Many in British society simply had enough of the ever greater concentration of power and money in Brussels and Cameron was simply listening to voters, as any democrat should do. In a similar way, he managed to become Conservative leader by promising to pull the Conservatives out of the European People’s Party, where the likes of Angela Merkel were firmly sold on EU-federalism. 

Cameron should have been more ambitious in his attempts to reform the EU, however. As former Open Europe Director Mats Persson wrote about his experience as advisor to Cameron on the failed renegotiation of EU membership, ahead of the 2016 referendum: “We under-bid. (…) Cameron’s brilliant 2013 Bloomberg speech – envisioning sweeping EU reform (…)– was incrementally distilled down to a less ambitious opening bid in the renegotiation. Even some European leaders suggested more ambition. As one diplomat put it, “In Europe, we ask for 10 things in order to get 6, you ask for 4 things to get 4. Why?””

Then also European leaders deserve blame. German Chancellor Angela Merkel ruling out Treaty change early on, after Cameron announce his intent to renegotiate Britain’s relationship. This made big reforms impossible. She also largely left the initiative to the European Commission. Also other countries that have a great interest in trade with Britain, like Belgium and the Netherlands, did not go out of their way to help Cameron. Perhaps the biggest effort was made by Central and Eastern European countries, as they did concede to modest restrictions on EU migrants’ access to welfare.

We also shouldn’t forget how in June 2014, the UK was outvoted, together with Hungary, during the decision to appoint Jean-Claude Juncker to EU Commission President. Juncker, an avid federalist then pledged his Commission would be “political”, thereby going directly against the UK’s preference of the Commission as an administrative body responsible to open up trade. Juncker did start a “better regulation” initative but that didn’t deliver much. Crocodile tears were shed after the UK public voted to leave, but many in Brussels should realise they carry a responsibility for the divorce too.