A multi-speed Europe is inevitable - and right

The 'outs' will prefer greater prosperity and see it as compensation for not having a seat in euro negotiations
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The Independent Online

So it is going to be a multi-speed Europe. What shape might that take?

The overwhelming probability now is that Sweden, Denmark and Britain will remain outside the eurozone for years, perhaps for ever. There is a decent chance that the new European constitution will be rejected by a referendum in one or more member states. They could include Britain, for it is possible, at least, that a weakened Tony Blair will be unable to resist the pressure to hold a referendum here.

Meanwhile the EU will acquire new members, who may or may not decide to join the eurozone. Yes, they are required to do so provided they qualify, but they may choose not to qualify if that were to mean slower growth.

So it seems almost inevitable that Europe will go multi-speed. A core of countries led by France and Germany will press on with a closer union. And an outer ring, including Britain and Sweden and possibly joined by some of the new entrants, will go more slowly in political terms, but have faster economic growth. There will be exceptions, but as a general rule the political fast-movers will be the economic slow-movers.

How will this affect the balance of power in Europe? Well, first, is the notion credible that the fringe will continue to grow faster than the core? You cannot prove it, but I think the balance of probability is that it will, for at least three reasons.

The first is that having a single interest rate for the eurozone must impose some growth penalty because that rate can never be optimal for all its members. In the case of Germany, too high a rate seems to be knocking about 0.5 per cent off its already slow growth. Cumulatively, that is huge.

Second, demography favours the fringe. The combination of faster immigration and in general slightly higher birth rates mean that the UK and Sweden will tend to maintain or add to their populations, while in Germany and Italy (though not France) populations will fall.

Third, highly skilled people seem to be starting to move to higher-growth economies because they see the opportunities are better. There seems, for example, to be a large and growing Italian brain-drain. The UK is already the principal recipient within the EU of such labour mobility. We will also get a boost from the new member states, whose workers we accept from day one, instead of delaying for several years as in most other EU states.

If this line of argument is right and the non-euro countries continue to outgrow the eurozone, the growing economic power of the "outs" will compensate for the political power of the "ins". The "outs" will prefer the greater prosperity and see that as compensation for not having a ringside seat in all EU negotiations. And in so far as their rapid growth makes them attractive places to export to and invest in, the economic success will of itself give them a considerable voice.

So the new members that come in next May, plus the other candidates such as Romania and Bulgaria, will find they are in a less monolithic club than appeared to be the case a few months ago. Some will choose to merge with the core, others to stay on the fringe.

This could be tremendously helpful in the years beyond. You have to consider where Europe might end. If Romania is in, why not Ukraine? If Ukraine, why not Russia, the vast majority of whose population live in Europe? (By contrast, the majority of the population of that other candidate, Turkey, live in Asia.) At some stage Russian membership is bound to come up, yet it is inconceivable that Russia could become a full member of a highly regulated, Brussels-style EU.

The looser the EU, the more different classes of membership it could offer, the greater the ease with which Russia could be accommodated. Bringing Russia back into the mainstream of the European economy would be an enormous prize - not least, it would help to secure Europe's energy needs.

And then there is Britain. It would be absurd and wrong - even if it were possible - for Britain to try to slow down European integration if that is what a majority of EU members want. But it is politically very difficult, perhaps impossible, to persuade the British people to cede more powers to Brussels. But it ought to be possible to apply the eurozone model to other areas, allowing the countries that want to move closer to do so, while allowing those that don't to opt out.

Might under these circumstances Britain find itself frozen out of the EU decision-making process? At an operational level, the answer is yes - we don't participate in eurozone interest rate decisions, but then we wouldn't want to. The protection for Britain is the size and success of its economy.

Did you know that Britain is now the third largest exporter in the world, if you take visible and invisible exports together? It is behind the US and Germany but ahead of Japan (yes) and France and Italy. We are also the third largest import market. The eurozone currently supplies half our imports. I do not think the core EU members would wish to jeopardise their prospects in such an important market.

The conventional wisdom among EU enthusiasts is that the Swedish vote was, if not a disaster, a serious setback. Typically their response is that the EU has to work harder to explain itself and to make its institutions more democratic so that the central bureaucracy is perceived as more legitimate. In other words, in future the patricians have to make the plebeians vote "yes".

There is another, equally "good European" view, which runs like this. This is an opportunity, not a threat. Europe will inevitably become more complex, and just as a one-size-fits-all interest rate may be rejected by some countries, so one-size-fits-all policies in other areas may be rejected too. The task is to create the political structures for Europe that reflect the democratic desires of its members, not to use money or authority to override those desires.

The pro-euro elite in Sweden devoted huge resources to try to persuade people to vote "yes" and they failed. It would have been far better to have explained to the eurozone members that membership was not on and then try to think through how the business relationships between Sweden and the eurozone could flourish none the less. That is what they - and indeed we - should do now.

The EU is bound to change radically over the next 30 years. If it is to include Russia and the Balkans it has to have different levels of membership. It also has to have a mechanism for countries to change their level of membership, with safeguards to make sure that these are not frivolously or frequently altered. More specifically, the eurozone needs to have a mechanism whereby countries can leave and re-establish their own currencies, again with proper safeguards.

There are many areas where having a common set of standards is very helpful. Having a single European one means that the rest of the world is not forced to adopt the only realistic alternative, US standards. There are many areas - mobile phones are perhaps the most obvious - where the European standard has beaten the US ones. It is possible that a better-designed euro might become a standard to challenge the dollar, though we have to accept that while at the moment the eurozone and the US economies are roughly the same size, in another 30 years, the US will probably be double as big. But that is all the more of a case for getting Russia in as soon as possible.

None of this is administratively easy. But it is much safer than having an overly rigid model that ultimately will be rejected by electorates, and rejected in an inevitably messy way.