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Britain, the eurozone, and how we could win the battle for the EU budget but lose the war

Our Chief Economics Commentator says that Britain has a strong hand to play with the eurozone; and, below, that we value stability over living standards

Hamish McRae
Tuesday 23 October 2012 18:41 BST
The German Chancellor Angela Merkel angered some other EU leaders before a two-day summit by calling for the European Commission to have the power to veto national budgets
The German Chancellor Angela Merkel angered some other EU leaders before a two-day summit by calling for the European Commission to have the power to veto national budgets (Reuters)

The next big fight in Europe is over the commission’s budget. Will it be frozen, as Britain wants, or will it be allowed to rise a little but be capped at 1 per cent of the region’s GDP, as Germany and a number of other hawks want?

The “not a penny more” line of the UK government – if that is what it is – will be popular here, but Europe is about negotiation, compromise and power. The German line is a tough one, but the detailed changes we are suggesting would, I gather, make a lot of sense. Since Germany is the largest net contributor to the EU, it may get its way.

But pause a moment. The numbers are actually quite small in terms of public finances. It varies a bit from year to year but our net payments towards the EU run at about £10bn a year. Opponents of continued British membership put much higher numbers on this but, to do so, you have to put in figures for compliance cost: what our companies have to pay to fit in with European regulation.

This is not the place to make a great defence of European regulation, but some elements of it would have to be done anyway, certainly if we want to go on selling into Europe. And while £10bn is a lot of money – five times the cost of running the Foreign Office – it is not so large in terms of our financial problems. We are borrowing that every couple of weeks. So while our payments to Brussels cause political resentment, in public finance terms they are quite small.

Something much bigger is happening and we might be wise to save our firepower for that. It is the way in which the seemingly short-term actions to shore up the eurozone are creating a new Europe. The banking union within the eurozone is the most recent example. It looks as though, by the end of next year, there will be a single banking regulator.

That does not mean there will be a banking union in the sense that banks will lend freely across national boundaries or that Spanish banks will be bailed out by the German taxpayer. But it means that a wall will grow between UK, US, Swiss and Scandinavian banks, and those in the eurozone.

In terms of European banking integration, we have already gone backwards. Banks find that when they plunge into a foreign market, they’re liable to pick up risks the local banks won’t touch. Now we will go back further.

The result will be that the idea of a common market in services as well as in goods is unlikely to be achieved, or rather insofar as it is, it will be within the eurozone and not EU-wide. This matters to us because we have a large deficit in physical trade with the rest of the EU, but a surplus in trade in services. So it is in our self-interest to maintain as much access as we can to European service markets.

Of course, it is similarly in the self-interest of core Europe to maintain access to the British market for goods, so we are in a strong negotiating position. But you don’t want to use up too much negotiating capacity on things that are relatively small, such as the contribution to the budget, when there are other things that are more important to us, such as trying to preserve access to the single market.

It is worth making this point irrespective of what happens to the euro or what happens to British membership of the EU – or indeed what happens to the eurozone economy, which is clearly splitting into two, a successful north and a disastrous south. We have an interesting and strong hand of cards to play, but we need to play them thoughtfully as well as forcefully.

Worried about tomorrow; can’t enjoy today

We are not, apparently, as happy as we should be given the UK’s national wealth. I wonder why. There is an established relationship between GDP per head and happiness, in that richer countries tend to be happier than poorer ones. But it is not a straight line, for some countries are happier than they “ought” to be given their living standards, others less so. For example, Denmark and Brazil seem particularly happy, Japan and Russia not as happy as they should be.

Our Office for National Statistics has just published a study of wellbeing in Britain. It takes four measures – real national income per head, real household income per head, inflation, and public debt. The first two measure living standards directly, the second two measure things that might worry us about the future. Inflation worries us not only because it eats into our present income but for what it might do in the future. Public debt worries us because we know deep down that someone, some time is going to have to pay it off.

People seem to value long-term stability over living standards. A squeeze on household budgets is worrying; the threat of 1970s-style inflation and unrest is much worse.

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