The UK implications of a eurozone on steroids

Jonathan Lindsell, 4 June 2015

Emmanuel Macron and Sigmar Gabriel, the economics ministers for France and Germany, have co-authored an article setting out their vision for dramatically extending the eurozone’s integration.  For those reformists and sceptics considering David Cameron’s renegotiation ending in a ‘two-speed Europe’, this is very much the higher gear.

The ministers’ proposals amount to much greater social, economic and fiscal union. They include:

– ‘Consistent, though not necessarily equal, minimum wages’
– ‘Harmonised corporate tax’
– ‘Structural reforms’ to the labour and business environment

From a federalist’s point of view, these all make sense. The ministers explain the labour reforms as a plan to combat ‘social dumping’, which is equivalent to the British media’s idea of welfare tourism. The tax convergence is designed to halt ‘races to the bottom’ as eurozone members try to attract business by offering lower business taxes than their continental fellows. It will be interesting to see how Ireland and Luxembourg respond– indeed, the proposal may partially be a reaction to the ‘LuxLeaks’ revelations.

Macron and Gabriel’s plans go much further than the paper Francois Hollande and Angela Merkel will submit to the European Council at the end of June. They detail a ‘preliminary eurozone budget’ with its own revenues from the Financial Transactions Tax and aforementioned corporation tax, which would provide for borrowing and avoid ‘self-defeating bouts of austerity’ but not ‘inappropriate crisis lending’. The European Stability Mechanism (the current emergency fund) would be brought under EU law as an EU rival to the IMF.

To legitimise these changes they suggest a new euro commissioner and a eurozone grouping in the European Parliament. Looking EU-wide, they want a union that is simultaneously deeper, ‘simpler and more efficient’, and including more subsidiarity (national-level control), to create internal energy and digital markets.

This could go either way for the UK, assuming Britain supports these changes while staying out of all but the EU-wide proposals. The bold plans, led by a committed Franco-German core, could do great things for continental competitiveness, reduce low-skilled immigration, and cut down tax avoidance. This in turn could make Eurozone members better neighbours, with healthier economies, buying more UK goods.

However, the precise details for the euro commissioner and parliamentary euro-group could imply non-euro countries being sidelined even for those developments that directly affect the whole single market. Britain could be outvoted and find the digital and energy sectors unified under rules that limit British competitiveness and strengths. At the same time, UK businesses could be indirectly affected by the eurozone changes such as the FTT, notwithstanding possible protection from the European Court of Justice.

A salient point here is that ‘Brexit’ offers limited protection against such potential developments. Outside the EU, it would be more possible to resist new digital and energy rules if the UK government decided regulatory independence was a higher priority than integration in those markets. Likewise, the taxes could be resisted. The second-order consequences, though, would probably affect UK business in either scenario.

Jonathan Lindsell is EU research fellow at Civitas. He is currently investigating different options for a ‘two speed Europe’.