SELF-INTEREST GUIDES COUNTRIES AS INTEGRATION FOUNDERS
By George Parker and John Thornhill

Financial Times (UK)
October 4, 2005

Ralph's Bar in Brussels' European quarter is throbbing. It is the time of year when the city gets its infusion of fresh blood as hundreds of bright graduates arrive with ambitions to "build Europe." Towering over the bar and its polyglot clientele, cranes haul into place the latest concrete beams and glass sheets of the European construction, an extension to the vast European parliament.

It is a dynamic scene, befitting an organization that has barely paused for breath since its first incarnation in 1957; a club driven by a restless desire to deepen co-operation between its members and widen its borders.

But in 2005, the forward momentum stopped. The European Union's proposed constitutional treaty, enshrining a new set of rules for the enlarged union of 25 member states, is in effect dead, killed by the voters of France and the Netherlands. The Union's leaders cannot agree on its new seven-year budget and the resulting political turmoil threatens to derail eastward enlargement. Even the EU's historic decision this week to start accession talks with Turkey has prompted a sense of foreboding. Opinion polls suggest that French voters would veto Turkey's entry even if it met all the accession criteria over the next decade.

Faced with these problems, Europe's leaders announced in June a "period of reflection." But, as José Manuel Barroso, European Commission president, observed last month, the debate has so far been barren. "Let's be frank, there hasn't been much reflection," he said.

This is a moment of truth for the EU, for its leaders and for the idealistic interns quaffing beers in Place du Luxembourg. Mr. Barroso argues that if the EU is to emerge from this period of stasis, it must put itself at the heart of Europe's response to the challenges of globalization, terrorism, and international instability. That will take leadership, and Europe is waiting for a generational change. By the spring of 2007 there could be new leaders in Britain, France, Germany, and Italy, removing some of the corrosive personal rivalries that have bedevilled relations between the EU's big four.

But while attention shifts to 2007, a worrying question is starting to be aired in Brussels: could the EU be in danger of going into reverse?

After almost 50 years of closer integration, the EU is witnessing a resurgence of national self-interest at its core, in which the ties of solidarity between 25 diverse member states are slowly being loosened. The French and Dutch rejections of the constitution have reinforced the trend, signalling a rupture in the link between EU institutions and electorates.

There are many manifestations of this new national assertiveness. Germany, for so long the Union's "milch cow," is no longer prepared to open its checkbook to fund the EU's budgetary transfers to poorer regions in order to prove its credentials as a good European; neither are Austria, the Netherlands, or Sweden. Britain is fighting a fierce battle to save its 4.6bn euros ($5.5bn, £3.1bn) annual rebate from the budget.

Five out of the 12 eurozone members are now in breach of the stability and growth pact, designed to keep budget deficits below 3 per cent of gross domestic product and prevent "free riders" destabilizing the euro by running irresponsible fiscal policies. When Francis Mer, the former French finance minister, was challenged to explain to colleagues why he was not bringing his country's deficit into line, he said he had "other priorities."

Although other finance ministers choose their words more carefully, their policies often reflect the fact that they are more concerned about satisfying national voters than their European partners. The weakening of the stability pact to accommodate these political realities has left the European Central Bank "seriously concerned." But perhaps most worrying for European Union solidarity is a new muscular nationalism that is calling into question one of the founding principles of the club itself: the operation of the single market.

For all the talk about how Europe might one day find the will to press ahead with integration in new areas -- such as defense, foreign policy, judicial co-operation or tax co-ordination -- less attention has been focused on whether it can enforce existing basic policies.

The EU's founding treaty enshrined the so-called "four freedoms" in the single market -- the freedom of movement of goods, people, services, and capital -- to underpin the continent's postwar recovery. Although the single market in goods is largely complete, member states are bickering furiously over a draft law to open up the market in services, which represents 70 per cent of the EU economy. France, gripped by fears that the directive might open the floodgates to a wave of Polish plumbers and other low-wage workers, wants to water down the law, as does Germany.

When it comes to the free movement of people, only three of the 15 pre-enlargement EU member states -- Britain, Ireland, and Sweden -- are applying the principle to workers from the ten accession states that joined the club on May 1, 2004, including eight former communist countries from central and eastern Europe. The other 12 are applying "transitional periods," allowed under EU law, to protect their labor markets for up to seven years.

Most recently, the rise of national self-interest has manifested itself in threats to the free movement of capital, including cross-border mergers and takeovers, which are seen by the European Commission as a vital tool for raising the continent's competitiveness. Antonio Fazio, the governor of the Bank of Italy, is under pressure to resign after allegations that he used his position to thwart foreign takeovers of Italian commercial banks but the phenomenon goes wider.

Gerhard Schröder has clashed with the European Commission over its attempts to scrap the "Volkswagen Law", which protects the car company from hostile bids. In France, Dominique de Villepin, prime minister, is invoking the principle of "economic patriotism" to defend national economic interests more effectively. His government has railed against the possibility of PepsiCo, the U.S. consumer group, launching a hostile takeover bid for Danone, the publicly-traded French yoghurt company. He is also drawing up a list of ten strategic sectors in which companies will be shielded from foreign takeovers, sparking warnings from the conseil d'état, the government's legal adviser, that this could contravene EU law.

Jean-Dominique Giuliani, president of the Robert Schuman Foundation, a European think tank, says that France's Gaullist government has responded to the No vote in the referendum by becoming more nationalistic. "When France becomes more nationalist it reasserts the patriotism of the state. Our natural response is to be more statist," he says.

The fact that France and some other countries are openly questioning the EU's "four freedoms" reflects their fears of globalization, and the impact of free trade and free movement of people on fragile economies.

For almost 50 years the merits of free trade have been broadly accepted for commerce within Europe's borders, if not with the outside world. The founding six members struck a bargain in 1957 under which Germany would gain access to a wider home market for its manufactured goods in exchange for paying large sums into the EU budget. The poor of Italy's south were free to settle around Europe, and many of them did; today the biggest immigrant community in Brussels is Italian.

Mr. Barroso's European Commission is worried about the new protectionist mindset and a fraying around the edges of the EU's single market. He argues that Europe needs to "reap not reject" the benefits of globalisation and says he will tolerate no breaches of the EU treaty: "There will be no concessions in this respect."

But Mr. Barroso's attempts to defend the single market might further antagonize public opinion towards the European Commission. The EU's executive is supposed to embody and defend the "general European interest" but in Paris and Berlin it is sometimes portrayed as being in the grip of "neo-liberals" pursuing a cruel economic theory. In an opinion poll published in *Le Monde* newspaper this week, 41 per cent of French respondents and 34 per cent of Germans agreed with the proposition that the EU was responsible for them living less well.

At a time of declining enthusiasm for the European project, the Commission is in a vulnerable position. Its legitimacy, once underpinned by France and Germany, is today routinely denigrated by politicians from the same countries. "Barroso who?" says one EU ­diplomat.

"The loss of leadership in France and Germany and a loss of confidence in the European project could mean those countries play rough on competition policy," says Peter Guilford, a former Commission competition spokesman and now a Brussels lobbyist.

Although Neelie Kroes, the EU competition commissioner, has executive powers to bring countries into line, Mr. Guilford argues the Commission cannot operate in a political vacuum. "It still needs member state support," he says. "Will Neelie Kroes have the political clout to enforce the rules?"

Inigo Mendez de Vigo, a Spanish Conservative who played a leading role in drafting the EU constitution, says he cannot see Europe moving forward for years. "I'm not optimistic at all," he says. "It's dark and I don't see where the lights are coming from."

John Palmer, the political director of the European Policy Center and a veteran Brussels-watcher, is more upbeat. He believes that Europe will be forced to respond to the pressures of globalization and become more assertive in foreign policy, tackling issues such as terrorism, trafficking, and the environment. "This is a step change, in which the momentum for European development will come from global pressures downwards, not the nations upwards," he says.

Different leadership models have been floated for post-2007 Europe to try to drag the club out of its introspective malaise. Nicolas Sarkozy, president of France's ruling UMP party and a strong presidential contender, suggests the EU could be led by a Group of Six -- the most populous countries of Britain, France, Germany, Italy, Spain, and Poland -- in effect sidelining the European Commission. However, this might only further divide the continent into big and small. Nicolas Schmit, the Luxembourg Europe minister, describes the idea as "dangerous."

A renewed Franco-German attempt to revive the idea of a "core" Europe moving faster towards closer integration is another possibility after 2007, although that would require the two countries to have a positive agenda on which they agreed. "France and Germany is a defensive alliance today," says one EU commissioner. "Their constructive contributions have been very limited to say the least."

Or perhaps Europe's new generation of leaders could take their cue from the young Poles, Czechs, and Lithuanians partying in Ralph's Bar, for whom Europe still represents an adventure of open borders and rising prosperity.

Donald Tusk, the Polish presidential frontrunner, says: "If you are looking for light and hope, I think it could come to a large extent from the new member states. The faith and belief in the European project is still very strong in these countries." In a time of cynicism about Europe, he may have a point.

ASSERTIVE BERLIN KEEPS UP BARE-KNUCKLE STANCE

Charles Grant, director of the Center for European Reform, said in a recent paper that Germany's attitude towards EU institutions under chancellor Gerhard Schröder had gone from "communautaire" to "arrogant", writes Bertrand Benoit in Berlin.

In less than a decade, Europe's largest economy has shed its traditional role in the EU as champion of European integration, financier of last resort, and defender of smaller member states.

This shift, which has translated into mounting tension between Berlin and Brussels, can be traced back to two long-term factors: Germany's depleted public finances and its transformation, on the international stage, from an actor driven by ideals to one driven by interests.

For most of the EU's history, the traditional means of settling conflicting claims to EU resources was for the German chancellor to agree to underwrite whatever compromise emerged from generally long and tumultuous talks. With Germany's budget deficit due to reach 4 per cent of gross domestic product this year and its debt standing at 66 per cent of GDP, such checkbook diplomacy is no longer an option.

Empty state coffers persuaded Mr. Schröder to team up with President Jacques Chirac of France two years ago and block the Commission from imposing sanctions against Berlin's lax fiscal policy. Germany's poor finances also dictated his opposition to the Commission's draft 2007-2013 EU budget.

The second, perhaps determining, factor behind Germany's new bare-knuckle approach to EU politics was Mr. Schröder's readiness to defend what he saw as his country's national interest. Kurt Biedenkopf, a veteran Christian Democratic politician and political observer, told the Financial Times last month that Mr. Schröder was the first chancellor to "do away with the fiction of the European interest being the same as the German interest."

Neither Germany's fiscal shortfall nor its global assertiveness came about overnight. Both resulted from long-term historical and economic developments. For that reason the more confrontational approach to EU affairs looks likely to endure after Mr. Schröder's chancellorship.

Should Angela Merkel, leader of the Christian Democratic opposition, become the country's next chancellor as head of a "grand coalition" -- with Mr. Schröder's party acting as junior partner -- the music of Germany's EU policies may change but the lyrics will remain the same.

Ms. Merkel has not concealed her aversion to the personalization of EU politics -- from the chancellor's intimate embrace of Mr. Chirac during the stability pact episode to his direct attacks on Tony Blair, the British prime minister, after this year's failed June summit. As chancellor, she has said, she would attempt to solve disputes in a less emotional manner. She also promised more consultation with smaller member states before important decisions.

Yet when she addressed the Bundestag, parliament's lower house, last month, she said the French and Dutch rejections of the EU constitutional treaty had shown EU citizens had had enough of "Brussels' tendency to interfere in matters better tackled at the local level."

EU citizens, she said, had not become Eurosceptic. Rather, it was the EU that had become too big, bureaucratic, and unaccountable.

The CDU's electoral manifesto is a striking testament to how far Germany's EU consensus has moved away from the federal idealism of Helmut Kohl, the party's last chancellor and the man who started eastward enlargement by achieving Germany's reunification 15 years ago.

The CDU now rejects Turkey as an EU member. Once among the most enthusiastic advocates of the single market, it opposes its extension to the service sector. It wants the Commission to reduce the amount of legislation it produces, and all its draft directives to be tested to ensure they are necessary and not economically damaging. Competition policy, meanwhile, should not be allowed to undermine European exporters.

"Not every problem in Europe is a matter for Europe," claims the party's manifesto, which also calls for a ceiling on the EU budget and rejects cuts in EU farm spending or in EU aid to Germany's poorest regions. "The remit of the EU must be cut back to the essential."

Ten years ago such a program would have been labelled Eurosceptic. That it now passes as mainstream shows how deeply Germany has changed.

ANXIOUS TIMES FOR THE EU

¦ The European Union's proposed constitutional treaty has been effectively killed by No votes in the French and Dutch referendums.

¦ Member states have been unable to agree a new EU budget, with rich countries increasingly reluctant to fund big transfers to poorer regions and the U.K. fighting to save its annual rebate.

¦ Five out of the 12 eurozone members are now in breach of the stability and growth pact, the EU's fiscal rules.

¦ France and Germany are attempting to water down a draft law to open up the market in services, which represents 70 per cent of the EU's economy.

¦ Only three of the 15 pre-enlargement member states -- the U.K., Ireland and Sweden -- are applying the principle of free movement of people to the 10 states that joined the EU on May 1.