The Future of the European Union: UK Government Policy
Written evidence from the Liberal Democrat European Parliamentary Party
Summary: Unless structural problems are tackled, the long-term future of the EU is at risk. UK European policy lacks strategic clarity on this and other matters. Economic recovery is not possible without a stronger Union, where fiscal solidarity supplements fiscal discipline. The fiscal compact treaty is a necessary expedient. Its incorporation in the EU framework will trigger a full-scale revision of the Treaty of Lisbon. The UK will have to decide whether to support further integration of the EU and, if so, whether to participate. A British referendum on the EU is likely to be necessary.
1. We welcome your important enquiry, and hope it can produce some clear-sighted commentary on and options for the guidance of the United Kingdom’s future relationship with the European Union.
2. As Liberal Democrat Members of the European Parliament we are committed to making a success of British membership of the EU and, in particular, to advancing the role, efficiency and legitimacy of the European Parliament in the governance of the Union and in British politics. We sit within the group of the Alliance of Liberals and Democrats for Europe (ALDE).
3. To set a context for our responses to your particular questions, we have some general points to make. First, we firmly believe that Britain’s membership of the European Union has been of substantial benefit to the UK and remains fundamentally in the national interest. The UK is clearly more prosperous, more secure and more powerful as a result of being a member of the European Union.
4. Second, no group has produced even a remotely compelling or attractive alternative to full EU membership. The obvious alternative available to the UK is to move to a Norwegian model as a member of the European Economic Area (EEA). But as the recent and thorough report from the Norwegian EEA Review Committee shows,  there are serious negative consequences from such a model, not least to national sovereignty since Norway is obliged to implement the vast majority of EU rules without having any voting powers over what those rules actually are. We find this ‘fax democracy’ option deeply inappropriate for the UK.
5. Third, the protracted liquidity and sovereign debt crises have made the EU more not less necessary. Economic recovery is not possible without deeper European integration, and the Europe 2020 programme sets the appropriate agenda. Recognising the need for a return to fiscal discipline at the national level, it is the obvious role of the EU to provide the platform and instruments for a revival of investment in sustainable growth. Appropriate action at the EU level, both directly through programmes financed by the EU budget, and via the EIB and through the launching of new project bonds, can produce massive cost efficiencies and economies of scale, not least by cutting wasteful duplication and adding value in science and technology (including defence capabilities), as well as by modernising Europe's infrastructure. The transfer of some significant items of public expenditure from national budgets to the EU budget, re-shaped to be more flexible and drive competitiveness, makes every sense. New streams of genuinely autonomous EU revenue will reduce the burden on national treasuries. We broadly support the Commission's range of proposals on reform of the own resources system.
6. Fourth, we believe that European integration has come almost as far as it can under present constitutional conditions; and that while, after the Treaty of Lisbon, the EU lacks little in terms of statutory authority it is deficient in terms of capacity of government and resources. Unless these structural problems are tackled urgently, the legitimacy and durability of the Union will be at risk.
7. And fifth, we are gravely concerned about the state of British European policy which we find too often to be driven by short-termism and partisan and populist pressures, managed by a declining diplomatic force, and guided by no sense of strategic direction. This may in part be the consequence of having a coalition government composed of contradictory pro-European and eurosceptic tendencies. Yet previous Labour and Conservative governments also signally failed to deepen Britain’s engagement with the EU or to enlighten British public opinion about the true nature of the country’s deep interdependence with its EU partners and the scale and scope of integration.
The December European Council
8. So, to turn to your questions, we believe that the crisis at the December European Council marks a radical shift both in the UK’s policy towards the EU and, more importantly, in its partners’ attitude towards the UK. No other prime minister since Anthony Eden has turned his or her back on the Brussels negotiating table. We find Mr Cameron's demands of his colleagues in the European Council to be matters of secondary not primary law, largely misguided in content and intemperate in tone. The evidence is that the coalition partnership did not work that day.
9. It is impossible, however, to be surprised by what happened. The European Union Act of July 2011 installed UK referendums on all future important constitutional change in the EU. Although denied by ministers at the time, this unilateral British constitutional innovation was not received elsewhere with equanimity: the EU Act is seen to have side-lined the Westminster parliament, weakened British political parties, and given the populist press a nationalist field day. The result is that the hapless British people have an entrenched veto against the constitutional evolution of the European Union.
10. Treaty change is a normal if complex phenomenon because the European Union is founded on a system of common law. Regular treaty amendment is needed to codify settled jurisprudence of the Court of Justice, to adapt to enlargement, or to adjust the Union’s competences and the powers of its institutions to deal with new challenges. Remove the possibility of treaty change, and the Union is paralysed. The fact is that the EU is once again facing a further round of substantial reform with, one way or another, major political consequences for the UK. Therefore the government cannot indefinitely resist a European referendum in Britain.
11. The December European Council was well aware of the threat of a looming British referendum. The main story of that meeting was not so much the attempt by a British prime minister to stymie the efforts to salvage the euro but, rather, the willingness of the other heads of government, under the leadership of President Van Rompuy, to call his bluff. Subsequent events confirm that the rejection of the British was not just a one night stand. There is no attempt made either to reverse the split or even disguise it. Indeed, we detect a palpable sense of relief in some quarters in the EU institutions that the perennially neuralgic British problem might be about to go away. While the Coalition Government has shown engagement and indeed leadership in some areas – for example by former DECC Secretary of State Chris Huhne on moving to an immediate EU 30% reduction in GHG emissions and at the UNFCCC COP in Durban – the more common perception has unfortunately been that the UK remains uncooperative, notwithstanding the Coalition Agreement commitment to being a positive partner in Europe. The UK maintains a negative attitude across a number of areas of EU policy – including the EU’s accession to the ECHR, the negotiation of opt-outs in the field of justice and home affairs, the first shots fired in the battles over the budget rebate and the reform of the own resources system, the continuing debate over the regulation of the financial markets, and a general British refusal to back the development of common foreign, security and defence policies. Good and energetic initiatives from the UK side need to utilise the usual European channels to reach their full potential. For example, the Like Minded Growth Group has successfully brought together 16 member states to focus on deepening the single market, smarter regulation and growth generation, but so far only in a parallel process not cross-referenced to the details of initiatives already underway at a European level.
12. It is extremely difficult to identify any benefit to the UK from the outcome of the December European Council, a view echoed in private by many in the British financial services industry which the Prime Minister’s actions were apparently seeking to protect. Meanwhile the costs to British reputation and relationships have been significant, with potential knock-on consequences for our negotiating clout, including, ironically, on financial services dossiers. Moreover, the potential for caucusing among Eurozone or Eurozone Plus countries on EU matters, including the single market, is now more real than before December.
13. We note with deep regret the tendency in London to proceed to debate EU affairs as if ‘Europe’ were a far off country of which nothing much needs to be known. The narrow nationalistic tone of the domestic debate does great harm to the image of the UK in the rest of Europe. The argument over the future of Britain's treaty commitment to the ECHR and the Charter of Fundamental Rights is being closely scrutinised, as will be any official discussion of 'repatriation' of EU competences. The behaviour of British right-wing MEPs who work merely to undermine the institution to which they are elected to serve is universally ridiculed, but the relative influence of all British MEPs is affected adversely by the belligerence of the few. In short, we deplore the fact that conclusions are now being drawn in Brussels, across Europe and in the wider world about Britain’s fitness and trustworthiness as an EU partner.
The fiscal compact treaty
14. The new treaty is unprecedented.  It works by explicit analogy with the EU treaties, respects the competences conferred under the EU treaties, seeks to deploy the institutions which are empowered by the EU treaties, commits to its own eventual incorporation within the EU treaties, but is not itself of them. It is an archetypal confederal treaty, committing the governments of signatory states to a course of action which if in the event they choose not to pursue there is no enforceable legal sanction against them. The European Commission may help to implement the fiscal compact treaty, but it is unable to use the fullness of its powers vested under the EU treaties to do so. The European Court of Justice is enjoined to act at the behest of one member state against another according to Article 273 of the Treaty on the Functioning of the EU in a dispute 'which relates to the subject matter of the [EU] Treaties'. Here the vessel of the fiscal compact sails into uncharted seas: Article 273 has never been used in litigation, not least because of what its use would imply for the elevation of the ECJ into a federal supreme court. At the very least, as the UK government has already made clear, the EU institutions will only be able to act in the context of the fiscal compact treaty under the threat of court action from another EU institution or a member state if a provision of the EU treaties is breached or the integrity of EU law abused.  The principle of sincere cooperation among member states and between the institutions is here a very relevant and important general principle of EU law.  It is difficult not to conclude that the relationship between the fiscal compact treaty and the formal EU treaties is highly ambiguous.
15. Despite its portentous title, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union does not go all the way to remedy the flawed structure of EMU as handed down by the Treaty of Maastricht. Nor does it comprise more than one element in establishing the reign of austerity: indeed, most of its provisions are already enshrined (with the full support of the ALDE Group in the European Parliament) in the ‘Six Pack’ of EU laws which re-tightened the nuts and bolts of the Stability and Growth Pact and has made it more difficult for states, even large ones, to evade their mutualised responsibilities to observe fiscal rectitude.
16. An important innovation of the fiscal compact treaty is that the signatory states commit to passing cardinal laws at home in order to install a debt brake on national budgets where structural deficits rise above 0.5% of GDP. The confederal nature of the treaty means, of course, that there is no mechanism for enforcing the implementation of such rules. The contracting parties also agree to use reverse qualified majority in the Council of Ministers when it acts in the excessive deficit procedure – a principled code of conduct whose practical operation will be under close observation. The effect of the corrective provisions of the new treaty will only be felt in a number of years once the outcome of the present austerity regime is known. The immediate impact of the treaty falls on those eurozone states which will be unable to access bail-out funding from the European Stability Mechanism unless and until they agree to ratify both the fiscal compact and ESM treaties. For that reason alone, the substantive importance of the fiscal compact should not be underestimated. Its symbolic importance lies in its exclusion of the British.
17. Two other features are notable. First, the treaty commits its signatories to using the enhanced cooperation provisions of the Treaty of Lisbon to go further and faster in matters of social and economic integration. And, second, like all good confederal pacts, the treaty will come into force before all signatory states have completed their ratification process indeed, when only 12 of the 17 eurozone states have done so. One would hope that such flexibility will influence the debate which the Union is bound to have at its next Convention on how to modify the entry into force provisions of its own treaties.
18. In any case, the fiscal compact treaty, if not an entirely good thing, is a necessary expedient, and adds to the pressure of market discipline and continual peer assessment to which all member states are now subjected to a greater or lesser extent. What is needed now, however, is faster economic growth to make palatable to a sceptical democracy the inevitably painful process of structural reform.
Incorporation of the fiscal compact treaty
19. Article 16 of the new treaty foresees its substantive incorporation within the EU legal framework 'within five years at most' following entry into force. It also predicates a situation five years hence in which the United Kingdom (and the Czech Republic) have changed their mind about the business and are prepared to concede what in 2012 they blocked. We support such incorporation. The UK’s interests are not served well in the current set up. We must ensure that a rigid two-tier Europe, with the UK as a second rank junior partner, does not develop.
20. We would draw the Committee's attention to the likely significance of the institutional innovation of twice yearly summit meetings of the eurozone. Under Article 12(3) of the fiscal compact treaty these summits will discuss Europe's competitiveness, the modification of the global architecture of the euro and its fundamental rules that is, the convergence criteria and the Stability and Growth Pact. Unless and until the UK agrees to the incorporation of the substance of the fiscal compact treaty into the EU framework its prime minister will be excluded from such important negotiations. British self-exclusion from such a forum would not serve the national interest.
Fiscal union and beyond
21. The integration of the fiscal compact treaty into the EU framework will not be the only item of constitutional business which the Union will need to address over the next few years. For a start, in addition to the new treaty, the rigid fiscal discipline enshrined in the current austerity programmes, the stronger regulatory framework for the financial sector, the creation of the EFSF and ESM and the revision of Article 136 TFEU, the Euro Plus Pact proposals on the supply side, the Six Pack (and other) EU legislation all need now to be followed through by a decisive move towards fiscal solidarity. The debate about stability eurobonds takes the Union in that direction, as does the election of President Hollande in France. We believe that it is in everybody's interests that the euro is consolidated through the building of a fiscal union in which joint and several liability for sovereign debt is admitted. Such a fiscal union will need effective economic governance to make common economic policy.  The shape and size of this government have yet to be determined, but its powers and instruments are becoming increasingly well defined including, for example, the creation of a proper treasury facility at the EU level. We have discussed above the need for a rebalanced EU budget with its own sources of revenue.
22. The creation of a fiscal union requires a radical overhaul of the Economic and Monetary Union chapters of Maastricht, including the granting of new powers to the Commission and Court, adjustment to the statute of the European Central Bank, changes to the decision-making procedures in the Council of Ministers, and modification of the 'no bail out' rules. Moreover, in addition to fiscal union, the next opportunity to revise the EU treaties will surely be minded to rectify some of the less good features of the Lisbon treaty. There will also be moves to reform the electoral procedure of the European Parliament and, possibly, to address the issue of its seat. In any case, it is already some ten years after the start of the last constitutional Convention whose work culminated in the Treaty of Lisbon: another general revision of the treaties cannot reasonably be long avoided with its inevitable climax in a British referendum.
23. For the United Kingdom, therefore, and for other member states frustrated by the British problem, there will be one unavoidable topic at the next Convention. This is nothing less than the continuing status of the UK as a member state. Will the UK wish to stay a member of a more federal union or not? If not, will the UK have either the moral authority or the political will to block its partners from proceeding where they deem it necessary and desirable to go? Alternatives to EU membership should be properly assessed. Would a form of associate membership be more convenient for the UK? If so, what shape could that association take? Would other countries, either currently full member states of the Union or actual or probable candidate states, prefer to be more or less closely associated with the federal core but not to be a full part of it? These questions will be divisive. Their answers will be complex. Any outcome of a re-ordering of membership of the European Union will be controversial both for those who stay and for those who go. But the future of Europe will not be secure unless the European Union reaches a higher stage of integration than it has at present or one it can hope to reach under the treaties currently in force.
22 May 2012
 The Schengen Agreement, by contrast, concerned an area of policy (passport controls) which the EU itself had not at that stage (1985) embraced and was crafted with the consent of all EU member states even though only some were to be bound by it.
 See the letter from the UK Permanent Representative to the Secretary-General of the Council, 22 February 2012.
 Article 4(3) Treaty on European Union.
 We note that Mr Cameron appears to agree with this. He told the Daily Mail on 8 May 2012: 'We think that single currencies really require single governments if they are going to work properly'. Mr Osborne speaks of the 'remorseless logic' of fiscal union.