Britain and Germany: Partners in Reform

What Germany and Britain can do to build a more competitive, flexible, democratically accountable European Union.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Foreign Secretary William Hague

Ladies and Gentlemen, I’m delighted to be here at the 63rd Königswinter Conference.

I want to talk this afternoon about reform: why we need it, and what Germany and Britain can do to build a more competitive, flexible, democratically accountable European Union.

This is a fitting venue. As you know, this palace was a reward from a grateful King Friedrich Wilhelm III of Prussia for the great reforming achievements of Karl August Fürst von Hardenberg, his Chancellor of State, including the abolition of various restrictions on trade and anti-competitive practices.

Thinking back my visit to Berlin in October, I am struck by how much our relationship has grown even since then – a tribute, in part, to those here today.

It is a relationship where we learn from each other:

Iain Duncan Smith, our Secretary of State for Work and Pensions, was in Berlin earlier this month to understand how Germany has managed to drive unemployment down to a post-reunification low of 5.5 per cent, even as the Eurozone remains in recession.

Lord Green, our Minister for Trade & Investment, has been here this week, following a fact-finding mission at the end of last year looking at Germany’s export success.

We are in turn sharing our experience. Next week a team from the Cabinet Office will visit Berlin to explain how we have been building better understanding of public psychology into the policymaking process.

In the EU too, our partnership has gone from strength to strength, in recent times:

On the EU budget, where Chancellor Merkel and Prime Minister Cameron argued that it was simply not right that the EU should spend more when national governments across Europe were cutting back. Working with other partners, we secured the first ever cut in the EU’s multiannual budget. As well as being good for our taxpayers it was good for the EU to show that the same budgetary rigour applied to European spending as to national spending.

On the first stage of Banking Union, a Single Supervisory Mechanism, where we reached a deal that respects the rights of those both inside and outside the Eurozone, and safeguards the Single Market.

And on better regulation, where the Chancellor and the Prime Minister have secured a commitment to cut unnecessary regulation so that business can flourish – particularly small and medium-sized enterprises.

We are also working very closely together to promote free trade, which I shall return to later.

In each of these cases, we have shown people in Britain, Germany and across Europe that we can make progress in doing better in Europe and reforming the EU.

But the scale of the challenges facing Europe is serious. Let me touch on three: First, how we make our way in an ever more competitive global economy. Second, how we address the EU’s lack of democratic accountability. And third, how we ensure that the EU develops the flexibility to respect the diversity of its Member States.

In the last five years, as the European economy has flat-lined, the Chinese economy has grown by an average of 9.3 percent per year, the Indian economy by an average of 6.6 percent. By 2030, some forecasts suggest that Europe’s share of nominal global GDP could halve, as the world’s emerging economies continue to surge forward.

Part of the problem we have faced here in Europe is of course the Eurozone crisis. But Europe’s economic difficulties run deeper than that. The crisis has simply brought forward the debate on some of the underlying structural problems that have been brewing for decades.

As an historian here in the heart of Prussia I must mention Bismarck. When he introduced the world’s first old age pension in 1889 for workers who reached 70, the average life expectancy was somewhere between 40 and 45. Now the average European lives to about 80.

The numbers are not sustainable. As Chancellor Merkel has pointed out, Europe accounts for just over 7 per cent of the world’s population, 25 per cent of its economy, and 50 per cent of global and social welfare spending.

Germany has led the way in getting to grips with these challenges through a series of painful but impressive labour market reforms and through fiscal consolidation.

Others have also shown what can be done. In Lithuania the Government reduced public sector wages by more than 17 per cent from 2008 to 2010. Ireland’s Government and the trade unions came to an historic agreement to cut 28,000 public servants between 2008 and 2012. In Portugal, the public sector pay bill was reduced by almost 23% between 2010 and 2012.

In Britain, our Government has reduced the deficit by a third over three years. The private sector has created one and a quarter million jobs. Employment is around record levels, exceeding the pre-crisis peak even though we have reduced the public sector headcount by more than six hundred thousand. We are rebalancing the economy towards high end manufacturing and exports.

Getting our finances and social models into shape is not, however, sufficient. We must also create the right regulatory environment for economic growth.

World-class German and British manufacturers are already capitalising on the opportunities that emerging markets present. We export BMWs made in Bavaria (one in four of which has an engine made in Britain) and advanced aircraft components engineered in Bristol and Bremen. But we also need to look at what comes next: the opportunities in exporting our knowledge industries and professional services.

The size of the global middle class is projected to increase by three billion by 2030. As prosperity levels increase, we want these new global consumers not only to drive an Audi and to fly in an Airbus, but to work in spaces designed by British and German architects, to negotiate international business through our law firms, and to finance those deals through London and Frankfurt.

This is one of the reasons why we are totally opposed to the proposed Financial Transactions Tax. And why we are uncomfortable with the proposed cap on bankers’ bonuses. Not because we don’t agree that the global financial industry needs better regulation: it does, and this British Government is proud to be putting in place some of the most exacting reforms of all, following the Vickers Report.

But that regulation needs to help us compete in the global race, not set our feet in concrete.

Financial and professional services account for 4.4 per cent of German GDP. The sector provides nearly 2.2 million jobs in Germany and 2.1 million in the UK. Across Europe, financial and related professional services accounts for nearly 11.5 million jobs. The global market is expanding rapidly. It is ours for the taking. But if we strangle ourselves with regulation that drives away business, you can be sure that Singapore, Dubai and New York will be ready to take advantage of our folly.

Financial services underpin the rest of our economies. If we impose excessive requirements on financial institutions, we throttle businesses’ access to lending. If we tax transactions, we make it more expensive for firms to hedge against risks, as great companies like Bayer and Siemens need to do every day. We end up holding back enterprise in general: not just banking but everything that we make, build or sell.

And if, on top of that, wrong-headed regulations mean that bankers or pension fund managers are simply paid larger salaries rather than bonuses that actually reflect their performance, we are simply re-creating the sort of perverse incentives that we set out to eliminate.

The second major challenge is how we build the democratic legitimacy of the European Union.

Let me say a word about Britain.

I think the British people agree that we need effective institutions to uphold the Single Market, so that firms across Europe can compete on a level playing field.

They want to see that market deepened, so that European firms can sell to 500 million consumers, and so that those consumers can in turn benefit from greater choice.

They appreciate the role the EU is playing in helping bring stability and prosperity to the Western Balkans and our neighbourhood – areas where the UK and Germany have worked together closely. Having just come from Croatia, which we are about to welcome into the EU and Serbia, which may soon start accession negotiations, I have just seen some of that progress at first hand.

I think the British people also want the EU to be a multiplier of our collective influence and values in the world, so that we can forge trade agreements that open new markets, tackle global poverty, or ensure the Iranian regime experiences real consequences for nuclear proliferation.

But they do not understand why Brussels has to interfere in how long junior doctors can work. Or why someone from another Member State should be able to continue to claim benefits in the UK even after they have moved back to their own country. I think we are all relieved that the European Commission is not going to ban Europeans from using olive oil jugs at restaurant tables. But it is extraordinary that such a decision should be within the EU’s power in the first place.

Too often, the British people feel that Europe is something that happens to them, not something they have enough of a say over. That the EU is happy speaking but does not seem interested in listening. That the EU is sometimes part of the problem, not the solution.

This is not just a British issue.

The latest Pew Research from earlier this month is a warning: a sharp fall in support for the EU across the continent. Eight points lower in Germany, at 60 percent. Two points lower in Britain, at 43 percent. 19 points lower in France, at 41 percent.

The fall is even starker for young people, traditionally more enthusiastic about the EU than their parents and grandparents.

Trust in the institutions is at an all time low. The EU is facing a crisis of legitimacy.

I do not believe that we are going to solve this through more powers for the European Parliament, or attempts to build a European demos that are bound to fail.

Turnout has fallen to record lows in successive European elections across the Union, although every major Treaty Change in the past thirty years has seen the European Parliament’s powers being increased.

The European Parliament plays an important role in holding European institutions to account. It can play a very positive role, as it has along with Commissioner Damanaki in the current reforms to the Common Fisheries Policy. But if the European Parliament were the answer to the question of democratic legitimacy we wouldn’t still be asking it.

I think instead that the solution lies in promoting the role of national institutions in European decision-making – because ultimately it is national governments and national parliaments that are accountable to our electorates. They are the democratic levers voters know how to pull. I want to offer some thoughts on how we might do that in a moment.

This idea of the right balance between national and European decision-making, and respect for the concepts of proportionality and subsidiarity, brings me to my third key challenge. How can we build a European Union that acknowledges and respects the diversity of its Member States? One that recognises that our national approaches to and ambitions for the European Union may sometimes differ?

And here I am not necessarily talking about the traditional approach – an opt-out here, an opt-in there – but perhaps something more fundamental.

The idea that, as the Eurozone develops the institutions required to solve its problems, it may have to move towards a level of integration greater than some members of the EU would ever feel comfortable with.

That, at the same time, some Member States may want to move towards enhanced cooperation, as we have done with the Unified Patent Court, or some want to do with the Financial Transactions Tax. But that ultimately the EU remains an inclusive club based on the four freedoms and the Single Market – something that is in the interest of all its members, in and out of the Eurozone.

These are relatively new concepts. We do not yet have the answers. But we need to start asking the right questions, as partners in a shared endeavour.

I know that our friends in Germany and across the Continent follow closely the vigorous debate on Europe that we have in Britain. They could perhaps at times be forgiven for asking themselves about our commitment to making European Union work.

But the Prime Minister couldn’t have been clearer in his speech in January.

He said that Britain’s national interest is best served in a flexible, adaptable and open European Union.

That such a European Union is best with Britain in it.

And that he will campaign for such an arrangement with all his heart and soul.

So now we want to get on with the business of delivering that reformed EU.

And here, Britain and Germany must lead the way.

I understand that in bringing stability to the Eurozone, Germany faces political challenges that are both very tough and of enormous long-term importance. The choices you make over the next few years are every bit as fundamental as those we need to face. My conviction is that the challenges we have recognised – competitiveness, democratic accountability, flexibility – are just as important to the European project as finding the right model for Eurozone economic governance. These are not competing agendas, but complementary – as I think we have both come to understand better over the last year.

Let me set out four areas on which I think we might focus together:

First, deepening the Single Market so that we’re making the most of the growth opportunities in digital, energy and services.

Development of a digital single market by 2020 could result in a four percent increase in EU GDP. With the European e-commerce market forecast to double in size to 625 billion euros by the end of 2016, we need to start by strengthening cross-border e-commerce.

On energy, we need to go further in increasing competition across the single market, liberalising gas and electricity markets, developing new low carbon energy sources and supply corridors, and strengthening interconnections between countries to enable EU-wide trade in clean, low carbon electricity. Cheaper energy would boost British and German companies alike.

On services we need to start by ensuring that the Services Directive is fully implemented across all EU Member States. The European Commission estimated last year that just ensuring that all Member States improved their implementation to at least the current average level would add 0.4% to EU GDP. Full implementation of the Services Directive could add 2.6% to EU GDP.

Second, making regulation work for business, not hold it back.

Here we are asking businesses what proposals they want to see from the Commission for reducing the regulatory burden – where SMEs need to be exempted, where rules need to be simplified, and where regulations need to be withdrawn altogether. We look forward to identifying common priorities with Germany and other partners.

Third, building new trade relationships.

Concluding all on-going and potential free trade agreements could boost EU GDP by two percent. Germany and Britain have worked hard over the last year to put the Transatlantic Trade and Investment Partnership at the top of the agenda. It could be worth 119 billion euros a year to the European Union and 95 billion euros to the United States. But perhaps more importantly, with a combined population of almost half of global GDP and nearly a third of global trade flows, Europe and the United States will be able to shape international trading standards for decades to come.

This is why it is important that we grasp the opportunity to launch ambitious negotiations next month, in time for President Obama’s visit to Northern Ireland for the G8 Summit. And why we should not limit the potential of those negotiations by excluding certain sectors from the start. On audio-visual, for example, we should have the confidence to recognise the opportunity that the American market offers us, worth 400 billion euros and growing at five per cent per year.

And fourth, starting to make the EU more democratically responsive.

I do not want to go into great detail at this stage, not least because David Lidington, our Minister for Europe, set out some ideas in his speech at the Europaforum in Berlin earlier this month. But my strong sense is that we need to recognise that most people across Europe look to their own national institutions. We need to rediscover the role of national governments and national parliaments.

Because, as Chancellor Merkel pointed out recently, Europe’s value is not measured by the growth of the acquis communautaire.

One area in which we have seen important progress is the Common Fisheries Policy. We are in the process of agreeing that groups of member states, not the Commission, should manage their coastal waters – because decentralisation makes sense. That would be a fine achievement but it has been long in coming because, although the EU is very good at centralisation, unlike the German or British systems, it lacks mechanisms to decentralise – to push powers down as well as up. We badly need such mechanisms. Indeed, I do not think the EU will be democratically sustainable without them.

In Britain, we are looking at the balance of competences between the EU and the national level. We want this work to contribute to an informed and serious debate in the UK. We also hope it will be of interest to our European partners, as similar discussions take place in other member states.

At the same time, we should do more to help our parliaments exercise their right to work together to raise a yellow card to object to legislation where action should be taken at a national rather than a European level, in line with the principle of subsidiarity. We should explore whether the yellow card provision could be strengthened or extended to give our parliaments the right to ask the Commission to start again where legislation is too intrusive, and fails the proportionality test. And we should think about going further still and consider a red card to give national parliaments the right to block legislation that need not be agreed at the European level.

Finding the right balance between integration in Europe for those who need it, and flexibility where it is best for our economies and our democracies, is the great challenge of German and British diplomacy over the next few years. Taking our voters with us, at the same time as we modernise our economies, is the great challenge for German and British politicians.

The more closely we work together, the more successful we will be in building a European Union fit for the 21st Century, and one which can truly earn the support and trust of people across our Continent and beyond.

Published 31 May 2013