Orchestrating Europe (Text Only)

The membership negotiations were sucessfully concluded in June 1971, following a top level meeting between Edward Heath and Georges Pompidou the previous month. Negotiations for a series of industrial free trade agreements with the remaining EFTA states ran in parallel and were concluded in subsequent months. January 1973 thus represented not only the moment of the first Community enlargement but the closing of a passage of history that had begun in 1958 with the failure of efforts to secure industrial free trade in western Europe. The moment was marked by an optimism scarcely dented by nagging differences on monetary policy. However, 1973 was also the year in which the inflationary boom of 1971–3 was savagely punctured, one of the immediate casualties being the prospects for Economic and Monetary Union. But although it was not immediately apparent, other treasured assumptions that had marked the 1950s and 1960s were destined to be discarded: economic growth, full employment, efficacious Keynesian economic management, technological leadership, to name but a few. It was in these new conditions that the Community had to absorb its three new members.

PART ONE (#ulink_69f1d8a3-49aa-5370-aee9-38194c0198bb)

HISTORY (#ulink_69f1d8a3-49aa-5370-aee9-38194c0198bb)

3 (#ulink_aeb20c65-9a7d-55d4-bb40-2353560c7cc6)

The Stagnant Decade, 1973–83 (#ulink_aeb20c65-9a7d-55d4-bb40-2353560c7cc6)

There is a received picture in Britain of a Community slumping from the high point of optimism reached at the Hague in 1972 into a dismal decade of inertia, relieved only by fractious competition among its member states. Like all received pictures it contains truths. The aspirations of 1972, such as the Davignon Report’s attempt to address the issue of political cooperation for the first time since the mid–1960s,

and the Community’s first enlargement in 1973, did little to break the pattern of self-interested national bargaining vying with rare bursts of collective altruism. Worse, the recession set off in 1973–4, and renewed in 1980–82 after an uneasy remission, brought internal problems and a pan-European sense of relative decline. Yet EC institutions sustained the idea of integration with an often surprising momentum in the interstices, so that the astonishing regeneration of the mid–1980s has to be explained not only in terms of a sudden shift around 1984 but in an accumulation of long-planned strategies at different levels within the Community and among different categories of players in the game.

The accession of Britain, Denmark and Ireland on 1 January 1973 occurred while the optimistic mood survived, so that the immediate consequential processes of adapting EC institutions and negotiating the informal areas took place against a background of goodwill, buoyed up by affinity between Edward Heath’s government and that of Georges Pompidou. But ministers and officials in Brussels had also to adapt to – or frustrate – the expectation of two new small states (Denmark and Ireland), both with a high agricultural content to their economies, and one large one (Britain) whose predominantly industrial economy, currency and financial institutions were, by the end of 1973, manifestly in disarray, and its industrial relations close to civil disorder.

Yet in the years of Britain’s final negotiations, the climate of opinion both in the EC and in the Heath government had been optimistic, even euphoric. To French observers, Heath seemed not only willing to pay the full price of entry but to bring for the first – indeed in retrospect the only – time a genuine willingness to follow European models of industrial policy and industrial government. In turn, Heath saw his DTI and regional innovations as material for the EC to emulate.

The fact that an anti-EC wing already existed in his Conservative party seemed unimportant, for Enoch Powell, then the chief critic, was not to turn to outright hostility until 1974. The fact that all Britain’s initial advantage was subsequently lost should not obscure the possibility that, had the oil crisis not struck then, and had Heath not lost the February 1974 election, Britain might have fitted into a novel triangular relationship with Germany and France in a way quite different from its actual halting, semi-detached progress thereafter.

Denmark, in spite of some internal opposition, could take advantage of the experience of other small states in northern Europe, and its economic linkages with West Germany; Ireland (whose emergence from a long period of introspective isolation which stretched back to the late 1920s had now begun) increasingly found a political ally in France. But British entry posed questions for the future of the Franco-German entente, and since the accession terms represented an act of will by the Heath government, with the close support of business, banking and industry, rather than the nation as a whole, Britain’s long-term stance under the next Labour government remained problematic – something which not only French and German governments but those of Benelux and even Italy watched with trepidation.

The new entrants’ responses differed from the beginning. As the Commission recruited new staff, experts and linguists, the Irish took up the offers speedily and successfully, the Danes less so, and the British with marked reluctance. Whitehall’s resistance to transfers, and fears among expatriates for their promotion, lost a great potential advantage during the next decade.

Due to the lack of full cooperation between ministries, for example, Britain found its former colonies losing out on the share of Yaoundé/Lomé aid even as late as 1981, when they gained only 11 % of the total despite the existence of an informal system of apportioning on a geographical basis, because the form had been shaped originally with Francophone Africa in mind, on which UK representations subsequently made small impression. The Labour party also refused to take the seats allotted to it in the Parliament, as trades unions did in the Economic and Social Committee (Ecosoc) – again in contrast to the other entrants, ensuring an illusory Tory parliamentary contingent at the first direct elections in 1979.

Meanwhile, the new Commission President, from France, Francois-Xavier Ortoli, encouraged the Paris Summit momentum on three broad fronts. As free trade agreements came into force with EFTA countries (Austria, Sweden and Switzerland, followed by Norway, Iceland, and Finland in January 1973, together with Portugal in 1974, newly liberated from dictatorship) it seemed for the first time since Messina that the ‘real Europe’ could be achieved. Discussion began with North African countries about long-term trading relationships, although nothing tangible was likely to emerge until the Council had agreed its own policy for the European side of the Mediterranean. By July 1973, EC and ACP countries started to negotiate both renewal and extension of the Yaoundé Convention, clearly necessary in terms of former British colonies, and despite this potent source of Anglo-French tension, what emerged as the Lomé Convention between the EC and forty-six Third World states was signed in February 1975.

Secondly, the Commission began serious planning for the Social Fund and the new European Regional Fund (which was to have an important impact on the British budgetary question in the early 1980s, and on the attitude of poorer member states who began to argue for what in the end became ‘cohesion’).

July 1973 brought the ‘Social Action Programme’, with involvement by management and unions in all member states. Thirdly, using the EPC machinery, the Nine successfully aligned their national policies at the CSCE meetings in Helsinki, an essential precursor of the final accord with the USA and the Soviet Union in 1975.

The era of détente in Europe seemed assured, not least because these three developments seemed to be an external sign of the ‘fundamental bargain’ made with the United States, that American firms which had already set up within the EC boundary should be treated as Community ones, offsetting the disadvantages of discrimination and trade diversion outside. But a currency crisis in January 1973 had forced the lira to float outside the ‘Snake’ (as sterling and the Irish punt had done since June 1972). The lira’s exit forced the remainder to stop supporting the dollar, then close to its floor against EC currencies. Despite French efforts to push Britain into the Snake,

the Snake had, in effect, left the ‘tunnel’, and the last attempt to shore up the vestiges of Bretton Woods ceased, ushering in a dangerous era of violent fluctuations and huge capital movements, later styled ‘casino capitalism’ by Susan Strange. The crisis forced the EC to forgo plans for the first stage of monetary union. Nevertheless plans for a European Monetary Fund surfaced briefly and the Economic Policy Committee emerged at the end of 1973.

That summer, the Commission won Council support for its first industrial and technology policy. But Ortoli reported to Council in indignant terms on the lack of progress with the internal market, intra-EC trade being still obstructed by a mass of quantitative restrictions and technical barriers. Member states, he implied, were responsible for the bureaucratic delays which obfuscated the customs union and which, intentionally or not, had increased since enlargement. While the EC prepared for the next GATT talks in Tokyo, it was clear that its own commitment to total harmonization, lacking member states’ consensus on the means, had created a vast backlog of work. The Council however showed no disposition to take up Ortoli’s more flexible alternative, which threatened the physical and psychological barriers to free trade in which each state still had such vested interests.

On 6 October 1973 the Israeli-Arab War began, closely followed by the oil crisis and rampant monetary instability, leading to the first full-blown European recession since 1947. OPEC countries’ use of oil supply and price as weapons to deter Western support for Israel had not been entirely unforeseen (at least by the Heath government) but there was little short-term action that any EC state could take, certainly not to look for strategic energy alternatives unless, like the Netherlands, they possessed gas reserves. Italy suffered most (and received help with its oil supply from Holland and Britain) but none escaped the initial shock, and even when OPEC restored production levels, the price rise (initially from $5 to $11.65 a barrel, but finally $14) induced serious cost inflation and balance of payments problems, with lasting consequences for industry.

The sauve qui peut among member states in late autumn and winter was such that for many observers (unaware of the oil companies’ swap agreements) the EC seemed to have lost its rationale as an economic, let alone a political, organism. Commissioners argued for a common energy policy, but Council ministers demonstrated themselves quite unable to broker a solution. The IMF Committee of Twenty did no better: only Italy and Britain tried out its recommendation that members should accept their oil deficits and not shift payments problems onto each other at the world economy’s expense. The USA, West Germany and Japan all deflated, the latter most drastically. Meanwhile, EC-USA relations almost ruptured over ECOFIN’s agreement to borrow $6 billion from IMF facilities with Saudi Arabian-OPEC underpinning.

Although ECOFIN eventually got its money, thanks largely to the UK delegation, the US Congress vetoed further funding and it became clear that, without American backing, the EC could stand alone only on a limited scale and then only if it were united, well-briefed and determined.

Such conditions proved rare during the next ten years as the Nine’s economies diverged sharply. Large reductions in output and working time occurred, and in Britain a three-day working week was introduced. Once the immediate crisis had passed, the underlying problems of meeting external deficits emerged, with almost insupportable consequences in Britain and Italy, together with contingent problems of recycling Arab petro-dollars into OECD investments. The effect was like that after an earthquake: a primary shock followed by disorientation, secondary shocks, immediate crisis responses, and then, at very different times, adaptation and reorganization.

Taking the decade as a whole, the far-reaching consequences of this ‘mid–70S crisis’ can be seen to have been decisive in re-shaping European nations’ ideas and policies for the remainder of the century. It shifted concern from full employment to inflation (with notable impact on the relative strength of unions as against management, and on the EC’s concept of a ‘social area’), and led to new power relations in each society’s major centres of economic activity: finance departments became dominant over those of trade and industry, central banks and the financial ethos superseded industrial priorities, and accountants gained ascendancy over both engineers and personnel managers. Finally, this crisis created a prolonged, pervasive questioning of the cost, priorities and effectiveness of state social service provision which, in the second oil-induced recession after 1980, brought about a revaluation of the state’s role itself. In this sense, (with the notable exception of France) it caused the end of that series of post-War settlements established in the late 1940s, and completed what the collapse of Bretton Woods in 1971–2 had begun: the Community’s severance from the long post-War boom.

Britain’s essay after 1979 in new-right economics and social politics – usually called ‘Thatcherism’ – thus turned out to be only the most urgent and extreme case of a wider trend that was to be replicated, in different national contexts, right across the Community and EFTA. The post-War corpus of ideas which had infused economic growth and political institutions since the 1950s ceased first to have absolute validity, and ended by being virtually obsolete – as the EC’s experience of prolonged high unemployment in the 1990s recession demonstrated.

Within the Community, it was soon clear that as currency cooperation in the OECD had been lost so had unlimited access to cheap energy and the belief in the automatic efficacy of neo-Keynesian macro-economic management. As the IMF’s Committee of Twenty noted, currency cooperation could not be restored until the USA resolved its trade imbalance, or until the surplus countries, Germany and Japan (which had restored themselves to surplus by mid–1975) reduced theirs. As the DM and yen rose, the dollar and sterling declined and, with the IMF’s relaxation of its rules in 1976 (to help out those with the severest problems), international coordination appeared lost in the impasse. France now floated the franc, leaving only four member states clustered around the DM in the ‘Snake’ from which the EFTA countries rapidly distanced themselves.

Certain industrial sectors suffered most: shipbuilding, textiles, above all steel. Car producers and consumer electronics did not escape and, in the general retrenchment of capital investment, a rapid loss of competitiveness ensued vis-à-vis Japan and the Pacific rim ‘tigers’ of South Korea, Taiwan, Singapore and Hong Kong. Low growth, low investment, inflation and unemployment were common to all, but in Europe, as elsewhere, responses varied widely, inhibiting any EC-wide industrial policy.

The West German economy readjusted faster than any other in Europe. After twenty-five years of holding the DM’s value down, to the benefit of trade and industry rather than of the consumer, the Bundesbank allowed the DM to rise, as did interest rates. The subsequent restrictive monetary policy, in conditions of restored price stability and independence from the dollar, made West Germany the natural basis for the ‘Snake’, but this was at the expense of domestic growth. Banks took the lead in the rationalizing process that followed, generally to the detriment of large overstretched firms such as AEG and Volkswagen. However, the harsh social consequences of this monetary policy were offset at government level by the SPD/FDP coalition, based on corporatist understandings with unions to cushion austerity measures.

Meanwhile, on the diplomatic front, and despite the fall of Willi Brandt in 1974, the ostpolitik survived under Helmut Schmidt, insuring stable relations with East Germany as well the Soviet Union, the USA and France. The Franco-German entente remained in place, since all three German parties accepted westpolitik as the only way to balance that in the East.

In France, after Pompidou’s death, despite the Gaullists’ preference for Chirac (RPR) rather than the UDF leader Giscard d’Estaing, it was the latter who succeeded as presidential candidate against the socialist challenge of François Mitterrand, in spring 1974. Giscard’s government held to the 6th plan, hoping to sustain both planned growth and industrial restructuring during the emergency. But being a liberal by inclination, Giscard also wished to diminish the Gaullist emphasis on state direction, while deflating the economy and reducing France’s dependence on external sources of energy. This was a policy which required heavy investment in civil nuclear development, yet which, for fear of a recurrence of the 1968 disorders, proceeded via monetary means rather than by direct wage cutting. It led first to negative growth, then, in 1975, to reflation, and ultimately to a 38 billion franc budget deficit, together with high unemployment accompanied by a weak currency.

In 1976, Giscard replaced Chirac with Raymond Barre (a former Commissioner) as prime minister, who had the more robust aim of cutting feather-bedded state industries down in size, reducing wages, and liberalizing prices. After strikes and much industrial conflict, the Plan Barre achieved surprisingly good results, notably with the rationalizing of steel production into two massive new holdings, Usinor and Sacilor.

In contrast with France, Italy, which had tried to avoid deflation, experienced 26% inflation in 1974 and suffered a steady fall in the lira. A period of political instability saw the regional electoral success of a much-reformed Communist party in 1976 (though it remained excluded from participating in the governing Christian Democrat-Socialist coalition). A strategy of terror mounted by the extreme left culminated in the murder of Aldo Moro, prime minister, in May 1978, and led to reinforcement of the right and extension of political warfare and corruption into almost every level of administration, finance and industry – with long-term repercussions through to the 1990s. Beset by crisis, with constant recourse to the IMF and West German support, Italy failed either to restore confidence in its institutions or to meet the external criteria for fiscal reform.

In Britain inflation continued to rise until it reached 23% in 1976,

thanks to a period of drift under a Labour government with only a small majority, preoccupied with instituting its Social Contract with the trades unions and sorting out the aftermath of a massive secondary banking crisis. Only in 1976–8, after Britain’s referendum on EC membership, and under the direction of James Callaghan and Denis Healey, did Britain achieve some control of inflation and a sounder monetary policy, together with an industrial strategy which, by the late 1970s, had had some effect on micro-economic industrial adjustment. For economic and political reasons therefore neither Britain nor Italy took much part in determining EC-wide patterns before 1980.

Recovery across the Community was correspondingly varied and patchy, depending on the sector and the level of demand, and was nowhere so strong as in Japan or the United States.

Currency fluctuations also fragmented agricultural markets and disrupted the CAP, so that the system of monetary compensation amounts (MCAs) grew ever more complex and had to be bolstered by export levies. Attempts by the Commission to reduce guaranteed prices were rejected by the main beneficiary states, so that MCAs, having been merely a temporary expedient, became an integral part of the CAP in six zones of varying price levels. This in turn caused a rift in the Franco-German entente, since the French government believed MCAs worked to the advantage of countries with stronger currencies.

Increased complexity reflected an institutional crisis. The oil shock and member states’ nationalistic responses produced in Brussels a mood of deep gloom: Ortoli declared that the Community had lost its vision and that its institutions were near collapse. Indeed at the OECD Energy Conference in Washington, in autumn 1975, the EC exposed all its differences, and the UK insisted on a separate seat. At home, members applied individual trade safeguards, many of which the Commission was forced unwillingly to accept. Collectively the EC turned protectionist, imposing a 15% anti-dumping duty on Japanese ball bearings. Of greater significance, it agreed to the Multi-Fibre Agreement’s cartel arrangements on September 1977 in order to keep the EC textile industries alive. There was infighting over fisheries, and a wine war between France and Italy which the Commission had to take to the European Court.

Whatever the language still used by EC institutions, the reality lay in national defensiveness, absence of a common energy policy, and inability to address new issues collectively. The EC’s outward appearances by 1976–7 had come to depend on the Franco-German understanding represented by Schmidt and Giscard, and on the DM core of the ‘Snake’. It was hardly surprising that, within the wider periphery, EFTA countries went their own ways, Austria for one set of reasons,

and Sweden for another. (Norway’s electorate had of course already voted against its government’s entry application in 1972.) Only the two Iberian states and Greece showed signs of wishing to join: all three, unlike the EFTA countries, seemed on balance to be assets of doubtful value.

Nevertheless, the Community’s level of activity maintained a certain momentum with the Commission’s establishment of its science and technology policy, its social action programme (which included provisions for disabled workers and equal pay for women) in December 1975, and further limited advances in the free movement of goods in the few sectors, such as pharmaceuticals and medical services, that were still profitable. The Regional Fund took off in March 1975, albeit with smaller resources than were originally envisaged, thanks to disagreements between the main payer, West Germany, and Italy, Ireland and (for different reasons relating to budgetary adjustment) Britain. The ECJ handed down several important rulings on transport and demonstrated a clear commitment to integration which put it, in national governments’ eyes, on the same side as the Commission.

Political cooperation also broadened out after Helsinki into bilateral agreements with Comecon countries and Yugoslavia, and in a continuing commercial dialogue with the Mahgreb countries of North Africa.

Even these limited gains came about primarily not because the Commission initiated policy but because the Council of Ministers willed it.

When the heads of government, jockeyed by the French Presidency, agreed at the Paris Summit in December 1974 to establish the European Council, they went beyond the founding treaties to formalize the existing informal, occasional inter-governmental mode of regulating business, over and above the EC’s existing, and Treaty-based institutions. This Council’s subsequent request to the Commission, Parliament and Coreper to prepare one report on European Union, and to Leo Tindemans, Belgian prime minister, to produce another, together with the agreement by seven states to introduce direct European Parliament elections and to increase the Parliament’s powers, showed how priorities stood. Although the decision for direct elections had been very controversial in France, being referred on grounds of national sovereignty to the Constitutional Council, France had taken the political lead with German acquiescence and Italian support – the latter predicated on the assumption of political influence with France and economic support from Germany.

Meanwhile, without becoming any more communautaire, or any less hostile to harmonizing laws and taxation, the British won an acceptable (though actually useless) formula on their budget contribution at Dublin in March 1975, an apparent redress which probably helped Harold Wilson’s last government to gain its referendum on retaining EC membership in June, after which Labour MEPs at last took their seats.

This emphasis on inter-governmental supremacy, as the recession began to lift, indicated that European integration would proceed without fundamental alterations in the balance of power or the patterns of activity set in the mid–1960s. France returned the franc to the ‘Snake’ in July 1975, and at a minor but not unimportant level acquired some support from Ireland, during the Irish Presidency. The restructuring of basket case industries was to follow the EC pattern of crisis cartels, first set out by the Commission in the case of steel in April 1975, followed by textiles, then the aircraft industry (1977), and shipbuilding (1978). Only in the novel areas covered by the Regional Development Fund was the Commission able to extend its informal autonomy by remedying grosser inequalities between north and south, core and peripheral regions, so that what had earlier been only an attempt to recuperate the Italian Mezzogiorno, became a more general policy of aiding poorer and peripheral regions.

The interplay between the Council and the Commission led to a flurry of activity, ranging from harmonizing company law to reports on a passport union and special rights for EC citizens. Most Commission draft directives at this time derived from the twin themes of harmonization or the internal market, free of border restraints, but those on worker participation and company law were clearly intended to restore an earlier tripartite balance between the social partners which the recession had severely damaged.

In a series of tripartite conferences, the Commission sought to inspire some sort of interdependence rather than sectoral competition, firstly between financial interests and secondly between management and labour – all to no effect. The Council rejected the directive on co-determination and the Vredeling Directive on worker consultation within large firms, and the ETUC discovered that the EC saw the ‘social question’ only in terms of markets and industrial survival.

This failure of an earlier dream can be attributed both to the real loss of union influence, especially in labour-intensive industries such as engineering, metalworking and textiles, and to the implicit defensive alliance between management and union leaders to safeguard what employment still remained. But it also emphasized how the earlier consensus had been eroded, and how the Commission was now powerless to restore it.

As Etienne Davignon observed in his report on European Union, it was becoming increasingly difficult to resolve even apparently specific issues without reconstructing the general political conception of what Europe should become. What had appeared to exist in 1971–2 had largely disappeared. The McDougall Report, for example, recommended in 1977 that member states should concert macro-economic policy and structural adjustment, together with the Commission’s regional strategy. But what might in the 1960s have been the beginnings of a genuine attempt at redistribution between core and deprived periphery was rejected by a Council whose members could not agree on what macro-economic policy might be, and therefore refused either the powers or the money. The ERDF itself had become ‘a pawn in the debate over far wider issues’.

At this stage, the total of 1.3 million units of account was split 40% for Italy, 28% UK, 15% France, 6% Ireland and 6% Germany. In 1981, Greece entered the arena with 13%.