Doug Bandow on Britain & Europe on National Review Online February 3, 2003, 9:30 a.m.

LONDON, ENGLAND — The U.S. has no stronger ally than Great Britain, and with a Labor government, no less. But future trans-Atlantic cooperation might hinge on whether or not Britain joins the euro.

European attitudes towards America have turned chilly of late. France, a member of the U.N. Security Council, continues to spar with the U.S. over Iraq. Germany's Chancellor Gerhard Schroeder won reelection by vowing not to cooperate with Washington. He's maintained his criticism of U.S. policy while working with Paris to generate a common European strategy.

Through it all Prime Minister Tony Blair has stood with the Bush administration. But nothing is permanent. The Blair-led letter of European support last week was an obvious diplomatic coup for the U.S. But most of its signers will offer little practical help during either the military campaign or resulting occupation. Indeed, when the Czech defense minister visited Kuwait, he offered a ride home to any of the 250 Czech chemical-weapons specialists who wanted to leave; seven jumped on board his jet and another score later joined them. Imagine Donald Rumsfeld doing the same for U.S. soldiers. Italy and Spain are more serious players, but could easily align with France and Germany after a change in government

Moreover, opposition to Washington's Iraq policy is rising even in Britain. Blair dominates the political landscape, but Margaret Thatcher's fate demonstrates just how fragile parliamentary control can be. At the same time, shadow boxing over acceptance of the euro is in full swing. Blair recently declared: "The euro is not just about our economy, but our destiny." The coming battle over joining euroland will pit large versus small business, divide both parties, and perhaps even affect Labor's succession, since Chancellor of the Exchequer Gordon Brown so far opposes Britain's entry.

For most Americans the euro is an administrative convenience, nothing more. Yet, observes George Bridges of Quiller Consultants, "an American businessman goes from Frankfurt to Madrid and appreciates the ease of using a common currency without realizing that he is going from economic basket case to another." Ironically, an expanded euro may end up encouraging economic protectionism directed against America and promoting a politically independent continent.

Continental Europe has never been a bastion of economic freedom. France was a great mercantilist state; Bismarck's Germany created the social-insurance state. The European Union and subsequently the euro helped open some of the most socialized, least competitive economies.

But the EU and euro also impose a regulatory overlay enforced by an unelected bureaucracy in Brussels. Unfortunately, writes British historian Paul Johnson, "European societies have become a paradise for bureaucrats, trade unionists, centrist politicians and those businessmen who prefer to work under government protection." No surprise at the supreme frustration in Brussels when they occasionally have to go to the voters of different nations for approval.

Moreover, the euro, which binds together 12 very different economies, is becoming unhinged at a time of slow growth. Last year Portugal violated the three-percent deficit ceiling. France has announced that it will not cut its deficit to meet euro rules. Explained French Finance Minister Francis Mer: "We decided that there are other priorities in France." Germany, the continent's biggest economy, acknowledges that it has violated the limit; the economic news from Berlin seems to worsen almost daily.

Italy's Premier Silvio Berlusconi is pushing tax cuts and spending hikes that will likely push his nation out of compliance. Other states have relied on accounting tricks to maintain formal adherence.

Public dissatisfaction also is rising. Many Greeks blame the euro for sharply rising prices. Two-thirds of Germans favor abandoning the common currency. The EU's president, former Italian Prime Minister Romano Prodi, spoke for many when he stated: "the stability pact is stupid, like all decisions that are rigid."

Thus, there's good reason for London to hesitate before signing on. After all, over the last decade Britain's economy has grown half again as fast as has the Eurozone, and is now zipping along twice as fast. Britain has lower unemployment and inflation and higher per capita GDP than does Euroland.

Great Britain also continues to receive more inward investment than France or Germany, and last year moved from fourth to second, after America, in total foreign-investment received. Moreover, the convenience of a common continental currency is overstated. Britain's trade with Euroland continues to increase as a percentage of GDP; in fact, in the euro's first three years Britain's exports to the Eurozone jumped more than the average rise in intra-zone exports.

Existing EU rules are costly enough. Observes Tory MP Liam Fox, the shadow minister for health who has formed a new think tank, the Atlantic Bridge, to promote trans-Atlantic ties: "Bureaucracy will be the end of us. That is the special relationship with Europe." American Enterprise Institute scholar Kevin Hassett calls it a "Red-tape Curtain," combining sclerotic regulation and bloated social-welfare programs.

Joining the Eurozone means even tighter economic controls. Last year, argued German Chancellor Schroeder, "What we need is to Europeanize everything to do with economic and financial policy. In this area we need much more — let's call it co-ordination and co-operation to soothe British feelings — than we had before." After denouncing the rigidity of Euroland rules, Romano Prodi called for "a single economic government for all countries who share the same money." Similarly, claimed the European Commissioner for Economic and Monetary Affairs, Pedro Solbes: "It is essential that joining the euro is not seen as an end in itself. The ultimate objective is full and successful economic integration."

The result would be to encourage European governments to circle the continental wagons. Complains Fox: "regional trading blocs were supposed to promote free trade, but in Europe they are becoming a way to limit free trade." France's death-defying defense of the Common Agricultural Policy, which accounts for nearly half of the EU's $95 billion annual budget, is but one example. Worries John Hulsman of the Heritage Foundation: "The very institutional structure of the EU illustrates that the more integrated Europe is, the more protectionist its leanings become."

American business has a stake in the relative openness of the British market. The U.S. accounts for about half of all foreign direct investment in Britain; Americans invest almost as much in the U.K. as in the rest of Europe.

Although British goods exports are oriented to the Eurozone, not so services and investments. All told, Britons trade as much with America as with France and Germany combined. Britain is the largest single investor in the U.S., while America returns the favor, putting more money into Britain than Euroland combined. Argues Liam Fox, "the British economy is more like that of the U.S. than of Europe." Indeed, "it's the only European country with more trade outside of Europe than within it."

Moreover, economic integration has obvious political overtones. Notes Fox: "Economic centralization is a precursor to political centralization." Which is the explicit goal of many Europeans.

For instance, French Foreign Minister Pierre Moscovici observed: "We don't agree with the Americanization of the world ... we are saying that together we can build a new superpower ... and its name will be Europe." European Commissioner for Regional Policy, Michael Barnier, pushed the same theme last year: "The choice is between an independent Europe and a Europe under American influence."

Even in Britain some critics of Washington want to move closer to Europe. Former Labor defense minister Peter Kilfoyle complains that "Britain ends up as America's handrag." Says Stuart Reid, deputy editor of The Spectator: "I believe that we Britons have for too long cleaved to the United States of America and ought now, with good grace, cleave instead to the United States of Europe."

Some, like Chancellor Schroeder, exhibit bad grace. Indeed, the late President Francois Mitterand reportedly said: "we are at war with America." It was, he admitted, "a war without death," but nevertheless was "a permanent war, a vital war."

Former French President Valery Giscard d'Estaing currently heads a quasi-convention charged with developing a new EU constitution. There is even talk of a name change, to United Europe or the United States of Europe.

The implications for Washington are ominous. Author A. S. Byatt has written: "Despite the creation of the European Union, Europeans do not speak with one voice — except when opposing U.S. foreign policy." In contrast, Britain is far closer to America. For instance, on his recent trip to the U.S., Foreign Secretary Jack Straw observed: "However effective Europe becomes as a regional or global actor, we cannot expect to make a real difference without regular, close and systematic cooperation with the U.S. in NATO, higher and more focused defense spending and greater efficiency in Europe's armed forces."

But the tighter Britain's connection to Europe, and the more stringent continental controls over British policy, the less able Britain will be to make its own decisions. Worries Bridges, an aide to former Prime Minister John Major, "the centrifugal force of Europe would be hard to resist." For instance, he worries, "If Great Britain decided it had to fight a war with the U.S. and wanted to bust its budget caps to increase military spending, one can imagine the reaction in Europe." Alex Hickman, with the no campaign, goes further: "If Great Britain joins the euro, its ability to act independently will diminish and maybe ultimately even disappear."

Still, it's not enough for the U.S. to urge London to just say no. "We should use the special relationship [with America] to build new institutions," argues Fox.

One possibility, suggested by John Hulsman, would be to encourage Britain to join an expanded North American Free Trade Association. London could first try to renegotiate the Treaty of Rome, allowing it to join NAFTA. Failing that, Britain could shift from the EU to the European Free Trade Area and European Economic Area (which include Iceland, Liechtenstein, and Norway), and then sign up with NAFTA. This, Hulsman argues, provides "the last real chance for Britain to choose an alternative future path, one that recognizes that its natural economic and political partner remains the United States and not the European Union." Creating a broader free trade association also would offer other nations an alternative to more statist regional blocs, such as the EU.

Or, to avoid the political complications of challenging Britain's place within the EU, the U.S. could unilaterally lower trade barriers against Britain. That would benefit Americans, even if the U.K. could not reciprocate, and free London from having to choose in or out of the EU when deciding on the euro.

Although Washington is the world's strongest power, it will not be able to forever avoid serious challenge from other nations and international blocs. A united Europe, though seemingly a distant prospect in light of the continent's current division over Iraq, could become a particularly potent adversary. Thus, the U.S. should discourage development of a centralized, monolithic Europe arrayed against America. That includes encouraging Great Britain to remain outside of the Eurozone.

— Doug Bandow is a senior fellow at the Cato Institute http://www.cato.organd a former special assistant to President Ronald Reagan.