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The Challenge of Reform in the European Union

Speech to the Centre for European Reform

Thank you for inviting me to speak at the Centre for European Reform's ninth birthday, which, as it happens, very nearly coincides with the fiftieth anniversary of the Treaty of Rome.

The Centre regularly produces innovative and thoughtful ideas on a vast range of European issues. I am delighted to join you in celebrating nine years of high-quality policy work and in honour of the Centre for European Reform's name I will speak about the need for reform in the European Union today.

The changes in the outlook for the European Union in years the CER has been in existence have been profound and fascinating, and while the Conservative Party has been able to contribute to the debate - at times, as on the euro and the EU Constitution, with real effect - on the whole it has been a period of frustration for us as we have been trapped on the sideline by three election defeats.

There is, however, now no doubt that politics is competitive again and that, as the Conservative Party contemplates the serious likelihood of winning the next general election and forming the next government we are approaching the question of Europe's future with a new interest and enthusiasm.

So I think it worthwhile this evening to look back briefly at the past fifty years on the EU's greatest successes and those areas where it has proved less successful and to look forward to our shared challenges in the next fifty years.

What strikes us first on comparing today's Europe with the Europe of 1957 is that peace and democracy is now almost universal across the continent. And we owe much to the EU for that tremendous achievement. NATO and the United States' involvement in Europe after the war must never be underplayed. But it is a central fact that the EU has established democracy as the European norm. Its attractions have convinced whole societies to make the painful effort to transform themselves, and they have found the effort rewarded.

A useful comparison can be made with the United States and its near aboard in Latin America. Democracy there remains fragile and economic stability uncertain. But in Europe from Slovakia to Spain democracy is strong and wealth generating liberal economies firmly established.

Of course there are other significant achievements to the EU's credit - the Single Market, a cleaner environment and co-operation over international crime, for example. Yet the European Union's emphasis in the past fifty years has often been political and internal.

But the challenges the EU now faces are very different. They are now primarily economic and external. India and China are enjoying explosive economic growth based on highly competitive industries and rising productivity. And this phenomenon means that the balance of economic power in the world in a generation's time will look very different. So it is profoundly worrying that the United States looks like meeting these new economic challenges and Europe does not.

Over the next twenty years GDP growth in the EU is expected to be little over two per cent, against nearly four per cent in the US. According to the European Commission's own figures, by 2050 the US share of world output will rise to twenty six per cent, while Europe's will have shrunk to only ten per cent. And this is set to mean an extraordinary shift in relative living standards - the average American will be twice as wealthy as the average European.

Prospects for the future look even gloomier when one considers the state of Europe's knowledge economy. Of the world's twenty leading universities seventeen are in the United States but only two are in Europe. More European PhD students at American universities stay there than come back. And the research and development gap between Europe and the rest of the world is widening further. The increase in corporate research and development investment for 2004-05 was two per cent in Europe but seven per cent in the US and Asia. Europe's economies have lost their cost advantages. If Europe loses its knowledge advantage too its economies will become utterly uncompetitive within our lifetimes. As the 2004 Kok report on the Lisbon strategy said, 'at risk … is nothing less than the sustainability of the society Europe has built and to that extent, the viability of its civilisation'.

So there should be no doubt about the seriousness of the economic challenge Europe faces. But I do not say this to throw a shadow over the EU's fiftieth anniversary or to say that we should despair. Rather to underline the need for reform and its urgency.

What kinds of reform do we need? It is clear that much of the weight of reform is domestic. Above all, it is only on the national level that people can be persuaded by their elected leaders that ways of working and life have to change. But the EU has a crucial role too. There are the things the EU should stop doing, the things the EU needs to do better and there are the things the EU needs to do more of.

First, what we need more of, and that is a complete Single Market with well enforced rules. And here we are making progress, as the last meeting of the European Council showed. Agreement to move towards unbundling the energy market is a good step forwards. There have been other advances, too, under this Commission. But we have a long way to go - the services directive fell far short of what had been hoped and there remains a lack of reciprocity in foreign takeovers, as the current case of Endesa illustrates. We will have to go further in these areas - our economies' efficiency depends on completing the Single Market.

Secondly, what the EU must do better, and that is simpler and better regulation. The Commission and the current presidency troika are absolutely right to make this a priority. There is far too much European legislation that hinders our competitiveness by imposing heavy regulatory costs on business and inflexible and unsuitable employment legislation. Vice-president of the Commission Verheugen has estimated that the total burden on business of Single Market legislation is €600 billion. All too often well-intentioned EU legislation ends up having a perverse effect. For instance, the Conseil d'Analyse Economique described the Financial Services Action Plan thus:

'When the Commission launched the Financial Services Action Plan in 1999 the aim was nothing less than to create … an integrated, deep liquid and regulated market to give the financial industry the benefit of a vast market and to provide investors with wider choice at a better price. Five years later and the feeling among the actors is that the EU has created a heavy, complex, partially contradictory regulatory arsenal which is incapable of delivering the anticipated results.'

In a global market-place muddled, ill-thought through and ill-drafted legislation is costing EU Member States the jobs and wealth we need. It is simply not good enough if EU legislation meant to liberalise markets results in stifling them and driving key businesses out of the EU. The legislative process has to improve, with better informed drafting and proper cost-benefit analyses.

Part of the solution, too, must be a general targeting of the administrative costs of legislation, and I applaud the Commission's drive to cut those costs by twenty five per cent. The President and vice-president of the Commission have said that progress has been too limited and too slow. They deserve the Member States' full backing and every European institution must get behind this programme.

So far, I have perhaps not strayed too far from EU orthodoxy. But if you think I do now I would remind that the Laeken Declaration asked if tasks could be returned to Member States.

It is not enough merely to cut administrative costs, although even that is proving difficult. We need to be able to cut unnecessary policy costs of European legislation too. That, significantly, is what the current British Government's own taskforce on better regulation has said is the real issue.

That is one reason why we have emphasised the need for greater flexibility in European legislation. As the long argument over the proposed Agency Workers Directive showed - over a category of worker insignificant in some Member States but of huge importance to Britain's economy, it simply does not make sense for the EU to try to regulate in an identical way such different national labour markets.

Another example of the damaging effect EU employment legislation can have in this area is the working time directive and the NHS. Estimated by the Government to have cost the NHS £250 million a year, the European Court of Justice's rulings in SiMAP and Jaeger on on-call time have meant that only two EU Member States are fully compliant with this legislation. Far from being resolved, the problem is currently a political football as Member States try to impose their own social models on others. The mess created by this legislation is now so bad that doctors are seriously concerned that it will mean the next generation of consultants will be insufficiently trained or experienced.

Getting labour market rules right is an essential part of ensuring that our economies can meet the challenges of a globalised world. We need to be nimble and precise in how we set those rules. So that is why the next Conservative Government's priority in Europe will be the reassertion of national control over social and employment legislation, including the restoration of Britain's opt-out from social chapter legislation.

There is another reason why we attach such importance to the restoration of national competence in this area. We are all aware that the EU is suffering from a crisis of a democratic disconnection with its peoples. The referendum results in France and the Netherlands showed that plainly enough. Clearly, too, French and Dutch voters had different concerns. But what, I think, united them was a feeling that the European Union was making it increasingly harder for national politicians to address national issues.

If the European Union is to recapture its peoples' affections it is very important that we tackle this problem head on. They must be reassured that European integration is not about a one way street which sees decisions being taken ever further away from voters. And these concerns are being expressed more widely than ever before - by the former German President Roman Herzog, by Chancellor Schuessel over the European Court of Justice's law-making tendencies and by the Dutch Government over EU law's intrusion into matters as naturally local as social housing.

Part of the answer must be a greater involvement of national parliaments in EU decision-making and seeing a real enforcement of the principle of subsidiarity. So we very much support the Dutch Government's proposal that national parliaments should be able to show the so-called 'red card' over breaches of subsidiarity. But people must also see that where appropriate the EU can return power to Member States. A flexible, adaptable structure for the EU will let it act where people want it to act and modernise as the issues we need to tackle together change decade by decade.

It will not surprise this distinguished audience to hear that the Conservative Party strongly believes that the Constitution and the proposals contained within it are not the answer to this problem of ownership and accountability. But it also represents a tragic misapplication of political effort and will.

To take this German presidency's agenda, for example, we have a wide-ranging series of issues - deregulation, energy, climate change - that are exactly the areas we need to focus on. The last summit showed what could be accomplished. But we know that the remainder of this presidency and probably the next two years will see national capitals' European energies absorbed by a sterile, inward looking debate about the Constitution. Hours will be spent poring over lines in the text, trying to work out whether such and such a provision would trigger a referendum in Britain, say, or Poland.

I do not think that is the best use of our time. If anything, it seems like displacement activity, a way of distracting ourselves from tough choices on economic reform, global warming or world trade talks. Institutionally, the EU is more or less managing as well as it has ever done with the enlargement to 27. Indeed, there is a rare consensus here in British politics. As Margaret Beckett, the current foreign secretary, has said: 'it would be too much to say that we're not coping at the moment'. And she went on to point out that slower decision-making may not be a bad thing. As she put it, 'sometimes in the past the pressure has been on to make a decision and then we look back on it and think it could have been done better'. I agree entirely. The claim that we need the Constitution for an enlarged EU to work is simply contradicted by the fact that we have an enlarged EU, there is no Constitution and yet the EU is working.

If anything, we have accomplished more because of better political leadership in the Commission and Member States since 2004. The necessary institutional changes - some reform of the rotating presidency and the number of Commissioners - are relatively technical and need not take years to resolve.

So our case is to focus on what Commissioner Barroso has called a Europe of results. When we and the Czech Prime Minister hosted a conference on European reform earlier this month we talked about three 'G's: globalisation, global warming and global poverty. These are the issues which people want the EU to engage on. Frankly, we need it to because it is only by working together through the EU that we are best able to deliver on these substantive issues.

You will find the Conservative Party, today again a serious contender for Government, a passionate advocate for European reform, for a Europe, in the currently popular phrase, that is fit for purpose for the 21st century.

Today's EU was designed to heal a Europe shattered by world wars. The need for a European Union is no less today than it was fifty years ago, but the problems we need it to solve and the opportunities we can use it to exploit have changed. There is a choice before us. There is the easy way of old, comfortable agendas. But the economic facts, the referendum results and the polls all show us where that leads: the EU would become an institutional fossil of the last generation's dreams and fears, increasingly unloved by its peoples and irrelevant to the real global issues we face today.

Or we can choose the hard way and have the courage to change the EU, to make it the indispensable foundation for a stable and prosperous Europe in the twenty first century. Change requires vision and statesmanship, but there is a new generation of leaders in Europe that can rise to the challenge.

If we make the right choices now we can make the European Union relevant in a way it has not been for years. I look forward to working with you to achieve that goal.

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