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THE UK AND GERMANY'S "PROGRESSIVE PARTNERSHIP"

Launch speech by the Minister for Europe, Peter Hain MP

and Summary and Extracts from pamphlet

GERMANY AND BRITAIN - AN ALLIANCE OF NECESSITY

by Heather Grabbe and Wolfgang Münchau

jointly issued by the the Centre for European Reform and the Friedrich-Ebert-Stiftung London

February 2002

Working Papers 1(e)/2002

SPEECH BY THE MINISTER FOR EUROPE, PETER HAIN MP

to launch the joint publication of the Centre for European Reform and the Friedrich-Ebert-Stiftung

Wednesday, 13 February 2002, London

As Minister for Europe I see for myself the strong alliance between Britain and Germany - the strongest it has been for many years - with a close friendship between the Prime Minister and Chancellor Schröder. In Europe we share common goals, enlargement, security, economic reform and we both want to see an enlarged EU that breaks down the historical divisions in Europe.

Economic Reform

Britain and Germany can both gain from further reform. The single market doesn't function in all areas; EU legislation sometimes puts an unacceptable burden on business; Labour markets lack sufficient flexibility and too many state aids hold back competition. That's why it's crucial that the target we set for ourselves at the Lisbon European Council in March 2000, to become the most dynamic and competitive economy in the world, remains a key goal for the EU. And Germany can work with Britain to ensure that we can succeed.

This is not just reform for reform's sake. It matters. If the EU matched US productivity levels, UK and German citizens could be £5,000 a year richer and reform would help create 20 million new jobs in the EU. Our progress so far has been good: five million jobs in the EU have been created, phone call costs halved and there are more Europeans online than Americans - and that's only 2 years into a 10-year programme. We need to be an outward-looking EU, learning from the US and Asia with whom we directly compete.

Despite the current economic climate in Germany, productivity remains higher than in the UK. Germany is the world's second largest exporter and an economic powerhouse. And let us not forget that it was only a decade ago that the Berlin Wall fell and the huge process of transition for East Germany began. I cannot envisage any country other than Germany capable of reuniting, with a 5% GDP annual transfer from West to East.

Europe is Britain's number one client - we export three times as much to the rest of the EU as to the whole of NAFTA; twice as much to Germany than to Japan, Canada and Australia combined; more to France than to the whole of the Commonwealth and more to the Netherlands than to South East Asia. Over half our exports go to the EU, supporting three million UK jobs. That's why we need a Europe that works for both UK plc, and the person on the street.

In or out of the euro, it is in the UK's interest for it to succeed. A successful euro will boost the single market, reduce transaction costs, boost competition, give greater price transparency and create new opportunities for trade and investment. But the economic conditions must be right and these remain exactly as set out by Gordon Brown in October 1997. They are the five economic tests - convergence, flexibility, investment, financial services and employment & growth.

However we must ensure that Europe does not isolate itself from the global market. Whilst the single market encompasses 375 million people today and potentially 500 million in the future, we still have a long way to go to ensure that European business and European consumers get the full benefits from trade. Otherwise we risk losing out to North America or the Asian Tigers. Trade between the US and Europe is $1bn a day and growing at a rate of 10% a year; together we share half the world's output. We need to ensure that the latest trade round launched at Doha is driven forward to open our economies to the Developing World.

Defence and Security

I particularly welcome the German Government's move to take a more active international role, especially in security and defence issues. Europe needs to enhance its capability of dealing with military crises and to take on a more active role in peacekeeping. Yet this can only work if all European partners pull their weight, so I welcome the recent German-led military mission in Macedonia and post 11th September, I welcome the German involvement and commitment to Afghanistan. For example, the German offer of up to 1200 troops for ISAF and the international policing effort.

The UK and Germany's 'Progressive Partnership'

I believe we are building a 'progressive partnership' together - from the EU, to wider Europe, to NATO and the wider world - as demonstrated in Afghanistan. This 'progressive partnership' is more than just an alliance between political leaders, it's about a commitment to make a real difference. That's why, for example, I am going to Berlin next week to meet my German counterparts on the EU's Convention to discuss the Future of Europe debate. I hope that we can continue to build on this alliance, both within the EU framework - dealing on issues like enlargement, reform of the CAP, and the Future of Europe - and beyond the EU's borders, continuing our joint efforts in the Balkans, Afghanistan and beyond.

Last year, Britain reopened its Embassy in North Korea, where we share our diplomatic compound with Germany. I hope we can continue this sort of co-operation. Because Britain and Germany, as key players in Europe, must be ready to work together and promote the shared values that we both hold.

We frequently look to each other as a source of ideas. We both want full employment, nutritious and cheap food and a Europe that promotes prosperity for all its citizens. We both want a Europe for the people, with democratic accountability. Above all, I believe that the UK and Germany can form a 'strong partnership' in Europe, which will lead the way to the EU delivering real benefits to real people, in a clear and easy to digest fashion.

Conclusion

I hope Germany can join the UK in the fight against red-tape and bureaucracy. There is a real need to encourage plain speaking on EU policies and not let our citizens become disengaged due to 'Eurobabble'. I hope that we can work on this together and that Germany can join the UK in presenting facts, not myths on Europe. For both our countries, 'Europe' is our number one client and 'Europe' gives us a louder voice in the world. The British-German alliance is much more than an alliance of necessity. It is a partnership of choice and we are both stronger for it.

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by Heather Grabbe and Wolfgang Münchau

FOREWORD TO PAMPHLET

The Centre for European Reform and the Friedrich-Ebert-Stiftung are delighted to publish this pamphlet on how Germany and the UK can forge a closer alliance, one that would greatly benefit the European Union. With monetary union achieved and enlargement imminent, the Union needs to make huge changes to its institutions and policies. In this new period of flux, the Union badly needs - but currently lacks - bold leadership.

The opportunities for the UK and Germany to work together at European level are the best they have been in a political generation. Prime Minister Blair and Chancellor Schröder, two reformist leaders of the centre-left who get on well, have led Europe's response to the new global challenges that have arisen since September 11th. Each has a keen understanding of his country's interdependence with the rest of Europe and the wider world.

These two pro-European governments should take a common approach in many policy areas, and thus help to lead a reform agenda for the EU. We welcome this paper, for we believe it will spur politicians in Brtiain and Germany to strengthen and deepen their co-operation, in their interests and those of the whole of Europe.

Charles Grant

Gero Maass

Director

Director

Centre for European Reform

Friedrich-Ebert-Stiftung London

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SUMMARY OF PAMPLET

The European Union needs a closer relationship between Germany and the UK. The Union has to make fundamental changes to its institutions and budget, and its economies require deep structural reform. But it lacks leadership. The Franco-German relationship, which drove major policy initiatives like monetary union, is weaker than it has been for many years. It is now as likely to hinder as to help the Union's development. A strong partnership between Germany and the UK - two large, reform-minded member-states - is vital to overcome the EU's inertia on tackling these crucial issues.

In many areas that need urgent attention, Britain and Germany have common interests. They both want the EU to enlarge eastwards and to take on new foreign policy responsibilities. Both are keen on liberalising foreign trade and tackling agricultural reform. In other areas, however, they remain far apart. This paper considers where closer co-operation would be easy, and where difficult. We put forward ideas for how the two countries could reconcile some of their differences and work together to further their own interests as well as those of the broader Union. This alliance is a working partnership, rather than one of born of history and emotion like the Franco-German alliance. But it is thoroughly necessary to push through long-delayed reforms of the EU.

Nearly 50 years after the foundation of the EU, Germany and the UK are still far apart on the principles of European integration. They play different roles in the Union and these have become institutionalised to some extent over the past decade: the UK stands outside the euro-zone and the Schengen area, while Germany is less actively involved in defence integration. The distance between their visions of the EU is still great, with the two countries' leaders setting out divergent scenarios for the Union after enlargement.

Political cultures and public attitudes are very different too. Germany's European policies are little affected by who is in power. By contrast, a change in government in the UK to the Conservatives (however unlikely at present) would result in a complete shift in EU policy. The British government is also much more sensitive to the views of a Eurosceptic media.

Despite these divides, however, there is considerable scope for greater co-operation between the two countries. On the questions of budgetary reform, enlargement, internal security and defence, the UK and Germany face similar short-term challenges, and share long-term goals. Working together on these issues would not only further the interests of both countries, but also make the Union function better.

The days have gone when the Franco-German motor pulled all the other countries along. Germany's relationship with France is more distant than it has been for many years, and Germany has sought other alliances to supplement it. But it is hard for see the UK as a serious partner as long as it remains outside the euro and Schengen. The UK has never been very interested in proposing grand new initiatives - the 1998 Franco-British Saint Malo declaration on European security and defence policy was extremely unusual.

The establishment of an institutionalised relationship to rival the Franco-German duo is probably unnecessary. There are very few areas where the EU can expect grand new initiatives on the scale of the single market or monetary union. However, British ministers should be less dismissive of the value of regular meetings, because they can be important in building long-term partnerships. For example, the British and German foreign ministers - Jack Straw and Joschka Fischer - meet just a couple of times a year, whereas Fischer usually meets his French counterpart, Hubert Védrine, every week. Although Fischer and Védrine may not always have much of substance to discuss, this constant dialogue - echoed at the level of their officials - facilitates a convergence of views and concentrates minds on the resolution of differences.

We argue that both Germany and the UK would benefit from a closer alliance on a number of key areas of EU reform. Two recent events have caused both countries to rethink their positions on EU integration, and made co-operation more likely. The first was the attacks of September 11th 2001, which provoked both countries to look anew at historically sensitive areas. For Germany, that area is defence, and for the UK it is European integration. As UK Prime Minister Blair told the SPD Party Congress at Nuremberg:

"For you, Europe is relatively easy as an issue; the commitment of military forces hard. For us, the opposite. To commit our military, relatively uncontentious; to commit to Europe causes deep passions."

(Tony Blair, speech to the SPD Party Congress in Nuremberg, November 20th 2001)

In November 2001, Chancellor Schröder committed German troops in support of the US military campaign in Afghanistan, overcoming the doubts of many of his supporters and allies. Blair has argued persuasively that interdependence in security is a reality, and that it requires Europe to integrate more closely.

The second change was the launch of euro notes and coins on January 1st 2002. This move has made many in Britain realise that its future role in the EU depends on whether it joins the euro-zone. The UK's status - as a future member or a definite outsider - defines its approach to a range of institutional and policy issues. Conversely, Britain's position outside the euro shapes the reactions of Germany and other member-states to UK initiatives.

The scope for joint action with Germany depends in part on the outcome of the 2002 elections. Will Schröder renew his commitment to economic reform if he is re-elected, bringing Germany closer to the UK? What kind of economic reforms would a CDU/CSU-led government under Stoiber put forward? Both Schröder and Stoiber are careful political tacticians, and short-term expediency does not favour large-scale economic reforms at present. The most likely scenario is that German will continue with selected pieces of reform, including of its labour market, but at a slow pace. The UK, meanwhile, is in danger of losing influence in economic policy-making if it maintains its euro-agnosticism for much longer. Every year that it stays out of the euro-zone, the UK's voice will grow fainter.

This paper concludes that there is considerable scope for greater co-operation between the two countries in enlargement, reform of the CAP and EU institutions, internal security and defence. Although British-German co-operation will never replace the Franco-German alliance, there is a promising relationship at working level. But to realise that promise, Germany must work much harder on economic reform and the modernisation of its defence forces, while the UK has to adopt the euro and change its attitude to Europe.

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EXTRACTS FROM PAMPHLET

Synergy and Conflict on Europe

Broad synergies….

Enlargement

Both want enlargement to happen, and see it as more important than preserving the current budget and institutions.

The EU budget

Broad agreement on the need for major reform, in opposition to France and the net recipients. Both want reform of the CAP, but they differ over what kind of agricultural policy should emerge.

Defence

A complementary relationship: the UK leads, Germany follows. But there is friction on financing, which will make defence integration difficult.

… and serious conflicts

Monetary union

Uncertainty about UK entry and major differences on methods of monetary policy-making.

Economic reform

No further German effort likely before the September 2002 elections, and progress afterwards depends on the composition of the ruling coalition.

Tax harmonisation

The UK is implacably opposed.

Scope for convergence

Institutional reform

Conflicting grand visions, but many similar ideas on reforming the European Council, the Council of Ministers, and making EU foreign policy-making more effective.

Justice and home affairs

Both countries are pushing forward the EU agenda on internal security. But the UK is still partly outside Schengen, while Germany is blocking progress on a common asylum and migration policy.

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Summary Of Policy Recommendations

Germany and the UK should form the core of an alliance to push eastward enlargement over the next two years. Such a push is essential to overcome the objections of interest groups and the reluctance of other member-states like Austria, France, Italy and Spain.

Blair and Schröder should put forward some common ideas on reforming the EU's institutions for the 2004 inter-governmental conference. Their cabinet ministers should meet more regularly to identify common interests and narrow their differences.

In pushing for reform of the Common Agricultural Policy, Germany must stand firm against the French. The UK and Germany should push for fundamental changes to the EU's budget. The UK should give up its rebate in return for a fairer overall system. Both countries should advocate the re-nationalisation of the EU's agricultural policies, and focus regional aid on the poorest areas in the enlarged Union.

Germany needs to step up the pace of reform in its armed forces and contribute more to European defence, both politically and financially.

The UK should join the Schengen area fully in order to encourage faster EU progress in justice and home affairs co-operation. Germany should be prepared to compromise with more liberal member-states in migration policy.

Britain has to join the monetary union. With every passing year it will become more marginalised in European debates on economic policy. Britain could play a positive role in pushing economic reform in the euro-zone, and in helping Germany to liberalise its economy. These goals can only be achieved if the UK adopts the euro.

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Heather Grabbe is research director at the Centre for European Reform

Wolfgang Münchau is editor-in-chief of the Financial Times Deutschland

The pamphlet "Germany and Britain - an alliance of necessity" (ISBN 1 901229 28 9) is issued jointly by the Centre for European Reform and the Friedrich-Ebert-Stiftung London.

It is available from the Centre of European Reform, 29 Tufton Street, London SW1P 3QL

Tel: +44-(0)20-7233 1199. Fax: +44-(0)20-7233 1177. email: [email-masked]

The opinions expressed in publications of the Friedrich-Ebert-Stiftung London Office are those of the author(s) and do not necessarily represent the views of the Foundation.

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