Why the EU is weak – and condemned to long-term decline

In the short term, the EU may be able to avoid the worst of the US-led credit crunch and economic downturn, says Simon Nixon. But bureaucracy and security issues are weakening the Union.

I went to hear Gordon Brown speak earlier this week. He was appearing at a gathering of business people and Westminster-types to discuss Britain and the EU.

The Prime Minister's appearance was significant, one of the organisers whispered in my ear, because it was the first time he had really come off the fence and made a positive case for the EU after years of prevarication.

A bit late now, I thought, given that Brown's notorious bad manners, his refusal to meet EU Commission President Jos Manuel Barroso during his first three months in office and his ill-judged and undignified refusal to attend the Lisbon Treaty signing ceremony has already done real damage to our relations in the EU. Besides, if he really believes in the positive case for Europe, why not put the case in a referendum, as he promised in his manifesto, rather than address a hand-picked audience of suits?

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Still, the conference was illuminating on several levels. First, because it showed how far the EU has fallen short of the hopes of many in business. Speaker after speaker from the business side stood up and bewailed the EU's failures to live up to its most basic promises. The Lisbon reform agenda, which was supposed to make the EU the most competitive place in the world by 2010, now looks like a bad joke.

Energy group bosses complained that the EU's failure to deliver a fully liberalised energy market put UK firms and UK consumers at a real disadvantage. Across the spectrum, bosses told tales of blatant protectionism and petty bureaucracy. And this at a time when the EU has the most liberal commission in its history.

The second striking theme was the extent to which the EU's political weakness is fast becoming a strategic threat. So many of the biggest risks to British security today can only be tackled together. Every EU country recognises the importance of energy security, yet all acknowledge that Russia is having little difficulty picking them off one by one.

Meanwhile, the free movement of goods and capital in the EU brings challenges in areas such as tackling terrorism. Only this week, it was reported that record numbers of illegal immigrants are crossing the EU's eastern border, at which point they are free to travel anywhere in the EU. No wonder the US now regards the EU as a significant threat to its security. That is likely to have an economic cost, leading to measures that will prove a check on trade.

So we're faced with an EU that is struggling to deliver on its internal objectives and can't deal with new external threats. Gordon Brown insists the new Lisbon Treaty the one that is not a constitution is designed to tackle this institutional weakness once and for all. But it's hard to believe this tinkering will do the job, even if it does provide another lucrative job for Tony Blair. The real problem is a chicken and egg situation: the EU fails to deliver because it is politically weak and lacks legitimacy. But it is politically weak and lacks legitimacy partly because it has failed to deliver. So long as that is true, it is hard to see governments handing over real new powers, so the EU will remain weak.

There's a clear investment conclusion to be drawn from this. The EU may well avoid the worst of the US-led credit crunch and economic downturn. That may make it a better investment bet over the short-term. But long-term, the EU's inherent weakness surely condemns it to continued relative decline. The US will bounce back from its problems, but will the EU? On a 50-year view, I know where I'd put my money.

Time to end the Northern Rock debacle

The next week or so, we are promised, should see crunch time for Northern Rock. The prospects of a private sector solution look increasingly remote. Even Gordon Brown has acknowledged that nationalisation may be on the cards. The Treasury is reported to have a bill ready to put before parliament. That poses a tricky situation for the Tories, who are still working out how they should vote on this bill. Having initially supported the Government's bail-out of the Rock, David Cameron and George Osborne have since been studiously quiet on the question of how the Government should get out of this mess, limiting themselves to political point-scoring over the perceived failings of the regulatory framework.

The Tory dilemma is that, if they oppose nationalisation, they condemn the Rock to bankruptcy, which means job losses, the potential crystallisation of losses for the Government and a long and costly administration. But to support nationalisation gives the Government a degree of political cover for what has been a debacle. Clearly, the politically more difficult decision is to oppose nation­alisation. But it is the right one. The moment for nationalisation has long past. Any payment to shareholders under the circumstances would be absurd. It is hard to see any happy ending for the Rock under public ownership that will not end up costing taxpayers far more than taking the pain of administra­tion now. The Tories should demand the Government end this debacle once and for all.

Simon Nixon is executive editor of Breakingviews.com

Simon Nixon

Simon is the chief leader writer and columnist at The Times and previous to that, he was at The Wall Street Journal for 9 years as the chief European commentator. Simon also wrote for Reuters Breakingviews as the Executive Editor earlier in his career. Simon covers personal finance topics such as property, the economy and other areas for example stockmarkets and funds.