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Hope amidst despair?

Martin O’Neill, Stuart Holland

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MO’N: Back to the original question if we may. In the era of Brexit, what does a socialist economic strategy look like for the British economy, both in terms of international agreements and in terms of domestic reform?

SH: The debate on Brexit should be in a European context, not just a UK context, because things are so fundamentally wrong with the EU that they have to be changed. There is increasing recognition of the case that Europe should have a variable geometry. Now, that tends to come out in two speeds in Europe. Some should go ahead with ever-closer union and others should not. But that needs to be spelled out in terms of what it would actually mean.

The variable geometry would need to be based on a single market. But the single market has to be social, i.e. not a market in which capital does what it wishes where, when, how, and why. But a market in which capital is accountable. For example, the provisions at the moment for a European Banking Union are only concerned with the security of banks, not the role of banks in serving or disserving society. And that ranges wider than either the rest of the EU and the UK; it ranges right through the Western financial system. The Labour Party should be joining with other parties which are concerned to achieve this, and to get a more socially accountable role for banks.

MO’N: What kind of Brexit would be most helpful to pushing Europe in the more social and ‘multispeed’ direction you favour?

SH: A realistic Brexit – both for the UK and the rest of Europe – would be building on the variable geometry that has already typified the EU. For example, some member states are in the euro, some are not. Some agree to quotas for migrants and asylum seekers, while some do not. But there are also areas in which the EU itself would need cooperation from the UK if it is to achieve some of its main current objectives, such as a Banking Union in which there will be more transparency for banks which otherwise are deemed ‘too big to fail’.

There are around 130 multinational banks among the EU’s 6,000 plus financial institutions. The European Central Bank has recognised the need to focus on the big banks in its regulatory efforts. But it cannot do this without information on the leading UK based banks. That is a far more important issue of common interest than whether some London based banks also set up offices in Paris or Frankfurt. While, if banking regulation in the UK is more lax than in a Banking Union, more EU banks may be locating to London than the reverse.

In this context the Bruegel Institute’s ‘continental partnership’ proposal, where Britain is the outlier in producing an eventual multi-speed Europe, has merits. But so does a European Union in which some member states explicitly reject ‘ever closer union’ – at whatever speed – and institutionally and politically are capable of doing so. Which is already the case.

Before the Brexit referendum Cameron gained explicit agreement from the European Council on enhanced cooperation by which some member states can adopt a policy without this binding others. Thus Britain does not have to go for ‘ever closer union’. Any new policy proposed in the EU can first be put to Westminster for approval and, in this regard, preserve the sovereignty of parliament. He failed to exploit this. He also failed to exploit the fact that that borrowing from the European Investment Bank for investments in health, education, urban regeneration and protection of the environment does not count on the UK national debt, and therefore is not subject to the draconian borrowing limits of the so-called Stability and Growth Pact. These were catastrophic failures but also issues that still, in both cases, are relevant to the Brexit debate.

MO’N: So if member states do not have to go for ‘ever closer Union’ are you optimistic that there will be a path towards creating that variable geometry? Or do you think Brexit could usher in a further unproductive, destabilising era for the EU?

SH: It could, if other countries follow suit, but the present line from Barnier and Juncker is to make it so difficult and so penal that other countries will not want to follow suit. Yet this depends also on what happens inside the Union. What will happen with Macron? Macron has said that there is a case for an ‘inner Europe’ which will go for an ever-closer union. On the other hand, he’s recognised that this doesn’t suit every other member state.

Macron may be very neoliberal on labour relations, but he also understands the case that Yanis Varoufakis and I have made in our Modest Proposal for resolving the crisis, i.e. that there should not only be the European Investment Bank (EIB) but also a European Investment Fund. Why two institutions? Because the EIB, with only rare exceptions, has only funded half of an investment project. It has a project-based psychology. If you present it with a plan for a high-speed rail link, it will fund it, but it has no macro-economic role. I argued to Delors that Europe needs such a financial role to fund full employment and recommended setting up the European Investment Fund to issue Eurobonds to recycle under-invested global surpluses, which it can do within its existing statutes.

A whole generation of EU officials has neglected the fact that one of the key things about the European Investment Bank is that its borrowing doesn’t count on national debt. The case I made in my Spokesman book Beyond Austerity (2016) is that the European Investment Fund – also now part of the EIB group – can issue bonds that also need not count on national debt. So, you thereby have instruments similar to US Treasury bonds, which don’t count on the debt of California or Delaware, without needing fiscal federalism.

There is still a role for the UK in all of this. For example, with Brexit it might not remain a member of the European Investment Bank Group, but the EIB can and does fund investments in non-EU countries. And there is self-interest for the rest of Europe in the UK drawing on Eurobonds issued by the European Investment Fund both to finance its own long-term recovery and contribute to that of the rest of Europe – mutual advantage, rather than the mutual recrimination currently dominating UK-EU relations.

MO’N: I pick up that there’s a both a pessimistic and optimistic strand in your thinking about Europe. There’s one thought that there is a German hegemony that is going to be very hard to break, and the aim for a Europe that is a Social Europe, that has a New Deal that really does invest in its future, is going to be very hard to get to. And hence, there was a case for Brexit that was maybe stronger than many of us thought at the time. But on the other hand, you have some confidence that Macron might have the political capital and political imagination to push through a more optimistic project.

SH: Macron has known and supported the case for joint EIB-EIF bonds since he was an adviser to François Hollande and even before Hollande became President.

Macron also knew of the proposals of Yanis Varoufakis and myself in the early statements of A Modest Proposal, from 2010, for joint EIB-EIF bonds. Mutualising debt could have been simple, putting it into an EU deposit account which, like a personal deposit equivalent, could not be used for credit creation, but need not be reduced other than in the long term, and whose interest would be serviced by the member state concerned. Which in fact was what Germany did with the debt of the former DDR, and which made it manageable.

When Macron moved from being an adviser to Hollande and became French industry minister he focused on the case for joint EIB-EIF bonds for recovery, with the EIF recycling global surpluses. At that time he was opposed by Schäuble. What is relevant now is that as President of France he could make the case directly to Merkel, who so far wrongly has assumed that Eurobonds would need to be guaranteed by Germany and funded by German taxpayers. I don’t think that Merkel knows that this is not the case.

And there is a precedent here for her potentially ‘learning up’. When Antonio Guterres proposed to the European Council in 1996 that the EIB should have a specific cohesion and convergence remit to invest in health, education, urban regeneration and environmental protection Helmut Kohl initially said no, on the grounds that ‘the German taxpayer has paid enough’. But when he was briefed directly that EIB bonds are not financed by taxpayers, do not count on Germany’s debt nor need German guarantees, he changed his mind, and agreed to this extension of the EIB’s remit in the Amsterdam Special Action Programme of 1997.

Which also has interesting political potential. For Kohl did not need to put this issue to the Bundestag. It was a political decision open to him as a head of government within the already existing statutes of the EIB, which allowed for general bond issues. And it could be the same for Merkel in agreeing Eurobonds for recovery issued by the European Investment Fund, since its statutes allowing this were agreed by the European Council in 1994. All it would need is her consent to a policy already agreed, in an existing institution, ready to go. Whether or not she were also prepared to admit that earlier she had been wrong, and now had ‘learned up’, doing so could reverse her image as the Iron Maiden of Europe. It would win her a reputation as a key figure in a lineage dating from Adenauer and Brandt to Kohl: until now, she has been the missing link.

With additional input from Joe Guinan and James Stafford, and editorial and transcription assistance from James Stafford and Kirsty Capes.

Martin O’Neill is Senior Lecturer in Politics at the University of York, and a Commissioning Editor for Renewal.

Stuart Holland is a Visiting Professor of Economics at the University of Coimbra and a Senior Research Fellow of the Institute for Advanced Studies Köszeg, Hungary.

Further Reading

Stuart Holland (1972) (ed.) The State as Entrepreneur: the IRI State Shareholding Formula (London: Weidenfeld & Nicolson)

—— (1975) The Socialist Challenge (London: Quartet Books)

—— (2015) Europe in Question - and what to do about it (Nottingham: Spokesman)

—— (2016) Beyond Austerity: Democratic Alternatives for Europe (Nottingham: Spokesman)

Stuart Holland, Yanis Varoufakis and James Galbraith (2013) ‘A Modest Proposal for Resolving the Eurozone Crisis, Version 4.0’, online at https://www.yanisvaroufakis. eu/modest-proposal/

Emmanuel Macron (2017). ‘Initiative for Europe.’ Online at: the_president_of_the_french_republic_cle8de628.pdf.

Marianna Mazzucato, (2011, 2013) The Entrepreneurial State: Debunking Public vs Private Sector Myths (New York: Public Affairs).

Philippe Legrain, (2014) European Spring: Why Our Economies and Politics are in a Mess—and How to Put Them Right (London: CB Books).

Jean Pisani-Ferry, André Sapir et al, (2016) Europe after Brexit: A Proposal for Continental Partnership, online at

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