Germany, United Kingdom Could Split Europe in Two

Germany would link deeper eurozone integration with Britain’s proposal for looser union.

Germany’s proposal to link Britain’s call for less closer union with its own desire to strengthen governance in the eurozone could take Europe closer to a two-tier union: an integrated core of euro states surrounded by loosely affiliated countries like Denmark, Sweden and the United Kingdom.

German finance minister Wolfgang Schäuble, one of Chancellor Angela Merkel’s closest advisors when it comes to European policy, told The Wall Street Journal earlier this week that he would speak with his British counterpart, George Osborne, “about how we can combine the British position with the urgent need for a strengthened governance of the eurozone.”

Osborne was recently deputized by Prime Minister David Cameron to lead the island nation’s negotiations for a looser relationship with the rest of Europe.

Although Cameron has promised to call a referendum on Britain’s European Union membership by 2017 following negotiations, he hasn’t made very clear where he would like to see changes. Analysts believe he wants to protect London’s financial industry from European regulations and Cameron has said he wants to stop immigrants from other European countries claiming benefits in Britain on their arrival.

The British leader has stepped back from demanding control over the number of workers that can come to his country from other European Union member states. Some in his Conservative Party as well as the Euroskeptic United Kingdom Independence Party want to curtail the free movement of people — a right protected by European treaty.

Late last year, Merkel warned that such restrictions would be a bridge too far. Der Spiegel reported that a demand to inhibit the free movement of people in Europe could convince the German government to withdraw its support for Cameron’s reform efforts.

Like Cameron, Germany wants to strengthen the European single market, especially in services, and enact a free-trade agreement with the United States — priorities it does not share with other key member states like France and Italy.

But Germany also believes countries that use the euro should pursue similar economic and fiscal policies to prevent another sovereign debt crisis. Britain, which has an opt-out from the single currency, does not want to give up its ability to run deficits or conduct an expansionary monetary policy. Hence the prospect of a two-tier Europe — which some of the other non-euro states, like Poland, fear because the currency union’s nineteen members account for two-thirds of the European Union’s population and half its economic output and would therefore likely dominate the entire bloc.

The British nevertheless welcome Schäuble’s suggestion with Open Europe’s Stephen Booth — whose think tank champions European Union reform along the lines Cameron has set out — seeing room for a grand bargain.

German-led eurozone hawks get more supervision of budgets and economic reforms, the French-led eurozone block get more solidarity (perhaps via some sort of investment vehicle or eurozone budget) and the Brits and other eurozone outs, such as Denmark, Sweden and Poland, get a stronger single market (including safeguards against eurozone caucusing).

The Spectator‘s James Forsyth is even more enthusiastic, writing that the division of Europe into a eurozone core and a non-euro periphery “is explicitly not on the path to ‘ever-closer union’.”

Which is why governments that want more European integration, not less, are likely to resist it.