Comment: Merkel visit means it’s time to renegotiate terms

By Pawel Swidlicki

Today’s meeting between David Cameron and German chancellor Angela Merkel offers an excellent opportunity to ‘reset’ recently strained Anglo-German relations, as well as a chance for Cameron to set out clearly how and why both countries can support one another as their roles in Europe change to reflect the new reality of closer eurozone integration.

The talks are expected to focus on the EU’s long term budget between 2014 and 2020, and clearly this is a pressing issue at the moment. Under the coalition, the UK has taken the toughest stance of any member state in demanding a payments freeze based on 2011, although MPs last week voted for a real terms cut. By contrast, Germany also wants to see a cut compared with the Commission’s €1.03bn proposal, but is prepared to accept an overall increase on current spending levels. It is important to remember that the two countries come at this issue from completely different perspectives – for the UK, in addition to practical budgetary considerations, the contribution to the EU budget carries great symbolic resonance, while in Germany it is seen as an unwelcome distraction given the wider problems within the eurozone.

Striking a deal on the EU budget will be very difficult – not for nothing did Tony Blair say it was harder to agree on than on peace in Northern Ireland. However, while Cameron and Merkel are unlikely to agree this time around, they can still have a constructive exchange on the issue. In particular, Cameron can point to the fact that far too little EU spending is geared towards delivering the growth, jobs and competitiveness that Europe so desperately needs, given that a large chunk is wasted on agricultural subsidies and the recycling of regional development funds around the EU’s wealthiest member states.

Framing the debate in these terms would be the best way of engaging Germany on this issue; even the staunchly pro-EU foreign minister Guido Westerwelle recently argued that "The EU cannot spend more than up until now. It must use its resources better than before." For example, the UK could propose limiting the EU's structural funds to its poorest member states – a decision that would not only reduce the budget but also make economic sense for Germany, the UK and Europe as a whole. Likewise Cameron could point out that given rapidly changing situation in the eurozone a five as opposed to seven year spending settlement would provide greater flexibility, especially given recent speculation about a separate budget for eurozone members.

Away from the immediate ruckus over the budget, both the UK and Germany face more existential questions over their futures in a Europe which is rapidly evolving as a result of the eurozone crisis. Both countries are travelling in different directions – Germany has been forced to take on a more active leadership role in a more closely integrated Europe to which the UK cannot sign up to. However, both countries face a similar challenge in needing to reconcile this new reality with domestic public opinion.

Merkel has let it be known that she has been unimpressed with the UK's attitude towards Europe recently, allegedly comparing Britain to the old men in The Muppet Show who do nothing but heckle from the sidelines, and hinting that if push came to shove, she would be prepared to see the UK exiting the EU. Certainly the attitude of the UK government has not helped; on one hand urging the eurozone to accept the "remorseless logic" of greater economic and fiscal integration, including Germany taking on liabilities for weaker eurozone states via debt pooling, while on the other refusing to take part in such measures itself and zealously looking after its own self interest. Leaving aside the intellectual inconsistence of this position – which puts Cameron and Osborne on the same side of the debate as France’s Socialist President Francois Hollande – this lecturing has not gone down well in Berlin.

The UK and Germany urgently need to stop talking past each other, and Cameron needs to show some sensitivity to where the German debate on Europe is at. Instead, he needs to put forward a hard-headed and coherent argument for why it is in Germany's interest to agree to a new deal for the UK on Europe. Cameron needs to point out that it is not just the UK that is moving away from Europe, but Europe that is moving away from the UK, and that given the increasing scepticism amongst UK public opinion, its membership terms need to change in order to reflect this. In short, the UK's EU membership needs to be reformed in order to be preserved.

So called 'differentiated integration' already exists to an extent, with some countries having opt-outs from certain EU policy areas. This could be extended as part of the wider changes to the EU's institutional structures that the Germans are keen to secure in order to anchor the new eurozone arrangements firmly in a rules based system – think European Court of Justice sanctions for breaking debt and deficit rules. The UK will have a veto over these talks, and Cameron has already demonstrated, he is not afraid to use it.

As much as Merkel may be loath to give into what she considers to be the UK's special pleading, not for nothing has she gained a reputation for pragmatism – for example her smooth exchange of the social democrats for the free-market liberals in 2009 and her U-turn on nuclear power post Fukishima – and it will be up to Cameron to put forward a convincing case for why such a deal would be in the German interest. Thankfully, this is an area in which Cameron can potentially make a strong case; without the UK, the EU's single market would shrink considerably with the risk of tariffs being slapped on German exports, Germany would lose an ally in the fight for a competitive and free-trading Europe, and it would have to increase its contribution to the EU budget to cover the shortfall. Nor would Britain's wider geopolitical clout be easy to replace.

All in all a lot to talk about over dinner, and there is no way a new Anglo-German 'grand bargain' will be reached overnight. However, it is important to at least start to process of a constructive dialogue on the issues which will shape the European debate in both countries in the immediate future.

Pawel Swidlicki is senior research analyst at Open Europe.

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