The EU EU neo-imperialism Blog Featured

The EU’s imperial ambition

UK map
Written by David Blake

As part of its plan to create a European empire to block anyone competing against it, the EU has become a global bully when it does not get its way. I discuss some examples and their implications for the UK post-Brexit

The EU’s imperial ambition – to prevent global competition challenging the ‘European Project’

The European Union has created the illusion that it is simultaneously both a worker’s paradise – given the social protections it guarantees to its workers – and a capitalist’s heaven – given how effectively businesses can lobby Brussels to raise barriers against imports from outside the EU. It does this by throwing a protective wall around the EU economy – in the form of the tariff and non-tariff barriers of the Customs Union (CU) and the regulatory barriers of the Single Market (SM). As a result, European consumers are paying more for the goods and services they buy than if they could purchase these at world prices, e.g., 17% more for food. The ‘European Project’ would collapse if its internal contradictions were fully recognised. A simple illustration of the contradictions is that while British businesses and unions frequently have a confrontational relationship with each other, both the CBI and TUC believe it is ‘essential’ for the UK to remain in the CU and SM after Brexit.

The EU has decided that the best way to continue protecting the project is to restrict any global competition that it faces – and it has set itself up an empire to achieve this. European citizens need to be protected against ‘inferior’ products and services from the rest of the world (e.g., chlorinated chicken) – and those who provide them need to be closely ‘controlled’.

Switzerland – the EU’s first colony

In a recent Briefing for Brexit, I discussed how the EU is trying to bring Switzerland under its legal and regulatory control by forcing it to accept ‘dynamic alignment’ with EU rules on migration, social security, and key areas of economic policy in perpetuity – plus final arbitration by the European Court of Justice.

Sounds familiar? They are precisely the same disastrous terms that we would face if we ratified the draft Withdrawal Agreement and Political Declaration.

Because of Switzerland’s refusal to be bullied in this way, it is being systematically denied access to the SM – and EU citizens are being blocked from doing business with the Swiss. The EU has just suspended the trading of Swiss shares on its stock exchanges and it is threatening to withdraw mutual recognition for exports of medical equipment. Switzerland is also being closed out of the EU’s economic, transport and energy system until it backs down.

This is all part of a plan for the EU to turn itself into a controlling empire. This was made very clear by Guy Verhofstadt MEP – chair of the European Parliament’s Brexit Steering Group and a former Prime Minister of Belgium –  in a speech at the London School of Economics on 28 September 2017: ‘The world of tomorrow is a world of empires, and only a united Europe will play a role of significance’.

The EU likes to refer to the control it seeks to exert as nothing more innocuous than ensuring a ‘level playing field’. But, in truth, this is just the public face of a deeply mercantilist mindset – and masks an unwillingness and indeed an inability to compete internationally. I explained the reasons for this in my Briefings for Brexit report on the origins of the European Economic Community.  At the heart of the European Project is a strong dislike of Anglo-Saxon/liberal-capitalist economics, preferring instead ‘state economic leadership’ over heavily regulated private sector companies which are expected to operate as efficiently as possible using the latest available technologies.

Here are some more examples of the EU flexing its imperial muscles in order to restrict global competition.

Withdrawing ‘equivalence’

The EU has just withdrawn SM access rights to countries as far apart as Canada, Brazil, Singapore, Argentina and Australia – again because, like Switzerland, they refused to do what they were told.

As reported in the Financial Times, the case involves the regulation of credit rating agencies (CRAs). The EU has unilaterally decided that these countries no longer regulate these agencies to the EU’s satisfaction and has withdrawn ‘equivalence status’ from them, meaning that European banks are no longer able to use CRAs based in these countries to help set their regulatory capital requirements. The concern was that those CRAs might say things unhelpful to the European Project – even though correct.

Equivalence is a regulatory regime where the EU recognises that the regulatory standards of another country are ‘equivalent’ to those of the EU which then gives that country permission to provide services to European customers.  However, the EU can withdraw equivalence without notice or explanation.

The European Project came under severe threat in the 2011-12 Eurozone sovereign debt crisis, when the EU claims that CRAs, like Standard & Poor and Moody, intensified the crisis in 2012 by downgrading member states, such as Greece and Portugal, at a critical time.

This angered the EU.  Since it didn’t like the message, it decided to shoot the messenger.  In 2013, it passed a law which restricts when such downgrades can take place and also establishes ownership rules for CRAs that are intended to prevent what it considered to be conflicts of interest.  This meant that a CRA had to set up a unit in the EU, thereby giving the EU more control, through a procedure known as ‘endorsement’.

Now CRAs are not faultless – they made a significant contribution to the global banking crisis in 2007-08 through their mis-rating of subprime mortgage debt – and they need to be appropriately regulated, but this has to be done at a global level to avoid regional inconsistencies and regulatory arbitrage. Other countries did not agree with the EU’s approach and this led to the EU withdrawing equivalence.

Imposing ‘economic substance’ rules

Another example relates to the EU imposing so-called ‘economic substance’ rules on what it regards as ‘offshore’ centres.  In December 2017, it introduced a list of jurisdictions (known as the ‘Grey List’) which ‘facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity (“substance”) in the jurisdiction’.

A jurisdiction can get itself removed from the Grey List if it cooperates with the EU in ensuring that entities established in those centres have economic substance and that the jurisdictions show commitment and compliance towards standards set by the EU.

The substance requirements apply to geographically mobile service activities, such as banking, insurance, shipping, fund management, financing and leasing, headquarters, distribution and service centres, holding companies, and intellectual property.

A number of jurisdictions introduced economic substance legislation by the end of 2018 in order to be removed from the Grey List. These comprise: Andorra, Bahrain, Faroe Islands, Greenland, Grenada, Guernsey, Hong Kong, Isle of Man, Jamaica, Jersey, Korea, Liechtenstein, Macao SAR, Malaysia, Montserrat, New Caledonia, Panama, Peru, Qatar, San Marino, Saint Vincent & the Grenadines, Taiwan, Tunisia, Turks & Caicos, and Uruguay.

The following Grey List countries have agreed to comply with the legislation before the end of 2019: Albania, Anguilla, Antigua & Barbuda, Armenia, Australia, Bahamas, Bosnia & Herzegovina, Botswana, British Virgin Islands, Cabo Verde, Costa Rica, Curacao, Cayman Islands, Cook Islands, Eswatini, Jordan, Maldives, Mauritius, Morocco, Mongolia, Montenegro, Namibia, North Macedonia, Nauru, Niue, Palau, Saint Kitts & Nevis, Saint Lucia, Serbia, Seychelles, Switzerland, Thailand, Turkey, and Vietnam.

Countries which fail to comply are put on the EU ‘Black List’: American Samoa, Aruba, Barbados, Belize, Bermuda, Dominica, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad & Tobago, United Arab Emirates, the US Virgin Islands, and Vanuatu.

One of the EU’s declared purposes for introducing these rules is to stop money laundering and to block offshore centres that have become tax havens.  We can all be sympathetic to that. But most of the service activities are perfectly legitimate – so this is just another attempt to restrict competition. The rules that the EU is seeking to have introduced in these centres are ones which mimic EU rules; and one of them is that they are properly applied, leaving open the door for the EU to withdraw its approval down the line if the application of the rules is not done to the EU’s liking – thereby creating levers for future control.

Even if you believe that it is reasonable for countries to have to compete fairly on a level playing field, the devil is in the detail of how that playing field is defined. What the EU is really seeking, as judged by its actions, is for all countries to apply EU rules – its details – as interpreted by and applied in the EU. But this is not a level playing field: it’s straightforward imperialism.

In addition, there is potentially something deeply sinister about the EU’s approach, as an adviser to some of these offshore centres told me:

The offshore centres have to negotiate with the EU in order to satisfy the economic substance rules.  This gives rise to two significant problems:

  • There aren’t enough people living in some of these centres to provide economic substance if the EU plays hard. I don’t think they’ll take such an approach in the first instance, and will allow onshore individuals to have, for example, multiple directorships, but down the line the EU could well play it tough and this would kill off the centres.
  • The EU requires the centres not only to have statutory powers to its liking over the entities, but also to enforce them. In due course, I foresee the latter point being used to control how the offshore centres use their laws, and effectively to exercise quasi-governmental control over those centres.

Implications for Brexit

All this will have important implications for the UK after Brexit.

First and foremost, the EU will now view us as an offshore centre. It will try to exercise control over our laws and activities in the same way that it is trying to do with Switzerland and the other offshore centres. In short, it will try to use the same ‘level playing field’ rules to stop us competing against it. This is made perfectly clear in the Withdrawal Agreement and Political Declaration.

This would turn us into the EU’s second colony. We know from the BBC4 fly-on-the-wall documentary Brexit: Behind Closed Doors broadcast in May 2019 that a member of Verhofstadt’s private office views us precisely as a colony. This needs to be resisted vigorously. The UK must remain in full control of its laws and taxes.

Second, the EU has stated that ‘equivalence’ is the only regime that it is willing to offer the UK financial services industry in order to allow it continued access to EU clients.  However, a regime which can be withdrawn without notice or explanation would be entirely unacceptable to a global financial centre like the UK – which does six times more business in the EU than vice versa.

We should instead insist that our future relationship with the EU is based on a different regulatory regime, either:  ‘enhanced equivalence’ (proposed by Barney Reynolds), which cannot be withdrawn without notice or explanation – or another form of ‘mutual recognition’, where two countries agree to recognise each other’s regimes as being of similar standard, but not necessarily identical.  The key is the enhancement of existing arrangements.

Given that London is Europe’s financial centre and will remain so after Brexit, either of these two regimes should be perfectly acceptable to the EU if we are to believe its promises to use its ‘best endeavours’ to ‘develop, in good faith, agreements giving effect to’ the future relationship between the UK and EU (to use the language of the Political Declaration).  They are also the only way to avoid being gradually sucked into the EU’s economic substance whirlpool.

There is now widespread horror and embarrassment by many in this country about the British Empire. Yet the very same people are apparently more than willing to sign up to the EU’s new Empire.

The rest of us need to resist any further attempts by the EU to exercise its bullying imperial power over us. But we can only do this once we fully understand what the EU’s real game is.

About the author

David Blake

Professor David Blake is at Cass Business School