Double your cuts: the coalition is threatening to make a second round of cuts. Picture: Daniel Malka/Gallery Stock
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The economic consequences of George Osborne: covering up the austerity mistake

How did the coalition government manage to transform the media debate on macroeconomics so comprehensively - and what will happen now they have?

The coalition defined itself as a government of austerity or, as its members preferred, as a government with the courage to take the hard decisions necessary to deal with the deficit. In its first two years it did what it had promised to do – and more – and as a result inflicted palpable harm on the economy. The recovery was delayed, costing the average household the equivalent of at least £4,000. In 2012 the government departed from its earlier plans and eased up on austerity, but pretended it had not.

The numbers are stark. GDP per head, a far better indicator of prosperity than GDP alone, grew on average by just 1 per cent a year between 2010 and 2014. The average growth rate from 1950 to 2010 was close to 2.25 per cent. Even under the last Labour government, average growth was 1.5 per cent, and that period included the global financial crisis. The past few years, as we recovered from the crash, should have been a time of above-average, not below-average growth. Even growth in the past two years has been only average by historical standards.

A government entering an election with that kind of performance should be trying to avoid talking about its economic record at all costs. Yet the opposite is the case. Indeed, the Conservative Party has an election platform that promises to repeat exactly the same mistake it made 2010. As a macroeconomist, I find it very easy to explain the impact the government’s mistakes had on the economy. I find it much more difficult to understand how it might, in three weeks’ time, get away with them, let alone promise to make the same mistake again.

The first important point to note is that austerity was not forced on the coalition. There was no market pressure that required it to embark on rapid fiscal tightening. There was a government debt crisis in 2010 but it was confined to a few eurozone countries, for one simple reason: none of those countries has a central bank of its own. If the markets refused to fund their governments they could not ask their own central bank to do so instead. From 2010 until September 2012, the European Central Bank refused to play the role that economists call “lender of last resort” and as a result interest rates on Irish, Portuguese and Spanish government debt increased substantially. In September 2012, the ECB changed its mind and promised (with conditions) to act as a lender of last resort. Interest rates fell and the eurozone debt funding crisis came to an end.

Outside the eurozone, governments had no problem funding their deficits. Interest rates on UK debt and that of other countries fell steadily. Yet to listen to many City economists is to be told that we should not take the markets for granted. Had austerity not been imposed, these markets could have turned on us at any time, and therefore it was right to reduce the deficit sharply as a precautionary measure. There is, unfortunately, a good deal of self-interest in this advice. If we have to fashion our economic policy to appease an unpredictable market, it adds to the influence of those who profess to be able to interpret its mood.

So let us imagine what might have happened, had the UK not undertaken austerity in 2010 and if the markets had started to worry that it might default. That would have put upward pressure on interest rates, as markets required some compensation for the possibility of default. However, the Bank of England was at the same time buying large quantities of UK government debt under its quantitative easing (QE) programme, which was designed to keep rates low. Any market panic would have been quickly offset by the Bank’s actions as it bought more debt. Unlike eurozone countries, the UK can never “run out of money” and so is not at risk of default.

Embarking on austerity was a choice for the coalition, not something it was forced to do. But large deficits cannot be sustained permanently. At some point they need to be reduced. And yet, since the time of Keynes, standard economics has recognised that cutting government spending or raising taxes reduces aggregate demand. So is there ever a good time to reduce the deficit?

There is a simple answer to that question. Although cutting the deficit will reduce demand, this can be offset by the central bank cutting interest rates. Fiscal austerity need not damage the aggregate economy as long as monetary policy is able to push in the other direction. The big problem in 2010 was that this was impossible because interest rates were already as low as the Bank thought prudent. So there is one set of circumstances in which it is unwise to cut the deficit and these circumstances were exactly those that prevailed in 2010.

Although the Bank felt it could not cut interest rates any further, it did have the policy of QE. Could this substitute for the inability to cut short-term interest rates? The answer is that economists had very little idea, essentially because QE had not been tried before. To embark on austerity, and hope that the programme would offset its effects, was therefore a large risk to take.

What happened was that the recovery in output that seemed to be about to occur in 2010 did not materialise. George Osborne would say that this poor performance was the result of things outside his control, such as the eurozone crisis. However, here we can turn to the Office for Budget Responsibility for guidance. The OBR calculates that austerity reduced GDP growth by 1 percentage point in both of the first two years of the coalition government: therefore, the level of GDP was 2 points lower in the second year. As growth did not return until 2013, at the very least that indicates that austerity led to a cumulative output loss of 5 per cent of GDP, which is about £4,000 per household.

How firmly based is the OBR analysis? There are very good reasons for thinking that its numbers are rather conservative. They look at the average effect of austerity over the past but, as has been noted, monetary policy is often able to offset the impact of fiscal consolidation on output, whereas on this occasion monetary policy’s hands were tied. We also have good econometric evidence that austerity has a larger-than-average impact in periods of recession. So, you could easily double the £4,000 number.

Osborne originally intended to eliminate the deficit within five years. However, in 2012, with the recovery nowhere in sight and tax revenues lower than expected, he changed the plan. Since 2012 there has been  much less deficit reduction and, partly as a result, the recovery began – three years late – in 2013.

 

***

 

This is all straightforward economics of the kind taught to every economics undergraduate around the world. The government chose a policy that many economists said in advance would do considerable harm. When that harm materialised it had to change its policy. That should have meant the government suffered a large blow to its reputation. The delayed recovery is one reason why living standards have suffered, so this is hardly an academic issue. A government with this woeful record should not be campaigning on economic competence. So, how has it managed to turn complete failure into the appearance of success?

There are four critical steps in how this was achieved. The first was to equate government budgets with household budgets. A consequence of recession is that many individuals and firms have to tighten their belts, so it seems intuitive that governments should do the same. This will be painful but individuals know that putting off their own adjustment can make things worse. It is part of every economics student’s initial education to learn why this analogy between individuals and governments is wrong – but most people have not studied economics.

A second key step was to blame the deficit on Labour profligacy. You do not need an economist to tell you that the main reason for the increase in the deficit was the recession created by the financial crisis. It is the case that the later years of the Brown chancellorship were not as fiscally prudent as his earlier years. But just before the recession the government debt-to-GDP ratio was lower than in 1997, which hardly indicates profligacy. Some have tried to suggest in hindsight that 2007 was a massive boom year (implying the need to run a budget surplus) but most evidence suggests otherwise and that certainly was not what most people thought at the time. There is enough here to make the profligacy charge vaguely credible, however, to people who do not look at the numbers.

The third stage in the austerity deception was to pretend that the policy change in 2012 was not a change in policy. The truth is plain to see in the data, but it was vital for Osborne not to admit that he was easing up on austerity. If he had admitted to changing his policy, he would have had to say why: austerity was delaying the recovery. All this stuff about a “long-term economic plan” can be seen as part of the effort to cover up the reversal and, therefore, the austerity mistake.

Pretending there had been no change in policy also allowed the fourth and final stage of turning failure into success, which was the most audacious deception of all. This was to claim that the recovery in 2013 vindicated the austerity policy. To see how absurd this claim is, imagine that a government on a whim decided to close down half the economy for a year. That would be a crazy thing to do, and with only half as much produced, everyone would be much poorer. However, a year later when that half of the economy started up again, economic growth would be around 100 per cent. The government could claim that this miraculous recovery vindicated its decision to close half the economy down the previous year. That would be absurd, but it is a pretty good analogy to claiming that the recovery of 2013 vindicated the austerity of 2010.

This was how the government could turn economic failure into apparent political success. The strategy also had one further consequence. It redefined the meaning of what good macroeconomic policy was. If you asked any economist what the aim of government policy should be, he or she would probably say it was to increase the welfare of the public, or, more specifically, to raise standards of living. A government that had presided over the longest fall in real wages in modern UK history would be in deep trouble. However, for much of the media, the goal of macroeconomic policy has been redefined as how effective the government has been at reducing the deficit. Macroeconomics as portrayed by the media is so different from the macroeconomics of the textbooks that I call it “mediamacro”.

Nothing illustrates mediamacro better than Ed Miliband’s 2014 Labour conference speech, in which he forgot to mention the deficit. In terms of what influences national prosperity, the real news over the past five years has been the stagnation in UK productivity. Yet when David Cameron failed to mention the productivity slowdown in his conference speech, hardly any journalist bothered to highlight this huge omission. When Miliband forgot to mention the deficit even Jon Snow lambasted him.

How did the coalition government manage to transform the media debate on macroeconomic policy so comprehensively? I have some idea of the ingredients involved but much less idea of how important each is. Of course having a partisan press is important, if only because it is capable of setting agendas. It also helps that the BBC can be easily intimidated. When its former economics editor Stephanie Flanders dared suggest that a lack of productivity growth might be a problem, Iain Duncan Smith made a formal complaint.

There is a further problem with how the media generally get their economic expertise. The economists you are most likely to see in the media are those who work in the City. It is, after all, part of their job to get media exposure; they’re always on hand to give a reaction. To be fair, when it comes to the daily ups and downs of the market, they are also best qualified to play this role, though in fact no one knows why markets move from day to day. But on issues of macroeconomic policy, City economists can present a biased and distorted view.

At the beginning of 2014, the Financial Times conducted a survey of economists; one of the questions it asked was: “Has George Osborne’s ‘plan A’ been vindicated by the recovery?” As I have already suggested, this question has an obvious answer. The 2013 recovery could not possibly vindicate the 2010 austerity because it is exactly what you would have expected to happen after austerity initially reduced GDP growth and was eased as a result. Among the academics answering this question, there were ten clear nos and only two clear yeses. However, among the many City economists who answered the FT survey, the numbers of yes and no replies were more evenly balanced.

Granted, it is regrettable that academic economists cannot speak with complete unanimity on the matter, but a 2/10 split is as close to a consensus as these things go. It is also the case that almost all academic macroeconomists would argue that the cuts in public investment that occurred in 2010 were a grave mistake. As the New Statesman reported in 2012, many of the minority of economists who originally supported immediate austerity have since acknowledged that cutting public investment in 2010 and 2011 was a grave mistake. It was these cuts, such as halting repairs to schools or reducing spending on flood defences, which most damaged GDP.

The austerity mistake involves basic macroeconomics. Cutting spending will reduce demand and is not to be undertaken when interest rates cannot be cut to offset its impact. The Conservatives, if elected, plan further sharp austerity in the early years of the next parliament, at a time when interest rates are still expected to be at or near their floor. Whatever your views about the desirable size of the state in the long run, to cut spending when the economy is still vulnerable in this way is to take a huge risk. It is exactly the risk that materialised from 2010, except today there is not even a hint of market pressure to cut the deficit quickly. Being able to cover up the earlier mistake is bad enough. Planning to repeat it is pure folly.

Simon Wren-Lewis is a professor of economics at Oxford University

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 17 April 2015 issue of the New Statesman, The Election Special

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Twilight of the postwar era

This Brexit-focused election is just one milestone in a long and complex relationship between the UK and the EU.

On 25 March the European Union celebrated its 60th birthday in Rome. Of the 28 members, only the United Kingdom declined to attend, signalling, to quote one senior EU diplomat, that it didn’t think the occasion was “appropriate for us”. The Daily Express called this a blatant “snub” to Brussels.

On 29 March Theresa May sent her “Dear Donald” letter – not, of course, to that dear Donald but to “President Tusk” at the EU in Brussels. It was delivered by a senior British diplomat with an antique and strained politesse reminiscent of his predecessors in Berlin in August 1914 and September 1939.

On 18 April the PM declared that it was in the national interest to hold a snap general election on 8 June, having five times in person or through official sources denounced the idea of going to the country before the set date in 2020.

On 29 April, a month after the PM’s letter, Donald Tusk secured agreement from the remaining 27 member states for the EU’s negotiating guidelines.

The following day the press reported a total face-off between May and Jean-Claude Juncker, the head of the European Commission, and EU negotiators at a Downing Street dinner. She was living “in a different galaxy”, Juncker is said to have exclaimed. May dismissed the story as “Brussels gossip”. But then, on 3 May, in an address outside 10 Downing Street, the Prime Minister hit back, accusing senior EU politicians and officials of meddling in the British election campaign.

Whom you believe depends, as usual, on which side of our national chasm you are standing. Of one thing we can be sure. The spin and the propaganda will go on remorselessly, day after day, for years to come, as this country tries to talk its way out of a European union in which it has never felt at home. To keep our bearings amid the dizzying intergalactic spin, it is worth taking a longer view. Because history matters in this debate and few of our “leaders” seem to have any historical perspective.

***

At 60 the EU is a senior citizen – rather stiff in the joints, grossly overweight and often a bit of a bore. It’s hard now to recall the heady hopes that its birth aroused. After two ruinous wars in three decades, many western European leaders were determined to escape from the vortex of belligerent nationalism.

Six countries signed the original Treaty of Rome in March 1957 to set up the European Economic Community. The EEC was a common market and customs union between Belgium, France, Luxembourg, the Netherlands and two defeated Axis powers from 1945 – Italy and West Germany. Britain could have been present at the creation; in fact, most of the six wanted us to join. But then, as now, the message was: “We don’t think it is appropriate for us.”

In part, the motives behind founding the EEC were economic. Hard borders and high tariffs would hamper recovery after the war. Belgium, Luxembourg and the Netherlands had already formed the Benelux customs union in 1948. They were also natural trading partners with Germany, sharing the Rhine-Meuse-Scheldt Delta, and Germany had vied with France for decades over the mineral resources of the Saar and the Ruhr. Now the six countries decided to pool these vital assets. The European Coal and Steel Community (ECSC) of 1952 was a stepping stone to the Treaty of Rome.

None of these states had abandoned the pursuit of national interests; rather, they were going about it in less confrontational ways. Electorates, still haunted by the Depression of the 1930s, now expected their governments not only to ensure order and security but also to stimulate growth and provide welfare. In these circumstances, some erosion of national sovereignty seemed necessary, even desirable. Prosperity wasn’t a zero-sum game, built on hard-nosed “us first” policies, but would be fostered by calculated yet enlightened interdependence. For the modern state, in short, absolute sovereignty could not be an end in itself.

That said, the essential imperative of European integration was not economic but political. For France and Germany, 1914 and 1939 were just the most recent manifestations of their bloody past, a cycle of wars that stretched back to the days of Bismarck, Napoleon and Louis XIV. Sedan 1870, Leipzig 1813, Jena 1806, Valmy 1792, Turckheim 1675 – the victories were emblazoned on public monuments and celebrated in school textbooks, the defeats quietly forgotten. ­European integration offered a chance for the French and the Germans to break free from centuries of tit-for-tat conflicts; a belated acceptance of the dictum “If you can’t beat them, join them”.

The Benelux countries were caught in the jaws of that Franco-German antagonism: whenever the two big beasts bit on each other, the three little ones felt the pain. ­Italy, the other founding member, was – like West Germany – desperate to jettison its pariah status from the Fascist era. So Rome 1957 served as a belated peace treaty, drawing a line under the Second World War for western Europe.

This zeal to transcend hard nationalism is seen most strikingly in the life of Robert Schuman, the man now celebrated as the “Father of Europe”. Born in 1886, Schuman grew up in Luxembourg but was educated at German universities and practised law in the city of Metz, in Lorraine – then part of Germany thanks to its victory in 1870-71. When the next war broke out in 1914, he was conscripted into the kaiser’s army: only medical problems saved him from having to fight against the French.

In 1919 France recovered Alsace and Lorraine, so Schuman became a French citizen and got into French politics. From 1942 to 1945 he fought in the wartime Resistance and then, amid France’s postwar kaleidoscopic politics, served variously as finance minister, prime minister and foreign minister. It was Schuman’s celebrated declaration of 9 May 1950 that paved the way for the ECSC and the Treaty of Rome.

Today the “Schuman roundabout” lies at the heart of the EU quarter in Brussels – an apt memorial, because his experience of the (un)merry-go-round of belligerent nationalism inspired his commitment to European integration. He was not alone. The West German chancellor Konrad Adenauer (born 1876) was a Rhinelander from Cologne who served as that city’s mayor from 1917 to 1933, until he was sacked by the Nazis. Over the years he had in turn chafed at Prussian domination of the Rhineland, feared French annexation, and endured two stretches of British military occupation.

The Italian premier Alcide De Gasperi (born 1881) had started his political life in the Austrian parliament before 1914, when his homeland, Trentino/South Tyrol, still belonged to the Habsburg empire. After the region was transferred to Italy in 1919, De Gasperi resumed his political career not in Vienna but in Rome, opposing first the Fascists and then the Communists.

The early lives of these three men along the shifting borderlands of war-torn Europe brought home to them the suicidal futility of hard nationalism. They also shared a profound sense of Catholic Europe, extending back through the Holy Roman empire to the era of Charlemagne.

It was from this historical platform that Schuman approached European integration. “If we don’t want to fall back into the old errors in dealing with the German problem,” he said, “there is only one solution: that is the European solution.” Coal and steel were an ideal starting point because they were double-edged – vital for industrial growth but also for waging war. Surrendering national control over these critical assets could enhance prosperity and peace.

***

The British approach to “Europe” was very different. In the mid-20th century Britain still saw itself as a global power. The sterling area took half of all British exports: western Europe, struggling to recover from the war, less than a quarter. In 1951 British industrial production equalled that of France and West Germany combined. And although Britain worked closely with France in 1947-49 over the Marshall Plan and the North Atlantic Treaty, its engagement with the Continent had clear limits.

“Our policy should be to assist Europe to recover, as far as we can,” senior British civil servants advised in 1949. “But the concept must be one of limited liability. In no circumstances must we assist them beyond the point at which the assistance leaves us too weak to be a worthwhile ally for USA if Europe collapses . . .”

“Limited liability” was a philosophy rooted in Britain’s experience of the war – also markedly different from that of the Six. In May and June of 1940, Germany conquered France, Belgium, Luxembourg and the Netherlands, with Italy jumping in to grab some of the spoils. That summer is now engraved in British national mythology. It was immortalised in David Low’s Very Well, Alone cartoon for the Evening Standard, depicting a pugnacious Tommy breathing defiance to the world from a rock in storm-tossed seas.

Victory was eventually achieved not with the Continentals, who seemed to be either foes or failures, but in alliance with those whom Churchill called “the English-speaking peoples” – above all, the United States. From this perspective, “sovereignty” clearly worked: we successfully defended our iconic southern border, the white cliffs of Dover, and gained ultimate victory. Only those who had been defeated (in 1940 or 1945) would imagine surrendering any national powers to a higher authority.

In 1950, therefore, when the Labour cabinet decided that the Schuman Plan was not appropriate for us, it was following the majority view in Whitehall and Westminster. Ernest Bevin, the ailing but still doughty foreign secretary who had led Britain’s drive for closer intergovernmental co-operation with France in the 1940s, had no time for the dread word “federalism”. In his inimitable phrase, “If you open that Pandora’s box, you never know what Trojan ’orses will jump out.” Pressed by the Americans to take these ideas more seriously, he questioned how he could go to his London dockland constituents in Woolwich, blitzed by the Luftwaffe in 1940, and explain that the Germans would help them in a war with Russia. As for France, he sniffed, “the man in the street, coming back from a holiday there, was almost invariably struck by the defeatist attitude of the French”. Great Britain, he exclaimed, was “not part of Europe”; she was “not simply a Luxembourg”.

This was a bipartisan attitude, endorsed by the Tories when they regained office in 1951. Churchill conjured up the image of three overlapping “circles” of global power, with Britain involved in each but not confined to any: the Commonwealth and empire; the “English-speaking world”; and, as he put it to the cabinet in November that year, “United Europe, to which we are a separate, closely and specially related ally and friend”. He and his successor Anthony Eden welcomed European integration for “them”, not “us” – as a way of reconciling France and Germany. After the Six embarked in 1956-57 on talks in Brussels about further integration, the British sent not a government minister but a Board of Trade official, and then merely as an “observer”.

The accepted wisdom in London remained that Britain’s trading interests were global and that a protectionist European bloc would be dangerous. Yet that kind of common market was not a foregone conclusion. Britain had a powerful potential ally within the Six in the form of West Germany, and especially its influential economics minister, Ludwig Erhard.

Almost as much as London, Bonn’s trading interests were global: 40 per cent of its exports went beyond Europe and much of West Germany’s European trade was outside the Six, with Austria, Scandinavia, Switzerland and the UK. Like the British, Erhard wanted a reduction of global tariff barriers to promote free trade, rather than the high-tariff, protectionist bloc favoured by Paris to defend France’s flabby economy. Yet a common market was inconceivable without the French, and Chancellor Adenauer – focused on postwar reconciliation – insisted that politics mattered more than economics. Erhard was told to get the best deal he could as long as France was “in”.

So that left the French able largely to dictate their terms. Among these were a steep external tariff, inclusion within the EEC of France’s overseas territories, acceptance across the Six of France’s high welfare payments and the development of a Common Agricultural Policy (Cap), which subsidised inefficient farming. By 1970 the Cap consumed 70 per cent of the EEC budget. But, as a senior Italian official observed ruefully, “Europe cannot organise without France and, to get her in, prices must be paid which may seem exorbitant.”

What would have happened if Britain had been fully engaged in these negotiations from the start? Might it have strengthened Erhard’s hand and helped forge a strong
Anglo-German axis in favour of a looser, more open free-trade area? That would have put pressure on Paris to accept London and Bonn’s terms, or be left out in the cold. In which case European integration could have developed along very different lines, with a Franco-German-British triangle operating in creative tension at the heart of the new Europe in an EEC that, in effect, would have been 3 + 4. A tantalising “what if”, but it would have required a very different attitude
in Britain towards its future and its past.

***

And so the EEC was born on New Year’s Day 1958 with six founder members, not seven. The British had been completely wrong-footed. In 1950 they expected Schuman’s pipe dream to go up in smoke; they were equally complacent about the Brussels talks in 1956-57; and they repeated the mistake yet again in assuming it would take years for the EEC to become a reality. Instead, not only was the EEC now a fact, but the Six made rapid progress in dismantling tariff barriers and agreeing the basics of the Cap. By 1961 they were seriously debating political union, or at least a common foreign policy.

London struggled to believe that those despised Continentals, who in their various ways had botched the Second World War, could bury the hatchet and work together. British complacency, even arrogance, has aptly been called the “price of victory”. And we’ve been paying the bill ever since.

Once the Six was up and running, there was a grave danger of Britain being marginalised. The European community threatened
to become “the only Western bloc approaching in importance the Big Two – the USSR and the United States”, a senior Whitehall committee warned in 1960. Aside from the economic damage that would ensue, “if we try to remain aloof from them” Britain would “run the risk of losing political influence and of ceasing to be able to exercise any claim to be a world Power”. The economic case for membership was still finely balanced: commercial and emotional ties with the Commonwealth, strengthened by the war, remained strong. Yet, for Harold Macmillan, like Adenauer in 1956, politics took precedence over economics. In August 1961 his government applied to join the EEC.

But the price of victory kicked in again. Charles de Gaulle had not forgotten or forgiven Roosevelt and Churchill for treating his Free French as second-class members of the wartime alliance. A fierce nationalist, he accepted the European project but sought to turn it to France’s advantage, or his conception of this. Crucial to his strategy was keeping Britain out of the EEC.

“My dear chap, it’s very simple,” the French agriculture minister told his British counterpart. “At the moment, with the Six, there are five hens and one cock. If you join, with other countries, there will be perhaps seven or eight hens. But there will be two cocks. Well, that is not so pleasant.”

Determined to rule the roost, de Gaulle blocked first Macmillan’s application to join and then Harold Wilson’s. By the time he retired and Edward Heath had negotiated terms of entry, 15 years had elapsed since 1 January 1958. The original deal-making among the Six had set hard, to their advantage. Any new member had to accept the club rules as given: the “acquis commun­autaire”, in Eurospeak. Worse still, in 1973, just months after Denmark, Ireland and the UK had joined the community, the bottom fell out of the world economy with the oil crisis, recession and stagflation, making it nigh impossible amid all the crisis management to force the EEC into reform as Heath had hoped. The good ship Europe had been launched on the high tide of postwar prosperity. But as the Six became the Nine, that tide began to ebb. We have never had it so good – ever again.

Since the 1970s and Britain’s “entry” into Europe, successive prime ministers have tried to undo the damage caused by their aloof predecessors. Most have done so “alone” – in 1940 mode – rather than working to form alliances with reform-minded colleagues on the Continent. In particular, as in the mid-1950s, they failed to build creative partnerships with the Germans.

Margaret Thatcher was a notable example. Her cantankerous “handbagging” secured rebates on British budget contributions in excess of what probably could have been obtained by “normal” diplomacy, but it alienated many of her European colleagues. And her visceral suspicion of the Germans, dating back to the Second World War, poisoned relations with Bonn. “She doesn’t really believe that there’s any such thing as useful negotiation,” observed Sir Nicholas Henderson, a high-ranking British diplomat. “She doesn’t see foreign policy as it is, which is a lot of give and take.”

Yet Thatcher was only the extreme case. Even prime ministers who were more “pro-Europe”, such as John Major and Tony Blair, were hamstrung by domestic politics – meaning both the rooted Euroscepticism of Tory backbenchers and also the tabloids’ determination to treat every encounter with “Europe” as a replay of old battles. Woe betide any British PM who returned from Brussels without being able to proclaim victory in another Waterloo (though the 1815 battle was won in tandem with the Germans, plus Dutch and Belgian support).

The Brexit frenzy is only the latest round in that story. Even on the Remain side, the Cameron-Osborne campaign – a breathtaking blend of arrogance and incompetence – chose to make its case almost entirely by economic scaremongering about the dangers of Leave (through “Project Fact”, aka “Project Fear”), rather than highlighting positives of the European project, especially its enduring contribution to postwar peace.

Of course, the EU has often been its own worst enemy. Reform has been slow: the Cap, for instance, accounted for 73 per cent of total EU spending as late as 1985 and did not fall below 40 per cent until 2013, still a remarkable figure for one of the most industrialised regions of the world. Institutionally, the bureaucracy is flabby; financial control is weak; decision-making is ponderous; the European Commission frequently locks horns with the European Council (the heads of government); and the persistent “democratic deficit” has exacerbated a popular sense of alienation.

Repeatedly, too, politics has trumped economics, particularly over the question of enlargement. In the 1980s the Nine ­became 12 in order to embrace three underdeveloped countries that had recently thrown off authoritarian regimes: Greece, Spain and Portugal. In the 1990s the euro was driven not just by the ambition of Jacques Delors but by the determination of François Mitterrand and Helmut Kohl to anchor the financial and industrial power of a unified Germany firmly in European structures – updating, if you like, Schuman’s vision. And since 2000, the EU has welcomed in from the Cold (War) those countries of eastern Europe that were anxious to escape the Russian bear hug. All these politically inspired moves have come at an economic price. To be sure, the EU28 is far more truly “European” geographically, but the original Six (apart from southern Italy) had a coherence as developed economies and functioning democracies that today’s mixed bag of members conspicuously lacks. Yet the EU project has continued to be animated by aspirations for close economic and political union that date from the 1950s.

***

Sixty is a ripe age. Many institutions do not survive that long and the EU (like Nato, founded in 1949) is painfully aware of the need to think imaginatively about its form and direction. The “Future of Europe” was firmly on the menu even at the Rome birthday party. On 29 March 2017 the UK, by contrast, began Year Zero – reborn into a brave new, Britain-shaped world, if you believe the Prime Minister; tumbling into the abyss, if you heed remaindered Remainers. Now Old EU@60 is about to meet New UK@0 for a long and bruising battle.

The stakes are high on both sides. Brussels is in no mood to let Britain off lightly: an easy exit would encourage other waverers and jeopardise the whole European project. Across the Channel, if May puts politics before economics (“control” of borders over access to the single market) her hard nationalism could alienate Scotland, undermine the Irish settlement, rupture the United Kingdom and end in no deal. A “full English” Brexit might prove very expensive.

The tabloids will doubtless report it as a replay of 1940 and “Our Finest Hour”: an earlier Brexit moment. Attentive as ever to them, May has embraced the description of herself as a “bloody difficult woman” who is eager to “fight for Britain”, in Churchill-Thatcher mode. Is her snap election intended to pave the way for a hard, nativist Brexit? Or does she just hope that a bigger majority will give her more room for manoeuvre in battling Brussels? No one knows, probably not even May herself. Current negotiating strategies, like battle plans, will not survive the first encounter with “the enemy”.

That is why it is important, amid the daily barrage of spin, sneers and aggro, to keep the bigger historical picture in mind. Because we may be entering the twilight of what can be called the postwar era, which began in the decade after 1945, when the horrors of belligerent nationalism prompted a fervent effort to make peace and build truly international institutions. The UN, Nato and the EEC were all products of that creative moment; likewise the General Agreement on Tariffs and Trade and the Universal Declaration of Human Rights.

This fabric of postwar internationalism is now ageing and strained – often in need of radical modification – yet in a world where nationalism, protectionism and racism are on the rise, it provides some flimsy protection against the law of the jungle. If Brexit is handled belligerently, it could help to pull the threads from that thin tissue of coexistence and co-operation.

Our leaders show little awareness of what is at stake historically. According to US Vogue’s recent interview with Theresa May, “She says she doesn’t read much history and tries not to picture how things will be in advance.” Jeremy Corbyn seems to live in an ideological time warp of his own. Boris Johnson does have historical sensitivity, but of a typically self-serving sort: see his entertaining little (auto)biography of Churchill.

This Brexit election is just an early milestone on a long and painful road. It took the UK over 11 years from first applying to joining the EEC. It may take as long to complete a full, legally watertight exit from the EU. Certainly, for the next few years, at a time when so many global problems are crying out for creative policymaking, the EU and the UK will confront each other obsessively to the exclusion of almost everything else. A dysfunctional union and a disunited kingdom – each captivated by its contrasting past – will struggle and muddle towards divergent futures.

David Reynolds’s books include “Britannia Overruled” (Routledge) and “The Long Shadow: the Great War and the 20th Century” (Simon & Schuster)

This article first appeared in the 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

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