The Missing Link? Zapatero, Blair and the Future of Europe

The Missing Link? Zapatero, Blair and the Future of Europe

Theme: José Luís Rodríguez Zapatero will meet Tony Blair in London next week to discuss the future of the European Union (EU) and ways in which they can improve the bi-lateral relationship between London and Madrid.

Summary: Tony Blair outlined an ambitious agenda for the current British presidency of the EU that will re-open debates about the economy, social protection and how the Union can respond better to the needs of its people. Blair has already been praised in some quarters for providing a wide-ranging set of proposals but he lacks a sufficient number of firm allies amongst other member states. Some are suspicious of the Prime Minister and Britain’s historical role within the EU whilst others are too weakened by domestic problems to offer any real support.

The Spanish Prime Minister, on the other hand, has already demonstrated a commitment to the European ideal since taking office just over a year ago. Like Blair, he is a young social democrat with a firm electoral base and is implementing domestic policies that in many ways resemble those of New Labour in Britain. Zapatero and Blair can play complementary roles in the current European debate and a firm alliance between them could have benefits for both leaders and the EU. But this will only be possible if they can agree to put past differences behind them.

Analysis: The meeting in London next week between the Spanish and British Prime Ministers brings together the leaders of the two European countries that have been most directly affected by terrorism and how to deal with that threat will be a topic of discussion (see below). The primary purpose of the meeting, however, is to discuss the wider European agenda and how Blair can use the British presidency to help resolve the current budgetary and constitutional crises. Both are recently elected premiers of leading European countries with robust levels of domestic support and credibility abroad.

In explaining his plans for the presidency Blair has already outlined some proposals about how he thinks Europe should proceed. But whilst the Prime Minister has been applauded by many for opening up the debate about Europe’s future, long-standing British isolation within the European Union, and Blair’s highly personal participation in the Iraq coalition, has left him without the partners or alliances which he will need if reforms are to be made.

Rodríguez Zapatero could now become a pivotal figure for the British presidency. Since coming to power just over a year ago he has re-orientated Spanish foreign policy towards its traditional integrationist stance within the EU. Moreover, he was the first European leader to voluntarily call a referendum that was subsequently won by a convincing ‘yes’ vote. Between them Blair and Zapatero have complementary strengths and a shared social democratic vision which, if they can work together, will put them at the heart of the debate about the future of Europe.

In a speech to the European parliament last month Blair presented his agenda for the British presidency and pledged to promote a debate about how Europe can achieve the economic success that will be needed to sustain social protection. It was, essentially, a reformulation for a European audience of the mantra that has sustained him in power as Britian’s longest-serving Labour Prime Minister: that a sound economy and social justice are inseparable. What this will mean in practice and how it can be achieved, will be at the center of the bi-lateral discussions in Downing Street.

Blair will confirm to Zapatero that his presidency is not a neo-liberal plot to undermine the political dimension of the EU and simply impose further de-regulation of European markets. He will explain his view that the Lisbon agenda needs to be pursued with greater vigour and want support for re-floating the Bolkestien directive to liberalise trade in the services on which Europe now primarily depends. Whilst 70% of Europe’s annual wealth arises from services they only account for 20% of cross-border trade. Blair is determined to open up the single market to services and will hope to win support from Zapatero whose Finance Minister, Pedro Solbes, voted for the directive when he was an EU commissioner. Madrid has been publicly agnostic about Bolkestien but must recognise an opportunity here for Spain’s financial service industry amongst others.

Blair’s psychology is also now a determinant as he dwells increasingly on his own political legacy. He has already announced that he will not be standing again as Prime Minister at the next election and he is expected to leave Downing Street within the next two years. When he was first elected in 1997 he pledged to put Britain at the heart of Europe and there have been important developments both within Britain (such as signing the social chapter) and for Europe (such as the Anglo-French defence initiative). Unfortunately, subsequent headlines have in fact reflected the weary tale of British intransigence, hesitancy, red lines and a titanic struggle with Gordon Brown over membership of the euro (which Blair has decisively lost). Blair himself now considers that re-positioning Britain in Europe is his outstanding, unfinished project. Demonstrating that he is able to work with a young, fellow social democrat popular with other European leaders is something that Blair will want to read in his own political epitaph when the time comes.

A partnership between the two should not, in theory, be difficult to achieve. Zapatero broadly shares Blair’s critique of the European economy and his own approach, reflected in the electoral programme and in Government, has the imprimatur of New Labour. Moncloa is committed to the same fiscal rectitude as Downing Street and the Finance Minister, Pedro Solbes, has shown that he is as tough as Gordon Brown in enforcing the rule. Zapatero, like Blair, emphasises the importance of supply side proposals to boost the performance of the Spanish economy rather than loosening fiscal or monetary policy. Zapatero will, however, be looking to defend as much as possible of Spain’s share of the EU budget and ensure that the diminution of social and agricultural funding is as painless as possible –or in commission parlance that Spain has a ‘soft landing’–. There will be no settlement of the 2007-13 budget under the British presidency but Madrid will be looking to establish a firm relationship with London as an ally in the battles to come.

Both Spain and the UK can enter into the European debate with the confidence that their economies are performing, at least on the surface, reasonably well. Both have rates of growth which are above the European average (3.1% in Spain and 2.3% in Britain compared with the EU-25 average of 1.7% and the EU-15 average of 1.4%). Secondly, both economies are creating jobs. Unemployment in Spain has been steadily falling for some two years now and in the UK it is less than 5% of the workforce. Finally, both are running a reasonably tight fiscal policy that allows them to avoid excessive government borrowing –for the moment–.

The underlying economic picture, however, is more complex. For various reasons both the UK and Spain exhibit features which are as much part of the European problem as a part of the solution. According to a recent report The Lisbon Scorecard published by the Centre for European Reform and compiled with the help of the Commission, both Britain and Spain can claim to have made some progress on implementing the Lisbon agenda but neither should be complacent. Both countries have structural economic problems that need to be addressed and both will need to improve their competitiveness if they are to maintain their relative economic success. Blair in particular should avoid casting himself as the doctor when Britain is, in reality, one of the patients needing the medicine.

Both Britain and Spain are running large balance of payments deficits on their current accounts which are amongst the worst in Europe –that is to say they are exporting too little in comparison with the amount of goods and services being imported. This compares unfavourably with Germany, for example, which remains the largest net exporter in the world and runs a current account surplus.

In the UK the story of an economic miracle is only really true if the British economy of 2005 is being compared with the British economy of 1975 and not with other European economies. It is true that there is a positive dynamic: inflation, interest rates and unemployment are all at their lowest rates for decades. But the British economy as a whole is actually growing more slowly this year at just over 2% compared with the 2.7% originally forecast (see above figures). The consequences in terms of a growing fiscal deficit as actual revenues fail to match predicted income will become obvious. Blair will need to make an uncomfortable choice between raising taxes (anathema to the Prime Minister), cutting spending (anathema to most Labour MPs) or increase borrowing (anathema to the Chancellor, Gordon Brown).

Britain is struggling to maintain its international competitiveness and the current account deficit was around €9 billion or 2% of GDP for the first quarter of 2005. This deficit is only in part explained by strong domestic consumption compared with weaker demand amongst its trading partners. The trade deficit is more plausibly explained by the most worrying feature of the British economy, which is the sharp decline of manufacturing in the UK. The increasing loss of competitiveness amongst UK manufacturers has been a feature of the British economy since at least the 1950s –although the decline became particularly pronounced under Thatcherism in the 1980s– and shows little sign of recovery. Since Tony Blair was elected in 1997 over 1 million manufacturing jobs have been lost.

Spain also suffers from a lack of competitiveness for various reasons. First, a particular problem is inflation which is running at 3.0% –well above the European average–. Over time this is making Spanish goods and services traded abroad relatively more expensive and less competitive whilst imports to Spain from low-inflation countries have become relatively cheaper and more competitive. The demand for imports increased by around 12% last year whilst export demand rose by only 3%. The trend has been exacerbated by weak domestic demand amongst Spain’s main trading partners compared with the strong consumer spending, fuelled by spiralling levels of household debt, within Spain.

Secondly, Spain is now facing the long-term consequences of a lack of investment in either capital or human resources. The rapid growth in living standards and personal incomes over the last decade has not been matched by a sufficient level of capital investment, or in the research and the development, needed to ensure sustained growth in the future. Government statistics indicate that Spain dedicates just over 1% of GDP to research and development compared with an EU average of 2% or 3% in Japan. Worse still, two important sources of capital –from the European Union and foreign direct investment– are now being closed off. Since joining the EU, Spain has been a net beneficiary of some €78 billion, the equivalent of around a 0.8% average annual contribution to GDP or 300.000 new jobs per year. Whatever the outcome of the debate over the EU budget for 2007-13 even the most optimistic commentators in Madrid accept that Spain’s share of the cohesion, structural and agricultural funds will diminish over the period.

Spain has also been, historically, a leading beneficiary of foreign direct investment (FDI) but, according to a report by the consultants AT Kearney, the country dropped out of the top ten favoured destinations for foreign capital last year. It fell from 10th to 13th position and is well below countries such as France, Germany or Japan which have amongst the highest labour costs in the world although the government argues that the position is alleviated by portfolio investment. This worrying trend is most easily explained by the fact that Spain is being squeezed between high-tech and low-tech economies. It can no longer compete with the new accession countries to the EU on labour costs and it is struggling to compete with the technologically advanced countries which have a developed capital and human infrastructure capable of producing high value-added products.

Britain and Spain are not, of course, the only European economies facing these challenges of improving the performance and competitiveness of European economy as a whole. Nor have the European Commission, Parliament or heads of state ignored the problem if we judge them by the number of reports which have been published over the last decade: the Lisbon agenda, the Kok report, the Sapir report, etc, have all analysed the problem and suggested improvements but too little has been done. Blair’s challenge is to replace inaction with dynamism. In both Britain and Spain some steps have already been taken to increase competitiveness. Blair’s leitmotif since 1997, for example, has been ‘education’ and in Madrid the publication of a 100-point plan for the Spanish economy will be followed up by further proposals on implementing the Lisbon agenda. Both Blair and Zapatero want to see this sense of purpose extended on to the European agenda and at the meeting in Downing Street they will discuss how this can be done.

The London bomb has forced the threat from terrorism higher up the agenda next week. As part of the long-term objective of improving European relations with the Arab world (and therefore European security) Blair had already decided to make a re-launch of the Barcelona process one of the priorities for the British presidency. Officials in London and Madrid have been working closely together on the project for several months now but the recent bomb attacks in London have given their work a new impetus. The Euro-med conference in Barcelona ten years ago brought together the countries which share a common proximity to the Mediterranean but which have different religions, cultures, economies and systems of government. Miguel Ángel Moratinos was one of the progenitors. The explicit intention has been to encourage dialogue and educational and commercial exchange between the participants with the not-so-hidden agenda of promoting democracy, open government and human rights in the Arab world. It has been a classic example of ‘soft diplomacy’ but one that has been, up to now, so bland that it has made little impact at any level. Especially after the London bombings Blair will want to make a success of Barcelona +10 and to do this he will require help from Zapatero.

Despite this agreement on many issues the relationship between Zapatero and Blair has not had a good start. For all their similarities in background, style and temperament –of which there are many– there has been little empathy between the two. It is hard to identify one causal incident or attribute responsibility to either party alone and there have been multiple examples of ineptitude and clumsiness on both sides. As a consequence Iraq became a source of personal as well as political division.

It is now clear, however, that Blair is seeking a firm alliance with Zapatero and the Spanish Prime Minister should respond with equal resolve. He should remember that Blair will not be thinking of past misunderstandings. One of Blair’s great strengths (and weaknesses) is that he is completely unsentimental and, as Robin Cook noted in his diaries: ‘Tony is only really interested in people with power’.

As an example of how the British Prime Minister works, Zapatero should examine the relationship between Blair and Ken Livingstone, the Mayor of London. Over the last three weeks as the two have worked closely and well on both the successful Olympic bid and the London bombings. Yet in 2000 Blair did everything possible to prevent Livingstone from becoming the Labour candidate for Mayor and engineered his expulsion from the Party. Livingstone then stood as an independent, won the mayoralty and humiliated the official Labour candidate in the process. When it became evident that Livingstone would repeat his success (and humiliate Labour again) in the election of 2004 Blair did not hesitate in facing up to reality. Livingstone, at variance with Blair on many issues and vociferously opposed to the Irak war, was invited to rejoin the Party and won the election as the Labour mayor.

In his meeting with Blair next week the Spanish Prime Minister will need to demonstrate a similar, resilient approach and more self-confidence than he has sometimes shown in the past. If Zapatero can now forge a successful relationship with Blair, as an equal partner in the project to move Europe forward, he will make a valuable contribution to the EU and enhance his reputation in European politics. He will also silence at least some of his critics who question his character and his capacity to be Prime Minister.

Hostile commentators have dubbed Zapatero the ‘accidental president’ because of the unexpected nature of his election victory in March 2004. They question the extent to which he can control the regional ‘Barons’, members of his government or the minor parties that help make up his majority in the parliament. Zapatero is accused of being a follower rather than a leader.

The doubts about Zapatero may turn out to be justified but it is worth recalling that similar things were said of Blair. In his first term the British Prime Minister was accused of being a ‘slave to the focus groups’, ‘all presentation and no policy’ and the indecisive, vacuous ‘phony Tony’. Few would have predicted that Blair would take the risks that he has or would become the world statesman that he now undoubtedly is.

A successful outcome in London next week would enhance Zapatero and help put an end to what appears to be a long-standing, if unspoken premise that Spanish foreign policy should be based on a supporting role. The time has come to establish a more mature approach and Spain should now take a lead. The next few weeks will be critical in shaping the future of Europe and next week Zapatero should seize the chance to establish himself and make a significant contribution to the outcome. This would benefit Europe, Spain and Zapatero himself.

Conclusions: Both Zapatero and Blair should put past differences behind them and avoid reopening the debate about Iraq during this meeting. They should concentrate wholly on how they can work together for the next six months on the EU.

Zapatero should approach the Downing Street meeting with confidence. He should abandon the mentality that has bedevilled Spanish foreign policy in recent years of being a junior partner or follower. He has an important opportunity to prove himself on the European stage and develop a role for Spain as a leading player in the European debate.

David Mathieson
Former Advisor to Foreign Secretary Robin Cook