Britain And Europe: Divided They Stand

Tensions are driving Britain further from the Continent

British television viewers have recently been entertained by a BBC historical sitcom called Let Them Eat Cake. Set in the 18th century court of Louis XVI and Marie Antoinette, it depicts the French royals and their courtiers as crude, lusty buffoons.

This view of continental Europeans as distastefully different has been especially prominent among Britons in the past few weeks. One dispute after another is thwarting Prime Minister Tony Blair's efforts to promote warmer ties with the Continent. France and Germany have been balking at importing British beef. Blair is opposing a German-led proposal to impose withholding taxes on securities throughout the European Union. Also galling to Britons has been German criticism of the proposed hostile takeover of Dusseldorf-based mobile-phone giant Mannesmann by Britain's Vodafone AirTouch PLC. German Chancellor Gerhard Schroder's support for keeping Mannesmann independent just weeks after Mannesmann took over Britain's Orange PLC fosters the impression that Germans think they can take over foreign companies, while keeping an unbreachable wall around Germany Inc.

The tone has changed dramatically from two years ago, when Blair aides believed they could work with Schroder, and even French Prime Minister Lionel Jospin, to promote economic reform on the Continent. But with Schroder drifting leftward and the euro sinking against sterling, such hopes now seem a grand illusion. "There hasn't been a convergence of political thinking," says Michael Hughes, strategist at Baring Asset Management in London.

TOUCHSTONE. In fact, observers on both sides of the Channel think Blair and the key Continental players are so far apart in economic thinking that Britain's entry into the European Monetary Union may be delayed beyond the expected date of 2002-03. Blair says he will hold a referendum on the euro after the next general election if economic conditions are right. But many think he'll find reasons to delay. "I think that Blair will try to defuse EMU by saying a postelection referendum is unlikely," says Michael Saunders, European economist at Salomon Smith Barney in London. If Blair's European counterparts come to doubt his seriousness on this touchstone issue, important consequences could follow. Without a strong British presence in European debates, economic reform on the Continent may slow. And Britain could face reprisals from its big trade partners.

One recent row has been over Germany's proposal to impose a 20% withholding tax on EU citizen's cross-border savings. Britain, with few allies, strongly opposes the measure. It claims the tax will not achieve its intended goal of stemming tax evasion. Instead, it could cause the $3 trillion eurobond market, which is centered in London, to flee to New York and Switzerland.

While a compromise on the tax may be worked out, Britain's growing isolation could lead to setbacks in other areas. There is talk of making Britain's eventual adoption of the euro more difficult. Indeed, on Dec. 3, Schroder lashed out at Britain for putting its "national interest above European solidarity."

Nasty talk. But given this year's stream of scandals, currency turmoil, and leftist drift on the Continent, staying aloof from the rest of Europe looks pretty good to Britain. Despite warnings of the dire consequences of not adopting the euro, British unemployment has fallen to a 19-year low of 4.2%, and the economy is picking up steam. "The main problem is that there is now no demonstrable economic advantage to joining," says Raymond Seitz, a former U.S. Ambassador to Britain.

Blair may still try to carry off a campaign to push Britain to embrace the single currency. Robert M. Worcester, chairman of polling organization MORI, thinks that Blair, who enjoys a huge 53%-to-28% lead over the opposition Conservatives, would win a referendum on the euro if he put his prestige behind it. Worcester predicts that Blair will call an early general election in 2001 and hold a referendum soon after.

HANDICAPS. Although many in business are skeptical, some manufacturers want an early entry. With the euro sharply down against the pound, those who invested in Britain as a platform to export to the Continent are feeling the squeeze. John Cushnaghan, managing director of Nissan Motor Manufacturing (U.K.), and other car executives say high sterling is chopping their margins and making further investment in Britain less attractive. Nissan U.K.'s profits fell by 70% in 1998, to $37 million, and margins are still "suffering," Cushnaghan says.

Despite such problems, it is hard to show that Britain is paying a price for not being in the single currency. For years, the country has enjoyed the lion's share of direct investment in Europe. Of course, there may be a price further down the road if companies decide that Britain is no longer a core European player and any investments they make there face handicaps. But for now, Britain seems to enjoy distinct advantages over the Continent. Until Europe makes a lot more progress in solving its problems, it will be smart of Blair to stick to his wait-and-see position. The scepter'd isle, for now, can go it alone.

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