Britain and the EU: a gulf in understanding

The UK's differences with the European Union can be found buried in her legal systems, and what they teach her about how to treat rules...

Jeremy Fox
3 April 2016

European Council meeting room

Great Britain and Ireland are the only members of the European Union with legal systems based on common law*. Civil law prevails in all the other member states. These two traditions are the basis of quite different ways of approaching EU regulation; and they lie at the heart of some of the most critical misunderstandings between – in particular – the UK and the EU. They also go some way to explaining why the UK seems constantly to struggle with EU bureaucratic rigidity and with what eurosceptics perceive as undemocratic regulatory incontinence.

Custom and equity are the two guiding principles of common law: precedent tempered by a sense of what is “just”, so that while past judgements make up the scripture, they don’t necessarily override fairness.

Civil law, on the other hand, owes its origin first to ancient Roman law – developed under the emperor Justinian – but also somewhat to the canon law of the Catholic Church. These were the twin influences that fed, under Napoleon, into what became known as the Napoleonic Code which was subsequently adopted in most of Europe, with variations, updates and rewrites appropriate to each nation. For our purposes, what is important in the Napoleonic tradition is that the law is codified in the form of statutes. Under civil law, a judge is supposed to be able to reach a decision by applying logical deduction to the written code. If this proves impossible, it is theoretically either the fault of the judge for not understanding the law properly, or of the legislature for failing to keep the code up to date.

In common law countries, courts interpret the law, while in civil law countries judges follow and apply it. Common law plays out as a gladiatorial contest between opponents; while civil law works more as an inquisition in which the judge’s role is to expose the truth. What this means in practice is that the British tend to take the law literally, probably because its cultural basis is consent – a consent epitomised with respect to new legislation through acts of parliament but where judicial interpretation and precedent still hold sway. By contrast, those who live under forms of civil law work under what distinguished lawyers and codifiers have written down. The Napoleonic Code (1804) was drawn up by a commission of four eminent jurists. Hence why Europeans tend to be more comfortable than the British with laws “made in Brussels”. Brits are simply not used to legislation being drafted by unelected bureaucrats or specialists; and some therefore conclude with sniffy condescension that while “we” in the UK are wedded to democracy those Europeans must necessarily be less so. Eurosceptics are doubtless not alone in looking askance at the proliferation and seeming intractability of EU “rules” and in wondering why the whole of Europe has not risen in arms against the Brussels bureaucrats.

One answer lies in the fact that the primacy of “the book” in the European legal tradition has given rise to a long-established custom of working through the interstices of the legislative framework whenever it seems possible and convenient to do so; and where civil legislation is concerned, legitimate reasons may sometimes be found for simply ignoring the letter of the law in favour of a higher purpose.

A few words of biblical context may help us understand the thinking. When, in the Old Testament, the Israelites demanded “like other nations” to have an earthly king as well as a heavenly one”, the prophet Samuel acceded to the request on the Lord’s advice, but only after warning the people that a king would use his power to bend them to his will. (Samuel Bk1, ch. 8). Thus began a dichotomy between human and divine authority that led along one path to claims that monarchs and spiritual leaders were divinely anointed, and along another to what became known as scholasticism, and subsequently under Jesuit influence as casuistry. The latter are forms of argumentation and abstract reasoning aimed at achieving a desired conclusion without trespassing on received dogma. Even today, Roman Catholics are used to discussing how and under what circumstances it is permissible to disobey the law. We are in the realm here of a cultural inheritance whose roots lie deep in the past.

Different attitudes towards the law are fundamental to understanding why Europeans states seem able to handle EU legislation even when it appears not to be in the national interest, while the UK – government as well as eurosceptics – claims to be powerless against its strictures. While Brits tend to think that EU legislation is set in stone – however “undemocratic” it may seem – Europeans are used to working out ways to circumvent it or, at any rate, to avoid some of its unwelcome consequences. A Spanish phrase summarises the approach: “La ley se acata pero no se cumple.” – the law is respected but not (necessarily) obeyed. This particular formulation arises from the Spanish colonial period when edicts from Madrid were dutifully acknowledged in the distant colonies of Latin America and thereafter ignored as “impractical”; but it is an inbuilt cultural characteristic of countries that have inherited the Catholic-Napoleonic tradition.

How are these differences between the UK and the EU manifested? Let us start with the issue of nationalised industries. Maintenance of a level playing field between member states in matters of commerce is a prime responsibility of the European Commission (EC) which is supposed to have wide powers of regulation. According to the EC, long-term state holdings in corporations are a form of state aid and therefore constitute unfair competition. Tories famously eschew nationalisation on ideological grounds, but both UKIP and strong Labour voices concur that the EU won’t allow it anyway. An illustration of the earnestness with which EU state aid regulations are treated as gospel is the government’s own manual on the subject published for the enlightenment of officials (downloadable, and excellent nourishment for masochists). For readers with less tolerant digestive tracts, an EC powerpoint focused on the steel industry provides the essentials of what we are supposed to believe. Clearly stated in the legislation is a prohibition on state aid for companies in trouble or for disadvantaged regions. That would seem to put paid to Redcar, Port Talbot and the entire British steel industry. Too bad that Chinese steel, under the protection and sustenance of the Chinese state, is being dumped on the European market at knock-down prices! Too bad for the UK that is because, as has not escaped everyone’s attention, so many exceptions to the state-aid prohibition exist that there’s room enough for tanks to trundle through the legislative gate without touching the sides, Belgian, French, German and Italian tanks among them.

Germany’s way with the rules is notably instructive. A study conducted by the TUC in 2012 and which formed part of a submission to a government committee states that “…over the period 2010-2012, German industries, including energy intensive industries, benefitted from a range of reliefs from duties, levies and taxes worth EUR 26 billion, or some EUR 8billion a year. These reliefs are set to continue for the longer term”. Moreover, “…they cover a wide range of measures (including) grids, power plants, energy efficiency, renewables, energy research and compensatory arrangements for businesses competing at the international level "(my italics). Nor is energy the sole framework for direct state aid to industry. Buried a little shyly in a long piece in The Economist on German manufacturing is an admission that the state doles out cash in support of industries that it thinks are important areas of growth, and offers “extensive” research facilities to small and medium-sized firms when they need help.

All that seems to be required for these subsidies to pass ‘go’ is a careful reading of the regulations allied to a determination to ensure that these don’t interfere with German economic interests. Even when Germany is caught in a flagrante breach of the rules, as seems to have occurred with the subsidisation of Deutsche Post, it somehow manages to avoid embarrassment or even bothering to respond. Thanks to the Centre for Policy Studies, we now know about Germany’s recent gas pipeline deal with Russia – a development entirely contrary to EU energy policy but which the EC will doubtless be unable to prevent. Germany is, after all, the EU’s biggest beast and, like the ghost in Hamlet, “is as the air invulnerable and the EC’s vain blows malicious mockery.”

Perhaps the most egregious German subsidy of all concerns exports to the rest of the EU – and, in particular, to the countries of southern Europe. Here Germany takes sublime advantage of the European Central Bank’s inter-bank payments settlement system known as TARGET2. Every time money flows from the banks of one euro member country to the banks of another, it does so through the TARGET2 system which works as follows.

Let’s say a Greek dealer orders a consignment of luxury cars from Germany. The German exporter duly dispatches the vehicles while the Greek importer instructs her local bank to arrange for payment. This is effected via the Greek Central Bank, which then registers a TARGET2 credit in its accounts in favour of the German Bundesbank (central bank), after which the latter in turn credits the amount to the bank of the German exporter. Because the deal is in euros no foreign exchange is applicable, and no money needs to change hands because these apparent financial transactions are just computerised entries. If, for example, the funds are lacking in Greece to pay the debt (which has been the case), then the Bundesbank simply registers a claim against the Greek Central Bank.

At the end of February 2016, the Bundesbank’s TARGET2 claims amounted to EUR 605 billion. Prior to the onset of the financial crisis in 2008, the balance was EUR 71 billion, while at year end 2006 it was only EUR 5 billion. In other words, as Greece and other southern European countries descended into critical levels of debt, the Bundesbank’s TARGET2 balances swelled in parallel. TARGET2 credits have enabled the Bundesbank to finance and therefore subsidise German exports to cash-strapped Eurozone countries – albeit at some risk to the German taxpayer because if any of these countries had been “allowed” to default, German citizens would have had to foot the bill. Hence the German pressure on Greece to knuckle down to austerity and to flog off state assets.

Admirers of German efficiency and apparent economic success tend to confuse the country’s reputation for meticulousness with straightforward dealing. Meticulous the Germans certainly are, and fine engineers too; but as the recent Volkswagen scandal has amply demonstrated, straightforwardness is not a characteristic to which they can fairly lay claim. An objective observer might be tempted to conclude that the German government favours the national interest above the interests of her European partners; but then it is to the German electorate not the EU that Mrs Merkel must answer.

France differs somewhat from Germany in her approach to dealing with EU regulations, though the objectives are similar. French nationalism is more overt, and direct state participation in industry more significant. The country maintains a large state sector, and readily finds reasons for blocking foreign ownership of French businesses, not simply those one might expect such as defence or “foundation” industries, but any firm considered to be a quintessential representative of the nation. When yoghurt-maker Danone became a takeover target, the government took up arms to defend what the French Prime Minister referred to at the time as “one of our industrial treasures”; a striking contrast with the UK government’s response to the takeover of Cadbury. But then France offers scant respect for “prohibitions” that are deemed not to be in the national interest, the attitude being that if an initiative is not allowed, then it will be redefined as “strategic” and therefore allowable after all, or simply met with a ministerial shrug of the shoulders and a sotto voce “on s’en fout” (we don’t give a damn). Here we see casuistry at work – if necessary with a defiant twist – in modern Europe. France has adopted a fiercely nationalistic policy of industrial development and seems unlikely to change course any time soon.

Whether protectionism is good or bad is not the subject of this essay. What may be of concern, however, are the possible long-term consequences of industrial laissez-faire – or an over-zealous adherence to EU state-aid rules. One consequence is suggested by the annual Thompson-Reuters report on the top 100 global innovators, the 2015 edition of which has Japanese and US companies leading the way with 40 and 35 respectively, while France has ten and Germany four. Among the newcomers are Korea with three and Taiwan with one. And the UK? None. In the short-term we may not notice much effect on our standard-of-living of what appears to be a lacklustre level of innovation, although the UK’s stubbornly low productivity may well be one; but who knows if in the medium-term we will not end up as hewers of wood and drawers of water in an economic universe controlled elsewhere? The UK’s finance sector currently feeds the government with tax revenues, and the low-paid service sector feeds the employment statistics; but they do little to foster the development of a vibrant, creative nation.

Ideology, of course, plays a role in the UK’s policy – notable since Thatcher – of delivering the country’s industrial welfare to the vagaries of the market. Ironically, the United States, considered by some to be the model of free-market thinking, is far less hesitant than the UK about protecting strategic industries. But regardless of the ideology at play, successive UK governments – and the current one not least – have a history of bowing to EU regulations more punctiliously than any other major country.

Nothing perhaps more clearly demonstrates the weirdness of the British attitude to EU regulation than the Hinkley Point C nuclear power saga. In 2014, the EC graciously gave the UK permission to proceed with Hinckley Point despite serious misgivings about pricing and loan guarantees that bear a striking resemblance to state subsidies. Moreover, the proposed lead builder and operator of Hinckley Point is to be none other than EDF – a French state-owned utility company. Both the Austrians and the Germans have objected to what looks like a stitch-up, and in July 2015 they filed a lawsuit against the EC for its decision to override EU competition law against state aid. In March this year, the plot thickened when it came to public knowledge that the Information Commissioner has been refusing to reveal details of the full extent of subsidies planned for Hinkley Point. Unsurprisingly, the EC’s green light for Hinkley seems not to have been based on the regulations but on politics. France has taken the UK by the hand and shown that if you have the clout, the guile and the effrontery (in varying degrees) then rules become largely a matter of “consumer” choice and of keeping up appearances in case the hoi polloi (the smaller or more gullible countries) get ideas above their station. If Hinkley Point goes ahead it will not be because the Austro-German lawsuit has failed, nor because the EC benignly looks away, nor even because the UK government wants it to happen. French self-interest will be the deciding factor – a conclusion as revealing about the EU as it is humiliating for the United Kingdom.

A word more about democracy. France, and Germany among other EU countries have shown themselves willing to prioritise national interests over formal EU strictures when the two are in conflict. Their electorates would doubtless interpret this willingness as an example of democracy in action. In the UK, by contrast, which makes a noisy virtue of sticking to the rules whether made in Europe or inherited as part of a sclerotic and unrepresentative political system, democracy seems to be little more than a smug soundbite, a totem of self-congratulation. The UK is not more democratic than our European neighbours. It is considerably less so; and the lazy failure of our political class to understand Europe, to grasp what it offers with both hands, to prioritise the national interest within a framework that is far more accommodating than we are led to believe, should induce us to question not whether we ought to be in Europe but why any of our politicians deserve our vote.

*England & Wales, Northern Ireland and the Republic of Ireland all have common law systems, Scotland has a hybrid common law/civil law system.

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