Lafontaine's fall could set scene for EU realignments

WINNERS and losers from the fall of Oskar Lafontaine are not only domestic but Europe-wide as well.

Undoubtedly the Blair government, which aspires to bring Britain to centre-stage in Europe, should be seen as the most prominent winner from his departure. Lafontaine's policies were in sharp contrast to New Labour's as regards taxation and public expenditure, regulation of international financial flows and economic governance of the euro.

The way is now much more clearly open to Mr Blair and his colleagues to forge closer links and alliances with Gerhard Schroder and a government over which he will have much more commanding control, with policies much closer to New Labour's. This could open the way towards more longterm realignments in European politics, and will facilitate Blair's own European initiatives.

But it would be a mistake to think the issues highlighted by Oskar Lafontaine will go away. Despite his self-defeating hamfistedness he made deflation, globalisation and international economic regulation salient and helped to put them on the political agenda. Such unorthodoxy should not be dismissed as simply retrogressive; it still has much to offer critically and prescriptively. It was also a breath of fresh air, articulating in public what many policy-makers, by no means all of them leftwingers, have been saying in private.

The Blair government has been conducting a far-reaching review of Britain's role in Europe, which is gradually becoming more clear in its policies and diplomacy. Indications of this rethink are contained in Mr Blair's speech on the National Changeover Plan to the euro on February 23rd, in which he said:

"In finance and business the world is more and more integrated. It is moving closer together. And if joining a single currency is good for British jobs and British industry, if it enhances British influence and power, I believe it right for Britain to overcome these constitutional and political arguments and the fears behind them".

HE refused to accept ruling out joining the euro on grounds of sovereignty, because technology, global finance, mass communication, travel and culture show a world moving together, in which "sovereignty pooled can be sovereignty, or at least power and influence, renewed".

Were euro membership to be ruled out the likelihood is that such a decision would have to be revisited in a few years, "and in the meantime we would lose all influence whatsoever in the economic future of the EU of which we will remain a member". He is quite happy to use the term integration to describe these processes.

The contrast with existing and previous Tory policy is sharp, notably with a formulation by the then foreign secretary, Malcolm Rifkind, who distinguished between interests and influence and said in an address on British foreign policy in September 1995: "We will not accept proposals that damage British interests on the spurious grounds that otherwise we will lose influence, create a two-speed Europe or be left out in the cold."

The Blair government believes the emerging European political system combines continuing vigorous nation-states and judiciously selected sovereignty-pooling. It foresees a system of overlapping core sectors of integration, in which there should be provision for differentiated membership as the EU enlarges to cater for varying capacities and willingness to integrate. It accepts that in order to maximise influence it will be necessary to participate in all the core areas of integration.

It also accepts the advice given by Raymond Seitz, the outgoing US ambassador in 1994, who said: "There is a simple observation that if Britain's voice is less influential in Paris or Bonn, it is likely to be less influential in Washington".

Mr Blair put it like this in 1995: "The fact is that Europe is the only route through which Britain can exercise power and influence. If it is to maintain its role as a global player, it has to be a central part of the politics of Europe."

Hence the several recent British initiatives to ensure it is at the core, even if not yet in the euro, which is recognised as the heart of the system. The St Malo defence agreement with France is crucial and a major influence on the developing debate on a European defence identity as NATO formally enlarged yesterday and prepares to launch a new "strategic concept" at its 50th anniversary in Washington next month.

Washington was none too pleased about not being informed of the St Malo initiative in advance. But this helped to develop French trust in the British. At King Hussein's funeral last month President Chirac responded to Mr Blair's pleas to keep the Americans on board by telling him: "That's your job".

YESTERDAY in Brussels Britain announced plans to opt in to the rapidly emerging EU justice and home affairs arrangements in several important respects. It is accepted now that the next British election will have to be fought with a clear government position on joining the euro if the referendum is to be held shortly after it, so we can expect a further gearing up in months to come.

British policy is also directed towards making new alliances with selected EU member-states in selected policy spheres; with the French on defence, with Ireland on the North, with Spain on a variety of issues (despite Gibraltar), with Sweden and Denmark on transparency and the euro.

Germany is crucial for this strategy of bilateral diplomacy.

BRITISH policy-makers deny that a classical balance-of-power approach is being followed, or that they seek to upset the Franco-German special relationship. But clearly a new relationship with Germany would bring Britain closer to the core and develop goodwill for the future.

It will be easier following Lafontaine's departure. He was demonised not only by the tabloids, but deeply suspected by New Labour ideologues and Europhile business interests alike.

The third dimension of New Labour's approach to the EU is to put forward its own distinctive proposals for flexible labour markets, business-friendly policies and so-called Third Way reforms in welfare, capital markets, competition and education systems.

This coincides much more now with Schroder's policies, so that the EU-wide balance between left-and right-wing social democracy has shifted. If Tony Blair can capitalise on this and win the next one or two British elections, he would assert leadership in Europe simply by surviving so well.

Whether he would thereby outgrow the policy issues associated with Lafontaine is much more questionable. Mr Blair accepts globalisation and open markets and regards it as pointless to limit or over-regulate them. Deflation, reflecting slumps in demand and excess economic capacity, is a worry throughout the international system. It remains to be seen how effectively they are tackled by a potential policy realignment involving Britain and Germany.