London, 25 May 1960
Secret
The Six and the Seven: Long Term Arrangements
I. The Immediate Outlook
1. The negotiations in 1957 and 1958 for a European Free Trade Area foundered largely because of a lack of political will on the part of some Governments of the Six (especially the French) to see the European Economic Community supplemented by a wider economic grouping.
[ matter omitted ]
3. It therefore still seems likely that after the 1st July next the Six and the Seven will go their separate ways at least for the time being. Each will discriminate against the other and against the rest of the world. The immediate discrimination may be increased at the end of the year if either or both groups decide to accelerate then the tariff reductions between themselves.
4. This division in Europe will be disliked and deplored by all the countries of the Seven and by the important elements in the Six. But unless the political situation is transformed […] the division may well continue for a considerable time—say eighteen months or two years at least.
II. Implications for the United Kingdom
5. The economic division of Europe will confront the United Kingdom with a most serious situation. There are significant political dangers which Ministers have emphasised in recent months—the fear that, despite the manifest advantage of the rapprochement between France and Germany, economic divisions may weaken the political cohesion of the West at a time when a common Western front is more than ever necessary. If, as seems to be the intention, the policy of the Six is to press forward with economic integration, impetus will be given to political integration. The Community may well emerge as a Power comparable in size and influence to the United States and the USSR. The pull of this new power bloc would be bound to dilute our influence with the rest of the world, including the Commonwealth. We should find ourselves replaced as the second member of the North Atlantic Alliance and our relative influence with the United States in all fields would diminish. All this would add to the strains on the EFTA. The independence which we have sought to preserve by remaining aloof from European integration would be of doubtful value, since our diminished status would suggest only a minor role for us in international affairs.
6. From the economic standpoint the immediate and overt effects will not be disastrous (only 14 per cent of our exports go to the countries of the Six, and it is reasonable to hope that a substantial part of this trade will continue despite tariff discrimination against us.) But even in the short term the fact that our efforts will be increasingly at a disadvantage in the markets of the Six (where the rate of economic growth has been high and is likely to continue so) will be a serious matter at a time when our balance of payments position once more gives cause for concern.
7. In the longer term, if we have to assume a situation in which the Six are a group continuing to discriminate in each other’s favour against us (and the rest of the world) and constituting a bloc with a high rate of economic growth, the situation will be still more serious, for the following reasons:–
(a) So far as direct trade is concerned, much may depend on the levels of the common external tariffs of the Six. If these are relatively low, the United Kingdom should be able to continue to export freely to the Six (as we do now to the USA) notwithstanding the tariff barrier. But, a great part of the success of the Six will derive from the dynamic of the new large common market and the scale on which their industries can think and plan. To share in that dynamic requires us to be ‘in’. To be ‘out’, even with a low tariff, is to be cut off from it. In addition, given the strength which will come from their large internal market, the industries of the Six may well develop into most formidable competitors in third markets. If the external tariffs of the Six are high, it will be more difficult for the United Kingdom to export there, but the competition of the Six in third markets may be less severe because of the higher cost of their imports.
(b) The Seven is not a despicable grouping in economic terms. The Scandinavian countries and Switzerland together form a market nearly as large as Canada (larger than Australia); and between the United Kingdom and the Scandinavian countries there are close and enduring ties. But it is doubtful whether a heterogeneous and scattered grouping—brought together by ‘ties of common funk’ rather than by any deeper purpose or by geographical contiguity—can develop a real cohesion or even continuity. In any event, the basic factors of population and economic resources must mean that the Seven is bound to be a weaker economic group than the Six. This is likely to have a profound psychological effect on United Kingdom industry. We have already been warned privately that although the FBI2 have been active and loyal in their support of Government policies in regard to the Seven, there is great uneasiness, amounting almost to dismay, among leading industrialists at the prospect of our finding ourselves yoked indefinitely with the Seven and ‘cut off’ by a tariff barrier from the markets of the Six. The prospect is seen of three powerful economic groupings—the USA, the USSR, the Six—able to develop internal markets of scale and therefore strong and competitive industries based on such markets—whereas the United Kingdom will have a preferential position only in the Seven and in Commonwealth markets (where we face tariff barriers in any event and where our position is likely to weaken rather than grow stronger).
(c) ‘Nothing succeeds like success’. There is already a belief that the Six are going to come out on top in Europe. This will almost certainly lead to a diversion of United States investment—which otherwise might have come to this country—to the Six (it has already happened in one or two instances), and to a move by United Kingdom industrialists themselves to invest in the countries of the Six. And the psychological feeling that the United Kingdom is bound to ‘lose out’ in the countries of the Six can have a serious effect on the efforts of our exporters to hold their position in these markets—e.g. in keeping the goodwill and interest of agents.
(d) In these circumstances it is doubtful if we could hold EFTA together. Some members—notably Austria and Switzerland—depend so heavily on their trade with the Six that it is doubtful whether, if they could no longer see the prospect of a Single European Market, they could avoid making an accommodation with the Six on the best terms they could negotiate unilaterally.
8. The conclusion is inescapable that it cannot be compatible with either our political or our economic interests to let the situation drift on indefinitely on the basis of a divided Europe, with the United Kingdom linked to the weaker group. We must therefore seek a wider economic grouping which should at least comprise a single European market, assuming that any still wider grouping—e.g. an Atlantic Free Trade Area—is not a practicable objective—at any rate at this time,—and we must be prepared to examine what this is likely to mean in the way of positive ‘contributions’ on the part of the United Kingdom itself.
1 In November 1959, Macmillan had established a new interdepartmental steering committee ‘to consider all the questions relating to the establishment of closer economic association between the United Kingdom and other European countries’. The new committee carried out a major policy re-evaluation in the spring of 1960, under the chairmanship of Joint Permanent Secretary to the Treasury Sir Frank Lee. The findings of the Lee Committee pointed irresistibly towards the need for drastic reform of Britain’s European policies. See UKNA: CAB 134/1818, Cabinet European Economic Association Committee, ‘Terms of Reference and Composition. Note by the Secretary of the Cabinet’, EQ(59)1, 26 October 1959.
2 Federation of British Industries: founded in 1916 and merged in 1965 to become the Confederation of British Industry.
[UKNA: CAB 134/1852]