Whoever said `no turning back'?

Whether it concerns federalism or fish, the contours of the Westminster debate on Europe remain drearily familiar: Eurosceptics versus "pro-Europeans", Brussels bureaucracy versus British sovereignty; the same tired arguments endlessly recycled.

Yet something important has changed with the apparent conversion of the left to European integration, and the evolution of the Thatcherite right into outspoken and rebellious scepticism.

The change is not just striking but also mystifying, since the right is winning the argument in Europe in favour of economic deregulation and privatisation. The Commission, so disliked by the British Eurosceptics, increasingly has a liberalisation agenda. Even the European Court is becoming proactive in promoting competition and challenging restrictive practices.

The economically liberal agenda has been sharpened by the single market, which has also enshrined "mutual recognition" of standards as a less intrusive governing principle than harmonisation for integration - something the more populist sceptics, who fret about obligatory square cucumbers and single-decker buses, appear not to have noticed.

The full impact of this policy revolution is only just beginning to be felt, and in ways which make a nonsense of established stereotypes. Neil Kinnock, as Transport Commissioner, has the job of breaking open the protected, inefficient world of European civil aviation. This involves educating in free-market economics a right-wing French government which is trying to shield from competition one of its overmanned, loss-making, nationalised industries, Air France. Another socialist commissioner, Martin Bangemann, is trying to expose Deutsche Telecom and other protected state monopolies to the commercial disciplines inflicted on British Telecom a decade ago.

Comparable battles are being fought at industry level to hold back a Commission bent upon opening up electricity generation and gas supply to competitive market entry. Another bit of the Commission is producing financial services directives which try to bring reluctant or uncomprehending governments to face the reality of global financial markets. The tide of economic liberalism also flows through trade policy. However grudgingly, the French signed up for the Uruguay round of world trade talks. The European Union now shows more enthusiasm for the multilateral rules of the new World Trade Organisation than the Americans. To be sure, there are some major blemishes, such as the proliferation of questionable "anti-dumping" actions against East European andAsian products. And demands to shut out foreign competition continue to come from France, more recently in the audio-visual sector. But the idea of a European closed "bloc", or Fortress, now belongs to the fringes of the debate - mavericks like Sir James Goldsmith - and is far removed from reality, except in agriculture.

Even the Common Agricultural Policy, that obdurate fixture of the old mercantilist Europe, is changing. The CAP is under severe pressure from budgetary limits, the McSharry reforms cutting production, the Blair House agreement cutting export subsidies and now the prospect of further European enlargement. The arguments of the future, rather than being between Britain and the rest, could well bebetween internationally competitive French agribusinesses and the less efficient German, Austrian and Scandinavian farmers.

The biggest step to consolidating the market revolution will be monetary union, if it happens. The concern of the British right has been about the sovereignty implications, which are not trivial. But the move to monetary union will also create three major policy breakthroughs in what would once have been called a Thatcherite agenda: it will intensify business competition by reducing exchange risk; it will entrench monetary discipline through Central Bank independence; and it will underpin fiscal disciplines on the public sector through debt and deficit limits.

It is not very difficult to understand why Europe is travelling, or being dragged, in this direction. International competition among firms is growing. Capital can, increasingly, move anywhere, freely. The attractions of Europe have been diminishing as the dynamism of the Fifties and Sixties has given way to what the German economist Herbert Giersch has called "eurosclerosis". These trends exert powerful constraints and disciplines on governments, even in a European Union. There are no hiding places. The Kohls and Balladurs may feel distaste for crude Anglo-Saxon economic language, but they are being driven by the same imperatives that have forced radical changes in Britain: smaller government; more competition. In a realistic and telling valedictory, Jacques Delors listed the beginnings of agricultural liberalisation and his White Paper on competitiveness as his most enduring achievements.

All of this makes the political positioning at Westminster look somewhat eccentric. Eurosceptics on the right have not only failed to notice what is going on but are alienating their own business constituency. More than half of British exports now go to the enlarged EU; on this standard, Britain is as integrated with the EU as either France or Germany. British businesses have made a massive physical and psychological investment in the European project. Unsurprisingly, many want to go further.

But their natural political allies want to go back. We are seeing a fundamental divergence on the right. On the one hand are those who accept that economic integration, both at a global and regional level, will inexorably erode much of the substance of national sovereignty, even if the symbols remain important. Indeed, further liberalisation is accelerating the process. On the other hand are those - not just in Britain, but in France, Italy, the US, Canada and elsewhere - who are trying to fight the trend through what Isaiah Berlin called the "politics of the soil": nation, race and cultural identity. Economic concerns are secondary. These reactions pull in opposite directions, causing the right to split for deeper reasons than personalities.

The same conjunction of forces puts the left in a most unusual position, with a historic opportunity: to give political leadership within a market-driven process of integration. This involves swallowing some bitter medicine. It is sugared by the Social Chapter, but that will provide only weak and temporary relief. While it has great symbolic and some legal importance in fields such as equal opportunities for women, the trend in Europe is away from, not towards, bureaucratic regulation of the labour market.

Across Europe, governments are dismantling controls that add to business costs and unemployment. Spain and Italy are well advanced in this process. Future social policy in Europe will be more market friendly, enabling greater cross-border labour migration by increasing the portability of entitlements, training and qualifications; helping workers and communities adapt to structural change; and building on interesting initiatives such as the Delors project for the "social exclus". There is no disguising the fact that the overriding thrust of policy is towards liberalisation, something which Delors himself almost certainly understands.

The trends described send a powerful political and intellectual current leading Europe in the direction of market liberalisation. It is extraordinary therefore that the British right has chosen this moment in history to back away from deeper integration,leaving the left to inherit the leadership role.

The writer is head of the international economics programme at the Royal Institute of International Affairs.