12 December 2011

Cameron's veto - Why the UK must stay in the EU for its own sake

written by: Don

The first use of the British veto in history by the Prime Minister in has caused a political storm and prompted me to produce my first political comment in this blog.

Being an European (as in not a British) but a great admirer of the British society, it is hard to not feel alarmed by the recent events.

In Europe, the general public is feeling the resentment of the British public towards Europe, many find it hard to not wish the British would just leave the EU as quickly as possible, so "we can get on with things" - a view shared by many in Europe. "Never mind leaving Britain behind, if that is what the British want anyway," they say. The mere fact that a wish for a British departure exists on the continent (and not just in Britain) is a whole new quality to the Britain-EU relationship, and the fact that this attitude is spreading quickly across the continent should send all the alarm bells ringing in Downing Street. The debate about whether Britain is isolating itself may well become a moot point very quickly - the continent has started to actively isolate Britain already, and this is, to a great extent, the fruits of the work by David Cameron over the last few days.

Many think that the continent will do better without the blockage by the British - obviously Britain not belonging to the EU cannot block the EU using its own institutions to implement the new treaty the 26 members so desperately want. Britain, on the contrary, will likely feel the pain of no longer enjoying the benefits of the single market should they decide to leave.

  • UK may find it difficult to export their goods (and importantly their services) to the large European single market potentially due to import duty. EU does make up a very significant portion of the trading volume of Britain, and no realignment of the British trading strategy can be implemented quickly enough to overcome the shock of a UK departure from the EU.
  • UK may also find that most foreign companies will no longer want to have their production site in Britain, but rather in continental Europe to serve the attractive single market with a much greater pool of consumers. Some British companies may even find it more attractive to produce their products in Europe directly. That may lead to massive job losses in Britain.
  • The European countries would finally be able to openly endorse and support the creation / enlargement of a big financial hub outside London, e.g. in Frankfurt, which may well surpass London within a short time, as more and more international banks will prefer to trade in a much larger single market rather than just outside. The city of London Cameron thought he was protecting may well blame him for bringing them down.
  • Finally, an economically gloomy Britain may result in internal tension, prompting some of the home nations to consider leaving the United Kingdom and joining the EU instead. This prospect would have been unthinkable some years ago but the recent statements from Scotland paint quite a different picture.

All of this is obviously very hypothetical, but certainly not speculative. I personally do not believe that David Cameron could possibly be that mad to lead the UK out of the EU. However, he is playing a dangerous game. The momentum is tipping dangerously over to the right-wing backbenchers, and unforeseeable developments may force the PM's hand to call for a referendum should he yield to the pressure from the right. That would render the PM powerless, as he will not be able to convince the British public to suddenly re-embrace the EU. He, of all Tories, has the least credentials to do so. The fate of the UK would be sealed and the future would look rather bleak.

What the British politicians desperately need now are two strategies: a strategy to solve the current sovereign debt crisis and a strategy to lead Britain back into a boom, but with a clear reference to the global conditions. The first strategy is needed since Cameron rejected the existing EU proposal but has failed to deliver an alternative. The second is needed as Cameron's existing domestic austerity measures proposed in the past, based on ridiculously optimistic economic developments, have become totally unrealistic ever since the said crisis in the EU has intensified - due to the lack (or the British blocking) of the first strategy.



Mark wrote on 14 December 2011:

Cameron has not chosen to leave the EU - he has decided not to sign the latest treaty. He claims he has made that choice because he believes he is protecting Britain's interests. Ultimately it may do more harm than good but at this stage I really believe you may as well toss a coin, we just don't know but we still remain full members of the EU as far as I can tell although other countries may not see it that way.

My issue with the latest treaty is that it transfers more fiscal responsibility and power to Europe. I guess the argument is that with more power to set fiscal policy then Europe is better able to resolve the current crisis and prevent similar events in the future. However the argument for fiscal independence is just as strong in my opinion.

It's pretty clear that setting fiscal policies on a Europe wide basis doesn't work. For example the needs of Greece are very different from the needs of Germany right now. Italy just paid 6.47% to borrow for 5 years. Germany paid 0.29% to borrow for 2. The amount of debt each member country is in varies massively. How can one policy cater to the needs of all?

I've read some strong arguments that the best way to solve the crisis is to abandon the Euro in it's current format. Greece etc default and leave the Euro and are then able to set fiscal policy to best aid their recovery. Another article suggested that Greece etc stay in the Euro but that France, Germany etc leave and create another stronger version of the Euro. Of course this will never happen.

Ultimately it still feels that the Euro was created for political rather than economic reasons. It also feels like the new treaty is trying to fix the crisis with more politics rather than well reasoned economics.

Mark wrote on 14 December 2011:

Oh no my very long comment got cut off :-(

Any way the short version is that the Euro was born out of politics and not economics and the new treaty is trying to fix it with more politics instead of well reasoned economics. The current needs of the member countries vary massively and centralised fiscal policies aren't going to work for everyone.

Don wrote on 26 January 2012:

Hey Mark, thanks for your comment, which was not only a great contribution to the debate but also uncovered a bug in my script :-P I managed to recover your original comment in full length so here it is.

Re Europe-wide fiscal policy: I get your point, but can one not just as well argue that the diversity of the borrowing costs is also a consequence of the lack of a fiscal and political union? It's a bit like the hen-&-egg debate really.

Some critics (and they are quite numerous) say that this push for a fiscal union by Merkel is not going to solve any of the immediate problems the Eurozone is facing at the moment. However, that is exactly why this is the right move: the idea to create a structure that would prevent such a crisis to happen again, the creation of a fiscal and political union has got to be a medium to long term goal of the EU. This push is meant to fight the cause of the crisis, not the symptoms.

The reason I am most disappointed by Cameron is that he completely failed to recognise the historical context, the medium term targets and the vision of the EU.

Don wrote on 26 January 2012:

Further reading: Britain, proud home of Euroscepticism

Don wrote on 06 February 2012:

more stats: EU Money

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