Britain in Europe

Most commentary in the past days about the outcome of the EU summit and Cameron’s veto has been vastly exaggerated. As often in the strange debate in the UK over Europe, it is a debate that is more about domestic politics than the EU or the actual role of the UK in Europe. Reactions now seem to suggest that Cameron’s veto is a first step for Britain to leave the EU or marginalise itself in the EU. Left, right and centre have all jumped on this with a passion that simply is not justified. It is too soon to tell what the consequences of Britain’s veto will be – for British domestic politics as well as for Britain’s role in the EU. What seems safe to say, however, is the consequence for internal British politics will prove to be bigger than the consequences for Britain’s role in Europe, let alone the future profile of EU policy.

Below I make some random comments, but since the post became long I’ll start with a short summary of my main points. Cameron most certainly made a blunder by vetoing a treaty change that would not mean anything for Britain’s role in the EU or its professed interest in defending the City. It tried to put on the table a number of issues which were not related to the limited treaty change that others were suggesting in light of the Eurozone crisis. Yet Cameron’s move was not surprising. A clash between Britain and some of the key Eurozone economies was bound to happen because it is increasingly difficult to have a rational discussion in Britain about EU policy while it has become evidently clear that at some point the treaty must change for Eurozone members. Cameron’s blunder is not so much about the veto itself, or the substance of the changes that Cameron proposed. In fact the so-called standoff is likely to have few consequences for the simple reason that the predominant conflict in the EU today is not between a federalist core (France and Germany included) and an increasingly eurosceptic UK. That conflict line is for all practical purposes over as far as EU politics is concerned and the future is likely to see many more conflicts between Germany and France, representing two different views on fiscal stability and economic policy. No, Cameron’s move was a blunder because it makes it all the more difficult for Britain to use the widespread EU fatigue across Europe to re-shape EU policy.

1. The odd part in Cameron’s veto is that what he vetoed would not have been a significant expansion of EU cooperation or power. It is certainly not a fiscal union that was agreed in Brussels last week. Much of the commentary in the past days seems to presume that the political spin from Eurozone leaders about the summit is actually a good account of what was agreed. In fact, the new fiscal compact does not really add much to the six-pack agreement from last year on economic surveillance and sanction mechanisms. Britain greenlighted that package – and, more generally, the Cameron government is pretty much in tune with the spirit of both packages as they deal with fiscal stabilisation after years of runaway public spending. So for all practical purposes, Cameron decided to pick a fight about a treaty change with the purpose of achieving a goal and cementing a policy discourse (fiscal discipline) that his government supports.

2. Moreover, as it is only members of the euro that would be subject to the new disciplines, Cameron decided to pick a fight about a treaty change that would not subject the UK to any new obligations. The UK was not asked to transfer any power to the EU. There were some suggestions nodding in that direction, but it was not the main intention, nor did it become the conclusion of summit. The summit declaration now states about the fiscal compact: “This will require a new deal between euro area Member States to be enshrined in common, ambitious rules that translate their strong political commitment into a new legal framework.”

3. Furthermore, Cameron picked a fight about something – new rules for fiscal discipline – that somewhat cynically can be described as a sideshow. The political context for this new fiscal compact is that the compact was called for by the ECB President, in a speech he made in European Parliament earlier this month. This “demand” from the ECB was a gift to Angela Merkel, who for a long time has championed stronger treaty-based rules on fiscal policy for euro members. In fact, Merkel has called for such changes time and again in the past two years because a) the German view of the source of the current crisis is fiscal negligence or irresponsibility, and b) the German constitutional court has raised warnings about forming EU structures that resembles an economic government without having greater treaty-support for it.

Paris, on the other hand, disliked the idea of treaty-based rules for fiscal discipline and has actively been trying to undermine, not to say destroy, such demands in the past years. Indeed, Sarkozy and his colleagues have a completely different view of the source of the crisis and what is necessary to prevent the Eurozone crisis from escalating into a Eurozone collapse. Yet Paris decided to go along with Germany’s demand on a treaty-based reform because Paris cannot afford distancing itself from Germany.

Importantly, France – like many other countries suddenly supporting Germany’s campaign – has now acted on the assumption that a fiscal compact will increase the likelihood that the ECB can assume a much greater role in temporarily helping euro countries in bringing down bond yields, ideally by explicit commitments that it stands ready to defend the Eurozone if its survival is at risk. If the ECB is allowed to do so, or if France and others have made a correct interpretation of ECB signals, is another issue. The entire purpose with revising treaty is to court the ECB.

The constitutionally constrained role of the ECB has been central in the criticism levelled against the euro project by many informed UK euro sceptics – and it certainly formed part of the reason to why the UK decided to remain outside the euro. Picking a fight about something that the UK desired for the entire Eurozone, but did not have to sign up to itself, is indeed a strange kind of diplomacy.

4. The context above is important. France is not unhappy about the fact that Britain has blocked a treaty change – or a treaty-based method to impose some more fiscal control. If Draghi handed Merkel a gift by his “demand” of a fiscal compact, Cameron certainly did Sarkozy a favour by vetoing a revised treaty. The scepticism towards a treaty change is also part of a larger uneasiness that France has with the EU. It is not alone in this feeling; Germany shares it too. France and Germany – supported by other countries – have for some time now actively been undermining the old treaty-based, Commission-centred, Community-method model for advancing EU cooperation. True, it has strongly favoured the establishment of new financial regulations, but it generally feels that the EU has reached its limits for what it can do on the basis of the old model. Both France and Germany would rather like to see a much looser form of EU cooperation going forward, one based on greater power for individual member states, along the lines of what has been labelled a Union method.

Behind this shift in France, Germany and other countries is a general fatigue with EU cooperation. A growing majority in France shares with the UK a tiredness with the concept of an ever closer union. Many in France’s political elite no longer thinks the EU is the platform for France to project itself and its political ideals on the continent or the world. So, Cameron’s veto was a gift to Paris – and, in more general terms, an expression of a sentiment shared by Sarkozy, Merkel and others. Merkel was dissatisfied with Cameron because she could not get a treaty-based fiscal compact. Give it a couple of weeks and any real anger there – in contrast to manufactured anger, or spin – will have gone away.

France and Germany are by no way natural bedfellows. Even if they both share a fatigue over EU, they have two vastly different outlooks on what is required in Europe in the next decade in order to improve competitiveness and growth. Germany is afraid of being one of few competitive and fiscally sounds economies in the Eurozone, and clearly sees the main dividing line in future to be one between fiscal responsibility and irresponsibility. That feeling is not only expressed by an increasing part of the population. It is today also a consensus position among the political elite.

Germany has changed its view profoundly in the past decade. It has been obvious throughout this crisis that Chancellor Merkel has been bored by Eurozone politics. Her predecessor was no different. The credo for the German view on Europe was for a long time that “you had to be a European to be a German” (coined by Franz Josef Strauss). Few Germans share that sentiment today. One part of German has become more parochial. Another – and much bigger – part has become more global. This is especially true of German business, which has much greater appetite for global markets today than it has for the EU. All of them no longer see the role of Germany being “the European of last resort” and the bankbook of the EU.

5. Britain’s general failure is that it has not been receptive to these changes in the way France and Germany view the EU. The divisive nature of EU policy and politics in the UK has given Cameron, and before him Brown, reason enough to keep as long distance as possible to EU politics. Nor has Cameron been interested in building stronger alliances with other leaders that largely share the UK criticism of an EU that is too protectionist and too intrusive in its regulations. Cameron has built some political friendships with other leaders in Europe, but they are underutilised simply because the UK does not really know what it wants to do with EU.

The political divisiveness over EU is also reflected in how British authorities and officials operate. In Brussels, the UK is an absent force as far as the general debate is concerned. Often, the UK or UK interests simply are not “there”. They have taken absence from general ambitions to craft EU policy and influence EU politics outside the meeting rooms of the Council. This is not a new phenomenon, but the general uneasiness with Brussels has vastly increased in the past years.

6. Let us now turn to the actual content of UK demands at the summit. One of the safeguards it championed was a protection of the single market. Nothing in the summit statement – and nothing that was proposed by euro governments ahead of the summit – pointed to a change of the single market and its legal status. In fact, the summit statement, without the support of the UK, says: “We agree to make more active use of enhanced cooperation on matters which are essential for the smooth functioning of the euro area, without undermining the internal market.”

The summit never intended to approach these matters. Those who liked to approach it would have been quickly rejected if they had made real advances on that issue. There are many more countries than the UK that fear intrusions in the single market. Yet they did not veto a treaty change. Hence, overall rules for deciding matters for the single market and the regulations of the single market remain the same.

The other issue concerned regulations related to financial services. What Cameron asked for in the negotiations was something that was not on the table. He also asked for something that in reality is not possible to give – a reversal of the legal foundation (a move to unanimity) for advancing new financial regulations – in such a manner. Such a change would be a big thing, and it would have consequences for many other issues, including the single market. Moreover, it would have been impossible to give UK such a reform at this summit. Cameron decided to table this proposal very late in the day, and I know from other countries that Cameron had not courted them ahead of the meeting on these issues. Cameron’s gambit came out of the blue for many countries that in general terms are friendly to the general criticism levelled by UK and UK interests against new financial regulations emanating from Brussels.

The substance of the UK demand is that it feels the EU has overstepped its limits for what it legally can do in the area of financial services. It has pointed to some Council conclusions from the June summit 2009 as evidence that regulatory developments in some areas have reached too far. This may be true, but that argument itself is not very convincing. The UK has already signed up to many of the regulatory changes done post the financial crisis – and, indeed, the UK also managed to get significant changes in initial proposals. If it wants to fight the legality of regulations in the pipeline, they could do so – either on substance or their legality. But this summit was hardly the time do launch such a fight. Cameron also wanted to reserve the right to adopt new capital-requirement standards that are likely to be more ambitious than those that will come out of the EU. But is this really a problem facing the UK today – that it would not have the chance to have stricter capital-adequacy regulations? If so, why have other EU countries already proposed domestically to introduce similar regulations that go beyond general Basel-III ambitions and the current capital requirement directive in the EU?

7. Finally, let us also crash another myth. Many Brits seems still to be of the view that Britain is the free-market champion in the EU that has to fight all the continental protectionism and dirigisme. That’s a view, however, that should have been antiquated a long time ago. The pro-market leadership from the UK has been diminishing for years. It is true that it has opposed many ideas embedded in new financial regulations, such as EMIR (OTC derivatives), AIFM (“hedge fund directive”), et cetera. But it is no longer so true in other fields. Increasingly, the UK is not being viewed as the chief defender of market principles in Europe.

For instance, many of the protectionist regulations coming out of Brussels recently are environmental regulations, and the UK has been in the forefront pushing them despite the fact that they have been protectionist and overly intrusive. In trade policy, Britain has been threatening with vetoing a new trade agreement with India, and it is UK and UK interests that have undermined many new initiatives to free up trade. For instance, the idea of crafting a transatlantic trade deal – cherished by many anti-EU Brits – has been undermined principally by the UK. This list could be made very long. At the heart of it is the outdated notion that Britain represents regulatory sanity in an EU of trigger-happy regulators.