The British Question

There is now a real chance the UK will leave the European Union. As the eurozone begins a process of accelerated integration and British Prime Minister David Cameron comes under increasing pressure from Eurosceptic Conservative MPs and public opinion, a moment of truth may come sooner rather than later. Crucially, the British question will also depend on choices the eurozone – and Germany in particular – make in response to the euro crisis.

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Rumblings about Britain's future in, or outside, of the European Union are louder than ever, and although few Germans seem to realize it, whether or not the UK remains in the EU depends to a significant extent on them.

The questioning now taking place over British EU membership is the culmination of a long-term trend going  back much further than decisions taken by David Cameron’s coalition government, led by the Eurosceptic Conservative party but also including the Liberal Democrats as a junior partner,—the most pro-European party in British politics (see David Rennie's excellent paper). The UK has long taken a semi-detached approach to the EU,—embodied by its opt-outs. But it has become increasingly difficult to be “halfway in” since the deepening of European integration in the nineties and in particular the creation of the single currency, which marginalized the UK within the EU while strengthening British Euroscepticism.

The euro crisis has exacerbated this marginalization and further strengthened Euroscepticism. British Eurosceptics feel vindicated by the crisis, which they see as proof that a single currency without a single treasury was a flawed idea, as they had argued all along. They now fear the UK is “shackled to a corpse“. Since the beginning of the crisis, these Eurosceptic MPs have begun to exert greater pressure on Cameron. At the same time, the steps eurozone countries have taken toward greater integration in response to the crisis have put Britain in a difficult position in that they directly affect British interests, above all the City of London's, but the Brits have little influence on them.

While British politicians see the need for greater eurozone integration—and in particular the creation of a banking and fiscal union—in order to solve the crisis, they do not want to be part of the new core Europe that is emerging. This explains the UK’s slightly schizophrenic approach to the euro crisis. Last July, Chancellor of the Exchequer George Osborne talked of the “inexorable logic” of fiscal union; but at the European Council meeting in December Cameron vetoed the inclusion of a fiscal union within the European Treaties. Since the December summit, the UK’s economic and political interests have been out of sync. The government wants the euro to survive in order to prevent the huge recession a break-up would cause, but at the same time wants to prevent a further marginalization of the UK to which banking, fiscal, and perhaps even some kind of political union is likely to lead.

While the British right sympathizes with austerity and in particular the budget consolidation now being written into EU law through the “six-pack” and the fiscal compact, it opposes the idea of austerity being imposed by the EU, let alone by Germany—which is the way it is increasingly perceived, not just in the UK but also elsewhere in Europe. The British left, meanwhile, is a little (but not much) more sympathetic to the idea of being part of a more integrated EU that goes beyond the trading bloc of the Eurosceptic Conservatives’ imagination, but is more opposed to austerity. It believes that what Martin Wolf called “kamikaze tightening” is increasing rather than reducing debt in the eurozone periphery and thus making the problem worse.

Against this background, the pressure for a referendum on British membership is increasing. The loudest calls for a referendum come from the right. Last October, 81 Tory MPs defied a three-line whip and backed a motion calling for a referendum on EU membership—the biggest revolt against Cameron since he became party leader in 2005. But there are also some on the left who now endorse the idea of a referendum, such as former Trade Commissioner Peter Mandelson (who wants the UK not to just stay in the EU but also to join the euro) and Shadow Chancellor of the Exchequer Ed Balls (who is proud of his role in preventing the UK from joining the euro during the Blair government). They see a referendum either as a way to legitimize British membership in the EU or as a defensive political maneuver to avoid losing voters to the Conservatives.

Cameron, whose formative political experience was the acrimonious feud within the Conservative Party over Europe under John Major, wants above all for the issue of Europe to go away. His stand at the December summit kept the Eurosceptics at bay for a while. He has also said he will seek opportunities to “renegotiate” Britain’s relationship with Europe, and in particular to repatriate powers transferred to the EU level, and the Foreign Office is currently reviewing EU competencies. But even if the coalition lasts a full term (that is, until 2015) and Cameron successfully puts off a referendum while he is leader, his potential successors could well promise to hold one if elected in order to gain support from the more extreme Eurosceptic wing of the party. In particular, London Mayor Boris Johnson has committed to a referendum and may use Euroscepticism to outflank Osborne—the other leading candidate to succeed Cameron.

It is difficult at this point to predict the outcome of a referendum. Much would depend on when it takes place and how the question is asked. But whether or not the UK remains in the EU will also depend to a significant extent on the choices the rest of Europe—and in particular Germany—makes in response to the sovereign debt and banking crisis. Depending on what they do, they could in effect force the UK into a stark choice between much greater integration on the one hand and withdrawal from the EU on the other. In particular, Article 16 of the fiscal compact specifies that within five years at most, steps should be taken to incorporate it into the European Treaties. If this happens—and if the UK is unable to negotiate an opt-out—it could leave the UK with little choice but to leave the EU altogether.

Thus much depends on the shape of the Europe that emerges from the accelerated integration process that is now underway. A tighter EU in institutional terms may well be needed in order to solve the crisis. But, in general, the tighter the EU emerges from the crisis—in other words the greater the transfer of sovereignty and the homogeneity required—the more likely the UK is to leave altogether. In particular, given that it is extremely unlikely the UK will join the single currency in the foreseeable future, much will depend on the extent to which a viable space remains for the UK within the EU but outside the eurozone and the fiscal compact. The British will need to be convinced that it is better for them to remain in the outer circle of a two or multi-speed Europe than to be a “Switzerland with nukes,” as one Eurosceptic Conservative MP puts it—that is, outside the EU.

Economic policy decisions will also be crucial. The further the EU is perceived to stray from economic liberalism—in particular through rules that are perceived to increase protectionism and undermine competitiveness—the stronger the pressure for a British exit will become. In particular, the eurozone banking union now being discussed could have a huge impact on financial services in the UK. The British government is likely to seek a guarantee—for example in the form of the kind of written protocol that Cameron wanted at the December summit—that decisions about financial regulation and the single market will be taken at the EU level rather than among the eurozone 17.

The measure that would most alienate the UK and increase the chances that the UK will leave more than any other is a European financial transactions tax (FTT). There is anger at banks both in the UK and in Germany, particularly about excessive pay and bonuses, but the government is already reforming the banking system based on the recommendations of the Vickers report published last September. There is also a new post-crisis consensus about the need to “rebalance” the economy toward manufacturing. The FTT is widely seen as a distraction that would unfairly target the City (it is generally expected that around 75 percent of revenues would be from the UK). Osborne described plans for an FTT as a “bullet aimed at the heart of London” and Cameron called them “quite simply madness“.

The question, therefore, is how much the eurozone, and in particular Germany, wants the UK to remain in the EU—and how far Germans are prepared to compromise on what they want in order to keep the UK in. Germans seem to be divided on this question. Some think it is important to keep the UK in the EU. As Rinke points out, the UK is often a free trade ally against France and has foreign policy and in particular military resources the EU badly needs. Jan Ross argues that, without the UK, the EU would become more inward looking and protectionist. However, others in Germany seem to be losing patience with the UK and some even think the EU would be better off without the UK—not least because the further integration that now seems to be necessary could proceed more quickly.

Chancellor Angela Merkel seems to be conflicted, or undecided, on the British question. Those close to her often say that her instinct is to keep the UK inside the EU as a free trade ally against France. But in practice this instinct seems to be overridden by the overwhelming demands of solving the euro crisis. Under domestic pressure herself, she appears to be prepared to alienate the UK in order to reach a deal with France and other eurozone countries—as she did at the December summit and appears to be doing on the question of an FTT. Clearly, these are difficult choices for Germany. But if Merkel really wants to keep the UK within the EU, she will have to try harder—and be more prepared to make concessions to British thinking, however incomprehensible or unreasonable it may seem from a German perspective.

This article first appeared in IP Journal.