Robert Pringle’s Viewpoint: Cameron’s high-risk European gamble

The UK government has pledged itself to start on what, in the view of many observers, seems likely to prove a doomed attempt to renegotiate the terms of its relationship with the European Union (EU). Already, prime minister David Cameron’s pledge to hold a referendum on the issue after a renegotiation – ie after the next UK election in 2015 – has raised uncertainty. His position satisfies neither the eurosceptic wing of his party, which wants an early referendum, nor pro-Europeans who question whether there is any political necessity to hold a referendum at all. Meanwhile, business leaders have grown increasingly concerned.

Cameron’s position has also irritated Britain’s most powerful allies, the US and Germany. Yet all the running inside Britain, politically, is being made by the eurosceptics, egged on by a largely europhobic media. All the ‘tabloids’ – Daily Mail, Daily Express and The Sun – are eurosceptic and they have been joined by the Daily Telegraph and The Times.

Cameron is gambling that he can lead the debate – a debate that, he points out, is already taking place. Public opinion is divided, with many blaming the turmoil in the eurozone for the UK’s inability to recover from recession. A survey held in November 2012 showed that 54% would vote to quit the EU on a straight ‘in’ or ‘out’ referendum – if held prior to any renegotiation.

Eurosceptic growth
The UK Independence Party (Ukip) has seen its share in the polls hit 9% – above that of the Liberal Democrats, the junior partner in the coalition government with the Conservatives. Although Ukip is unlikely to gain a single seat at the next election for the Westminster parliament, due to the UK’s first-past-the-post electoral system, the rise in its share would split the right-wing vote, letting in Labour candidates in many constituencies where otherwise they would not stand a chance.

Yet, in reality, Ukip support is more a protest about immigration and other issues than a reflection of any deep discontent about the UK’s relationship with the EU. Thus even a satisfactory ‘new settlement’ with Europe and a vote to stay in Europe are unlikely to remove that threat to the Conservatives. Equally, the Ukip share of the polls should not be interpreted uncritically as a barometer of sentiment towards the EU.

Environmental, working time and other regulations from Brussels are viewed as increasingly costly and profoundly unfriendly to business and entrepreneurship. That is why several leading spokesmen for small business organisations are highly critical of the EU. Above all, the eurosceptic case rests on the view that there is no possibility of being “in Europe but not be run by it”.

The Fresh Start Group – a new group of pro-European politicians – has produced a detailed report proposing such a renegotiation: “Proposals for deeper fiscal integration or banking union within the eurozone are likely to require changes to the EU treaties, presenting opportunities for the UK to negotiate additional treaty changes that are in the best interests of the UK. This is an historic opportunity, both to articulate a vision for the UK in the EU, and to negotiate the treaty changes needed to make it reality.”

Eurosceptics doubt that any such renegotiation will be feasible.

The underlying causes of the crisis in the UK’s relationship with Europe are twofold: the stubborn weakness of the euro area economy and the implications of tighter integration in the euro area that will be the unavoidable precondition of a lasting recovery – if the EU economy was doing well, there would be no talk of the UK leaving. The adverse effects on the UK have been repeatedly stressed by leading politicians and even by Mervyn King, governor of the Bank of England. It is natural for the man in the street to conclude: “If the euro and the EU are responsible for our economic depression, of course we don’t want to be part of it!”

Many people in the UK still believe that the euro will not survive. Some agree with economist Roger Bootle who, in an article in the Sunday Telegraph on January 13, advised the US not to interfere, and not to worry, saying the UK could exercise more influence on the EU from the outside. Bootle continued in brutal terms: “In terms of economic dynamism, the EU is a failure… And the EU is a political disaster too. Its institutions do not work; it is profoundly undemocratic; its leaders are isolated from ordinary citizens; and its economic interventions veer between the scandalously incompetent and the blatantly corrupt. For all this and much else besides, it is widely loathed.”

In my view, Bootle’s comments are way over the top. The EU is not “widely loathed”. It is tolerated as a fact of life, and the population enjoys its freedoms. It is time for all those who believe it is strongly in the UK’s economic and political interests to stay anchored in the EU to speak up.

Speaking up for the EU
Start with the City of London. It is in the interests of UK financial services and of its hugely successful professional and business services to minimise the costs and increase the opportunities of doing business from the UK.

First, on the costs; anything that, even at the margin, raises costs will reduce the competitiveness of the City. In a highly regulated business such as finance and business services, the fewer the regulatory frameworks to which firms have to adjust, the better. The EU tries to promote consistency across the 27 member countries. Secession from the EU would give the UK a choice between accepting EU financial legislation without influencing it or creating its own financial regulatory framework. Developing a separate UK regulatory regime for financial services would add further to the complexity and costs of doing business in London.

Large, internationally mobile financial groups also play a critical role in the City. Certainty in their regulatory environment is essential and they will view an impending UK secession as likely to add to the costs of doing business in London. With so many of these entities being foreign-owned, they can easily relocate across the English Channel to continental Europe.

Similarly in terms of opportunities, the EU single-market agenda aims to create a pan-European market in financial services, especially wholesale services, across all 27 member states together with the underpinning of financial infrastructure such as settlement and payment systems. This greatly extends the opportunities for UK financial firms over what might have happened if the UK had been outside the EU. Leaving would imperil UK access to this market on equal terms with those based inside it.

Then there is the effect in the rest of Europe. In the 40 years since Britain joined, UK financial firms have made a major contribution to EU financial regulation and the EU’s input into comparable efforts at the global level, such as the Financial Stability Board and the Basel agenda. Of course, they often complain about it, but no knowledgeable person doubts that the UK’s influence has been pervasive. Without the City’s influence, regulation in the EU could well become more dirigiste. The EU would suffer, but so would all firms such as those based in the UK doing business there. Helping to keep an open, international, accessible, competitive market alive in the whole of Europe is much more important than just focusing on the UK.

What is at stake is the health of the economic sectors that contribute the majority of the UK’s surplus on invisible exports and make an indispensable contribution to the economy and balance of payments. Trade surpluses of £47.2 billion in financial services and £8.3 billion in professional services in 2011 dwarf those of any other sector; £17.6 billion, or 37.5 %, of the surplus derives from trade with the EU (source: TheCityUK, Economic Contribution of UK Financial and Professional Services, January 2013).

What are the drivers of this success? The rule of law, property rights, the English language, the time zone – many factors are involved. But location within the EU is one of them.

The same applies to the wider impact on inward investment generally to the UK. Of course Asian and US manufacturers locate in the UK primarily for its access to the entire EU market. Risk that, and crucial inward investment will be jeopardised.

Lessons all around
Yes, the euro is having a tough time. But the pain need not be in vain. The countries of the eurozone are learning how to live in a globalised world economy. The difficulties they face in sacrificing their monetary autonomy – their ability to devalue – are in fact a reflection of the difficulties that face all countries, once the false promise of devaluation is set aside. That is why the Italians, French, Portuguese and even Greeks stay grimly inside the euro ‘tent’; they know devaluation doesn’t work – they have tried it countless times. Once the lessons have been learnt – or rather, if they are – the euro area should regain its economic dynamism.

In my judgment, UK political leaders and central bankers pin too much of the blame for the country’s difficulties on the problems of the euro. The UK’s problems have multiple causes, most of them home-grown. The risk is that the UK will decide to leave the EU just as the euro economy rebounds with full vigour. Having left in haste, it will then repent at leisure.

But there are lessons for the EU too. It must restrain its interventionist, dirigiste, statist impulses. The UK is pointing to real dangers and to rising regulatory burdens.

The political classes in all EU member states have much to answer for: in the UK, for holding on to a romantic view of its past, where it ruled without serious challenge for hundreds of years and wants to carry on as usual; on the continent of Europe, for yielding again to the temptations of playing the political game at society’s expense.

The worst mistake the EU leaders could make would be to tell the UK ‘No deal’, or to accuse Cameron of trying to ‘blackmail’ Europe, as one German politician did last week. That would guarantee the UK’s early exit, whereas Cameron actually wants to persuade it to stay in – if the right terms can be negotiated.