Why Britain and the EU Still Need Each Other

  • Share
  • Read Later
Illustration by Alexander Ho for TIME

David Cameron’s decision to wield his cherished veto in Brussels last week added more high drama to the endless euro saga. Cameron’s refusal to sign up for a new EU treaty to save the euro, which gained the support of every EU member except Britain, was an abrupt departure from Britain’s usual arms-length approach to greater Europe.  But that doesn’t mean the British-European partnership is permanently falling apart. Both sides still need each other’s economies and will continue to muddle through.

In the short run, the spat did both sides some political good. The veto won Cameron a much-needed domestic boost with conservative eurosceptics in his party. And France’s Nicolas Sarkozy and Germany’s Angela Merkel reinforced their defacto two-country rule over teetering Europe.

On the economic front, not much has changed. Britain still has what it has always wanted: an arms-length customs union that promotes trade and economic ties while leaving out the fiscal constraints, foreign policy tie-ups, and common currency complications. Sarkozy claimed the spat created “two Europes,” but that was already the case.  Britain has always been the only EU country that doesn’t accept the idea of joining the single currency at some point. That’s why every other non-eurozone country went along with the new fiscal pact.

The problem for Britain, even if it manages to stay out of the fiscal/currency loop, is that it still wants a big say in how the EU evolves. And it can’t have that if it remains outside a broader and deeper union ruled by majority. The biggest concern is being subject to changes that hurt its financial industry, which accounts for 10% of its economy.  Cameron doesn’t want British banks to suffer from a proposed EU financial tax and curbs on hedge funds and short-selling. And, believe it or not, he wants some elements of EU regulation to be tightened, such as the EU’s more lax proposals on capital reserves, which could lead to an exodus of money and talent from London’s financial powerhouse into other European banks. Cameron’s veto doesn’t stop the EU from moving forward with its own financial reform agenda. But that doesn’t mean the EU will get its way. There are many challenges ahead for the EU in implementing its new treaty, which could become a legal quagmire and challenge the authority of EU institutions. That alone leaves Cameron plenty of negotiating room.

So does the EU’s interest in Britain’s economy. Britain promises better (if still meager) growth over the next few years than many of the euro laggards. Its forecast 0.7% growth next year looks better than France’s projected 0.6% growth and a lot better than Portugal and Greece’s roughly 3% contraction. With eurozone growth sputtering along, France and Germany need access to Britain’s market, the third largest in the EU, to drive growth.

All this means neither side will be willing to scrap the unique British-EU arrangement any time soon. Sarkozy has already tried to clear the air post-Brussels by insisting that Europe “needs Britain” and that a British exit from the EU is “not on the agenda.” It’s only a matter of time before the big three admit they can’t all have their cake and eat it too.

0 comments