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Can Europe Survive without Britain?

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cameronDavid Cameron is clearly not interested in winning friends and gaining influence in Brussels. On January 23rd, the British Prime Minister made a major foreign policy speech calling for a renegotiation of the United Kingdom’s relationship with Europe as well as an “in-out” referendum sometime after the next general election.[1] Mr. Cameron cited the British public’s “all time high” disillusionment with the EU and the fact that they had not been consulted on Europe since 1975 as the reasons he was calling for the popular vote.

Mr. Cameron conditioned his remarks by expressing his continued support for Britain’s – modified – participation in Europe. He expressed his determination to seek a mandate for renegotiation with Brussels and for the referendum in the next general election as part of the Tory manifesto. The Prime Minister stressed that “simply hoping a difficult situation would go away”[2] was the wrong approach: “I believe in confronting this issue – shaping it, leading the debate.”[3]

Mr. Cameron did not list which powers he would be negotiating to take back, nor what would happen if Europe refused to negotiate any revision at all.

With Friends Like These

The speech was immediately attacked from all sides. European Foreign Ministers lined up to scoff at Mr. Cameron’s main goal of a treaty revision[4]. Germany’s Guido Westerwelle rejected “cherry picking” of EU rules and called for more, not less integration. Laurent Fabius of France warned Britain of the dangers of leaving the EU, and smugly noted that France would roll out the “red carpet” for British businesses[5].

Even the Swedes, who have kept “ever closer union” somewhat at arm’s length, chided Mr. Cameron’s tactics. The Swedish Foreign Minister, Carl Bildt, agreed with the need for flexibility in EU rules, but warned that “a 28-speed Europe…is just a mess.”[6] Only the Dutch backed Mr. Cameron, openly calling for “a Europe that remains limited to its core tasks.”

osborneAs if to add injury to insult, on 28 February the European Parliament voted to impose a bonus cap on Europe’s bankers, setting a limit of 100% of base salary[7]. Bankers in the UK, which accounts for 40% of Europe’s financial services industry and is home to the only global financial center in Europe, were set to suffer disproportionately. George Osborne, Chancellor of the Exchequer, flew to Brussels in an attempt to win at least some concessions from his fellow finance ministers. The Germans squirmed and talked about “technical implementation issues” and wishing to reach agreement with Britain, but otherwise the silence was deafening. Mr. Osborne was outvoted 26-to-1 and frustration with British vacillation was very evident.[8]

At home as well, Mr. Cameron faced opposition from both his main political rivals. The opposition leader, Labour’s Ed Miliband, categorically rejected an in-out referendum on European membership and accused Mr. Cameron of pandering to the extremists in his party rather than representing the national interest[9]. The Liberal Democrats, while forming part of the coalition government, nevertheless expressed their disapproval. Party leader Nick Clegg said an “EU plebiscite is madness”[10], leading to years of uncertainty for UK businesses. Mr. Clegg was adamant that a referendum demand by the Tories would a “red line” during any future coalition talks.

Britain’s business leaders also voiced their qualified disapproval of Mr. Cameron’s plans. Many of these executives privately chafe at what they consider to be excessive regulations and control from Brussels and most are against abandoning the pound or any closer integration; yet in public they are almost universal in their support for the common market. It is “sheer madness,” says one businessman, for a nation with half of its exports[11] going to Europe to talk of leaving it. Led by the flamboyant Richard Branson  – at least in vociferousness – a group of British corporate bigwigs are preparing a pro-EU counteroffensive against Mr. Cameron.

britpoliticos

Even the Obama Administration expressed cautious reservations at the British approach. Even before Mr. Cameron’s speech, State Department officials were warning of risks that a referendum could turn Britain inwards.[12] After the speech, Administration Press Secretary Jay Carney reiterated that America wants the UK to stay in Europe[13]. President Obama has consistently supported a strong EU and greater integration; the US continues to view the European Union as a fundamental element in European democracy and a key national security interest. Progress on an Atlantic free trade agreement between the US and EU would significantly raise the costs to Britain from leaving.

Home Fires Burning

European Foreign Ministers don’t vote in British elections, and Mr. Cameron’s referendum call has as much to do with domestic politics as with Europe. Mr. Cameron has his hands full: rebellion among the backbenchers in his own party[14], a resurgent Labour party taking advantage of the continued doldrums of the UK economy[15], and the poaching of conservative voters from an increasingly popular UK Independence Party (UKIP)[16].

voterintentions

 The polling data is indeed grim reading for conservatives. The Tories have trailed Labour in the polls since late 2010[17] – ever since Mr. Osborne unveiled the budget with the largest spending cuts in decades.[18] Most polls have Labour with a comfortable 10 point lead over their conservative rivals, which is only likely to lengthen so long as Britain’s economic performance is weak. Mr. Cameron no doubt hopes – fervently – that the economy will improve enough between now and the next general election, scheduled for 7 May 2015[19], to extinguish Labour’s lead in the polls. 

Of even greater concern to Mr. Cameron is the more immediate threat posed by his own right. The challenge posed by the waspish MEP Nigel Farage and his openly Eurosceptic UKIP is a growing one. Although far from becoming a second party threat, the UKIP is nevertheless polling on a par with the Liberal Democrats at roughly 10% of voters. Whereas neither Labour nor the Liberal Democrats pose a threat to Mr. Cameron’s core conservative constituency, Mr. Farage threatens to steal voters from conservative MP’s just when they need them the most.

Mr. Cameron has moved aggressively to counter his disadvantage at his weakest point: Europe. By finally providing his party with their long sought after referendum, he has become the hero of the hour for Tory MP’s as well as conservative voters, though he hopes the effects of his speech will last longer than that. Even the most anti-Europe MP is unlikely to buck the PM now.

Mr. Cameron has also sent a broadside into rivals on both left and right. The UKIP can no longer bang on the drum of EU exit; at least they are not as likely to steal Tory voters anymore. Labour and the Liberal Democrats also face a quandary: if they outright oppose a referendum which is popular with British voters [20], they will end up looking elitist and anti-democratic. On the other hand, agreeing to the referendum benefits the Prime Minister and allows him to control the timing, pace and the initiative of the debate.

Playing for Time

There is no question that Mr. Cameron is aware of the potential costs of an exit from the common market and he has been very clear that he personally does not want Britain to leave Europe. By leaving the referendum in the distant future, and predicating it on a Tory victory in 2015, Mr. Cameron is hoping to reap the short-term domestic benefits without conceding much in the long-term. There is evidence that seems to support this view.

Much has been made of a recent Times poll showing a majority of Britons favoring a UK exit, but it is significant that fully 23% of respondents were undecided. Even more telling, 61% of all respondents conditioned their response upon the deal any future British government might make: the British don’t want more Europe, but that doesn’t mean they don’t want any Europe at all. In fact, only UKIP voters are adamantly against “any Europe at all”. Even within the Tories, the anti-Europe bloc remains in the minority.

europepoll

While much has been made of Britons’ visceral rejection of all things from Brussels, much if not all of the dislike is focused on social issues and immigration, rather than economic complaints. While business leaders grouse about “excessive regulation” from EU bodies, the reality is that most people concede that British firms and the British economy have benefited mightily from the Common Market. Mr. Cameron clearly feels that in the long run-up to an actual referendum, pragmatism would win out… as long as he can secure an acceptable deal from his European partners.

Race to the Bottom

Some European leaders are betting that the referendum will never happen. After all, for Britain to leave the Common Market would be economic suicide, they argue. Europe accounts for half (50.6% in 2012) of British exports.[21] While it is also true that Britain receives 51.1% of her imports from Europe[22] and is a major trading partner for all of Europe’s largest economies, Great Britain is only a small part of the exports of any European market in particular. With the exception of Norway, exports to the UK represent only 6% to 7% of total exports for most European states.

tradebycountry

That places Mr. Cameron in a somewhat awkward position: the UK stands to lose up to €269 billion in trade – on aggregate – from departing the Common Market, but none of her trading partners will individually lose more than €70 billion, even if the EU as a whole would lose more the Britain. This could lead to the perverse dynamic of individual states with little to lose in British trade blocking any revisions to the current relationship even states with more to lose might be willing to make concessions.

Perverse or not, €300 billion is still a very great deal of money to lose, and European economies are not in a position to be leaving any money on the table. The economic damage to Britain’s partners goes beyond a simple calculation of export volume: British industries are heavily involved in Airbus and the parent company, EADS. European pharmaceuticals have a critical research and manufacturing presence in the United Kingdom; the automotive sector in the UK is also pan-European. Great Britain is a major exporter of petroleum and its derivatives to Europe. The City of London provides vital financial services to many European companies and is the only global financial center in Europe.

Mr. Cameron is also aware of his economy’s declining stake in Europe. British firms have made a sustained effort since the middle of the last decade to better position themselves in emerging markets. This strategy has borne fruit, with exports to the EU steadily declining as a percentage of total exports. There is an apocryphal story of a debate between pro- and anti-Europe British politicians. Where the pro-EU politician stated smugly that British trade with the Netherlands was greater than that with China, the anti-EU politician replied, “That’s precisely the problem.”

uktradebyregion 

British exports to the “rest of the world” have steadily increased and surpassed – by some measures – the percentage of exports to the EU. At the same time, Europe has become a much smaller share of the global economy. That trend is likely to continue as emerging markets continue to enjoy higher sustained growth rates than the mature economies of Europe. The farther in the future the date of a referendum, the harder it will be to argue “catastrophic damage” to British voters.

worldgdp 

There is another, political reason, why Europeans, particularly Germany, want Britain to stay and may be willing to give Mr. Cameron some face-saving concessions to take to the voters. Today, the European Union is relatively well-balanced, with four great economies dominating (Germany, France, United Kingdom and Italy – Spain could be included as a courtesy, but it is only 66% of Italian GDP).

 withuk

No economy dominates, though Germany is clearly the most important and influential member of the club. Take away the United Kingdom, however, and the Common Market starts to look an awful lot like a continental version of the Prussian Zollverein of the late 19th Century.

without uk

The balance in the Common Market is lost, and the stability provided by a “semi-independent” UK is replaced by either a too dominant Germany or a coalition of Mediterranean states to counterbalance the Teutonic giant. Such a shift in the internal dynamics of the Union could have profound and highly negative impacts on the future of the institution. German power is already being reviled in markets where “Germanic” austerity has bitten the hardest, and the Franco-German relationship is straining.

Germany is well-aware of this negative perception and has been actively attempting to mitigate it. The Germans want to be the good Europeans; and to an admirable extent, they have succeeded. It is probable that Berlin would be extremely sensitive to enhancing perceptions of “dominating Europe”; and they do not want the formation of a permanent “Club Med” working against their interests. Germans value the British commitment to free and open markets, to trade liberalization and to the avoidance of undue regulations.

The Last Democrat in Europe

Most commentators have asked, “Can Britain survive without Europe?” Perhaps the opposite question is more pertinent. It seems clear that both Britain and Europe stand to lose a very great deal from a divorce, no matter how accommodating it is. The British economy would weather the storm eventually, though the cost might be more than the British public is willing to bear. It is, after all, a nation state. The European Union is not a nation state and its institutions remain fragile – it is less clear to me that it could survive a British departure. The economic costs, though significant, are affordable: what is difficult to reconcile is the fundamental realignment of power within a Europe limited to the continent, a Europe even more obviously dominated by Germany.

Will it come to divorce? No one in power wants it; certainly not Mr. Cameron. All factors point to a compromise solution: give the British some leeway on the social and immigration issues they keep banging on about, while leaving the most important economic and regulatory structures unchanged. Mr. Cameron will have something he can sell to his public; so will the Europeans.

On one point, Mr. Cameron should give no ground. The referendum should go forward. The EU has changed dramatically since the last time the British public voted on membership and they have the right to expect their voices to be heard. For an institution that ostensibly supports democracy, the European Union has proven to be remarkably allergic to the democratic process. The fact that the United Kingdom is setting this example is very necessary to the long-term health of Europe. After all, if Europe cannot convince its citizens that the benefits far outweigh the costs of membership, what future does it really have?

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Sources and Notes

[1] “David Cameron Promises in/out referendum on EU,” BBC News, 23 January 2013
[2] Ibid.
[3] Ibid.
[4] Kuchler, Hannah, “European leaders hit out at Cameron,” Financial Times, 23 January 2013
[5] Ibid. Mr. Fabius was referring to Britain’s perhaps tactless comment during the 2012 French election that it would roll out the red carpet for French businesses fleeing Mr. Hollande’s proposed high tax plan.
[6] Ibid.
[7] Or 200% with shareholder approval. “EU agrees to  cap banker’s bonuses,” BBC News, 28 February 2013
[8] Charlemagne, “Anatomy of a Failure,” The Economist, 09 March 2013
[9] Watt, Nicholas, “Ed Miliband rules out support for in-or-out EU referendum,” The Guardian, 23 January 2013
[10] Stacey, Kiran, “EU plebiscite is madness, says Clegg,” Financial Times, 10 March 2013
[11] Eurostat (2011). Depending on which data source you reference, the actual percentage can be higher or lower than 50%. Her Majesty’s Revenue and Customs service reports 53.3% of total 2011 exports, in GBP, going to EU nations; while Eurostat reports only 47.4% of total 2011 exports, in euros, going to EU countries. This discrepancy is potentially do to exchange rate fluctuations and how they are accounted for within the year.
[12] “UK risks `turning inwards` over EU referendum – US official,” BBC News, 09 January 2013
[13] Simons, Ned, “United States `very clear´, Britain must not leave the European Union,” The Huffington Post UK, 23 January 2013
[14] Mason, Rowena, “EU Budget row: David Cameron faces rebellion from more than 50 Tory backbenchers,” The Telegraph, 31 October 2012
[15] Wooding, David, “Labour Ed set for landslide win at next general election,” The Sun, 10 March 2013
[16] Helm, Toby, “UKIP only 10 points behind Tories, latest poll show,” The Guardian, 9 March 2013
[17] ComRes Poll, Ipsos-Mori Poll, Poll of Polls, Populus Poll –  BBC News Poll Tracker
[18]Spending Review 2010: George Osborne wields the axe,” BBC News, 20 October 2010
[19] Due to the Fixed-term Parliaments Act of 2011. This measure, which was part of the coalition agreement between Tories and Liberal Democrats in the current government, replaced the previous system whereby the Prime Minister – acting under the authority of the Crown – could dissolve Parliament at any time, thus precipitating a snap election at a time of political advantage to the incumbent.
[20] 74% of adults polled indicated a “strong” intention to vote in any future referendum on EU membership (“strong” defined as those who indicated an intention to vote with an 8, 9 or 10 on a scale of 0 to 10). Survey conducted by Populus Limited for The Times. The poll was conducted online on a random sample of 2,204 adults between 23 and 24 January 2013. Interviews were conducted across Great Britain and the results have been weighted to be representative of all British adults.
[21] See note 11.
[22] Eurostat (2011).

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