The international system is facing a period of increasing upheaval. The duopoly of power: the Soviet Union facing the West, has given way to a radically different order. Initially the emergence of a single "hyperpower" -the United States- was suggested to be "the end of history", or rather the end of ideological struggle. However, it is now clear that the United States is not as preeminent as it had seemed.
The shock of September 11th revealed that critical challenges now came from outside the state system- from small and ruthless groups with a seemingly limitless appetite for death on an industrial scale. Meanwhile, the economic strength of the US has been challenged- first by China and now, increasingly, by India. As other powers emerge: Brazil and a resurgent Russia, it is clear that the old certainties are giving way to new uncertainties.
In this world of more even wealth and greater competition, the position of Europe has grown ever more uncertain. Initially Europe seemed to be the big winner of the end of the cold war. From being the cockpit of the cold war conflict, Europe has reunited, with the institutions of the European Union and NATO gaining almost all of the former Soviet occupied states as new members. Yet, this superficial success masks a great crisis.
The United States is challenged by the new balance of power, the European Union is not merely challenged, it is threatened. The economic structures that were created in the post war world are now threatened by competition and by demographics. Instead of funding savings, the socialist systems created in the 1950's and 1960's chose to fund welfare through government expenditure- a mistake that has had profound implications for wealth of all subsequent generations. Indeed the creation of comprehensive social protection now threatens European competitiveness to such an extent that it is difficult to see how it can be maintained in its current form at all.
For the Conservatives, the answer is clear- to cut ties with the European Union and to forge a new niche as a dynamic, privateer economy off shore of the lumbering socialist behemoths of the European Union. The problem, although British demographics are OK, and helped considerably by the relatively open door that the UK has allowed to the workers from the new EU member states, is that the UK is not particularly competitive compared even to many EU economies. The disruption that leaving the EU would cause- irrespective of whether the EU takes punitive action against the UK, which would certainly be a possibility under some circumstances- would create so much uncertainty as to undermine the British investment cycle, and reduce the efficiency of the British economy still further.
Thus, the UK will still need to negotiate its position with the European Union, and ultimately the UK can not separate its own destiny from the success or failure of the European economy, with which it conducts 70%-80% of its trade. This fundamental reality may be unwelcome in certain quarters, but Britain is not isolated within the EU. The Nordic countries and most of the new members are firmly on the side of a less intrusive, more Liberal European Union. It is now up to British diplomacy to make the best of a potential reforming group- one that may yet include Germany, the swing state of the EU- in order to put forward a new agenda for the European Union. This agenda must recognise the scale of the crisis that faces the continent and begin the process of radical reform that can maintain Europeans in the face of the increasing challenges from the rising global powers of Asia and America.