Saturday, December 10, 2011

Cameron's veto: what next?

The thunder of the Brussels Summit is only just fading, and it is still by no means clear what happens now. In many ways the summit has created more questions than it has answered. 


However, there is no doubt that the relationship of Britain with the rest of the European Union has reached a point of fracture that places the UK outside the core of the organisation. David Cameron has, as he threatened, wielded the British veto, but the consequences were not what he intended. Instead of forcing the other 26 states to address British concerns, they have instead created a separate agreement without the participation of the UK. Although the British have- rather childishly- insisted that this group of 26 not use the facilities, even the offices of the European Union, the fact is that the Franco-German entente has de facto expelled the United Kingdom from the new direction of the European Union.


The miscalculation that David Cameron has made was not to think beyond the veto. The UK did not have any alternative plan. Neither had the British engaged with anyone else to put forward any other solutions. Intransigently, the British position was simply that the role of the City of London had to be taken separately from the rest of the financial crisis. This was not a position that could be taken seriously by any of the other member states, most of which believe quite strongly that "financial speculation" has been a major cause of the crisis in the first place.


If Mr. Cameron's strategy was flawed, he was also outplayed tactically by the Franco-German entente. They were fully prepared for the British veto and had made contingency plans accordingly. The result was the effective reconstruction of the European Union without British participation.


However the result of the Brussels summit is still set to be tested. The Germans may have achieved their goal of deeper fiscal integration, but it remains to be seen whether the agreement delivers the "big bazooka" that can soothe the fretful markets. The fact is that only now does Berlin recognise the twin nature of the threat they face. The first is the obvious sovereign debt crisis which can only be solved by major macro-economic reconstruction. The second is the deep crisis in the European banking market. Over the course of the past three weeks, several of the largest banks in Europe have come close to collapse, and they are still on life support. Without further emergency capital, we will still see a major European bank failure within coming weeks or even days, unless immediate remedial action is taken.


The determination of the new EU-26 will be tested to the utmost in the next few weeks. The liquidity- never mind the solvency- position remains dependent on significant policy changes by both the ECB and the EFSF- and that the EU-26 governments all fully support these with their own full faith and credit. It is in order to attract German support that the summit sought the binding commitments that David Cameron vetoed. If that German support remains partial or grudging, then the outlook for the Euro will still be in the emergency room. However, if the EU-26 follows through on the declarations that they have made, and they acquire greater market credibility, then there is a breathing space for the new macro-economic restructuring to begin.


As for the UK, David Cameron has essentially made a bet that the Euro will not survive as a single currency. Certainly, from the perspective of the British political discourse, that is a reasonable position to take. However, by walking away from the crisis, he has earned the contempt of the rest of the EU. If the UK was not willing to help in the depths of the crisis, then it will be excluded from the share of the recovery.


Britain is not a member of the Schengen zone, not a member of the Eurozone, it opts out of large parts of the European treaties, it has vetoed greater defence cooperation. For a long time other members have regarded the UK as a semi-detached member of the bloc. Now that status is institutionalised not just by British opt-outs but by exclusion. For the first time Britain has been told that it may not participate in a significant areas of EU debate. Unfortunately for Britain, that now means that critical areas of economic and financial policy will no longer have input from London.


That is a major change. It is also likely to be a permanent change. It is also a huge diplomatic defeat for London. After years proclaiming that they would not accept a two-speed Europe, after supporting enlargement in order to weaken the centralising policies of France and Germany and staying at the "heart of Europe", Britain has ended up in a minority of one. The stunned faces of the British delegation said it all- decades of work and engagement with the European project have ended in the worst possible result: a Europe united against us.


The Eurosceptics have had their victory. Perhaps, they may yet still seek a formal withdrawal from the EU, after all most of them would be quite happy to end all the EU arrangements, no matter how beneficial they may be to us as individuals. For those of us who have supported the benefits of closer Union, this has been a profoundly disappointing time, and it is something that many Liberals will not forgive, that the Liberal Democrats in the coalition could not construct a more practical alternative to the ineptly wielded Cameron veto. Yet perhaps it is too soon to consider the political consequences, while the economic consequences remain unresolved.


When 26 countries are prepared to make an agreement and one is not, then that is a problem. Many Eurosceptic bloggers this week have linked to the David Low cartoon of Dunkirk, "Very Well, Alone", as usual, they draw on the well of imagery of the Second Word War- one Tory MP told Cameron on Wednesday that a bring back "piece of paper" would be simple appeasement.  This is not 1938, and Brussels was not Munich, and our failure to move out from the past is what lies at the root of our dysfunctional relationship with the EU.


I don't know if the Brussels agreement will stick, still less whether it can begin to solve the crisis. My hunch is that it will take many summits, many meetings, and much more anguish to solve. However, that process will be long and involved, new alliances will emerge, new ideas will be developed. Meanwhile Britain will not be part of any of it,


The arrogant isolationism of the Eurosceptics, with their dogmatic bravado and insulting contempt for people who support the European ideal has now made a lasting impact on the relationship between Britain and the rest of Europe. Yet we have been here before. Britain barely participated in the Messina conference and we did not sign the treaty of Rome in 1957.  In the end, we recognised, too late, that we needed to be part of the emerging EU. 


It is quite possible that the Euro survives intact and ultimately begins to prosper. But then it will be too late for the UK to join: we would not be permitted to do so by the other EU members, who will long remember our failure to acknowledge what we had to do in order to solve the financial crisis. "Saving the Pound" might be the last thing we want to do in twenty years, but of course it is possible that by that time the UK itself, in its current form may not exist. It is not just the EU that faces an existential risk. The difference is that 26 governments decided to confront that risk head-on and one did not. 

3 comments:

Francesca said...

Over the course of the past three weeks, several of the largest banks in Europe have come close to collapse, and they are still on life support. Without further emergency capital, we will still see a major European bank failure within coming weeks or even days, unless immediate remedial action is taken.

OMG!! which ones????and which one?????

Cicero said...

It is dangerous for officials to name banks they think are in trouble, because it becomes a self fulfilling prophecy. However it is quite clear that those banks who have been trading more and more collateral at the ECB discount window are in the most trouble. Market rumours swirl around Commerzbank, Soc Gen, Credit Agicole, BNP and several others. Although it remains to be seen how accurate these rumours are, it is clear that all of these banks need to improve their capital position urgently and significantly

Francesca said...

I see...
off the record, there are rumours about HSBC... what's your opinion on HSBC? I would have thought that bank, ot of all of them, was pretty safe....