Cameron’s Speech and Britain’s New Vision for Europe

28^th January 2013

ResPublica Director Phillip Blond writes for the Social Europe Journal

David Cameron’s speech has generated much the expected reaction. Domestically those on the Conservative right who hate Europe have welcomed the offer of an in/out referendum as giving them the chance to finally escape a continental union they despise, while those on the left decry Cameron for his reckless disregard of UK national interests and his betrayal of a vital pillar of social democracy. Internationally Britain’s allies see the offer of a final in/out option as one of extreme risk to European and indeed global security. But Cameron’s speech and the offer of an in/out referendum on EU membership to the British people in 2017 should he be re-elected in a majority government is none of the above.

Firstly this was a profoundly pro-EU speech designed to finally quash British euro-scepticism, keep Britain inside the European Union and if Cameron follows through with diplomacy and engagement it may increase Britain’s influence within Europe. Secondly from the perspective of the EU and Eurozone what Britain is arguing for – the continuing importance of the distinction between the common currency and the political institutions of the EU – is in the real long term interests of both the Eurozone and the EU.

To take the last point first. The Euro originally conceived as a means to ensure political convergence is now an agent of economic divergence and profound social disorder. Youth unemployment in Spain is now at over 60%, and this contagion is spreading throughout Europe. The politics of internal devaluation forces the Greek economy back 11 years whereas the Portuguese must go back to 1997 – a generational loss of 18 years. Eurozone unemployment is at 11.8% a historic high – but that average disguises worse news – 26% unemployment in Spain and a similar level in Greece, Portugal is up to 16% and Italy will probably reach Spanish levels as soon as the debt issue is finally forced through its political system.[1] Overall according to Eurostat, unemployment increased in 18 member states in the year up to November 2012, and given how far devaluation is expected to go is set to rise even higher.

The aim of such hard medicine is to restore convergence and internal economic equilibrium to the Eurozone but on many indicators asymmetries are increasing. For example in 2012 Italian GDP was 6% below its 2006 level in Germany GDP is 8% higher – internal devaluation is driving debtors further apart from creditors, in which case the patient will not survive the cure.[2]Europe’s current elite cannot countenance Euro failure and they cite other positive indices to show that convergence is possible, and countries have made progress. For example the eurozone’s aggregate fiscal deficit fell below 2.5 percent of GDP at the beginning of 2013. It stood around 3.4 percent last year, down from a terrifying (as it is not yet shared collectively) 4.1 percent in 2011. But severe imbalances remain and look relatively intractable – Germany’s current account surplus is stubbornly high at 6% of GDP. Goldman Sachs has recently calculated on an exchange rate basis the adjustment still needed to provide convergence and its still enormous about 25-30 percent in the case of Spain and around 15-25 percent not only in Greece and Portugal and also in France. But the gap is even larger as surplus counties need to appreciate Germany on these figures requires for example a real appreciation of 15-25 percent.[3] So on some measures the gap remains as high as 50% in exchange rate terms – given the cost so far this represents a genuinely terrifying prospect.

Basically this means certain countries may not politically survive the transition and facing generational unemployment may well elect parties and politicians who promise to exit the current regime. Medium term Euro break up is still possible not least because northern voters have yet to see the true costs of the status quo: semi-permanent subsidies of a new order of magnitude to southern debtor nations. Most voters in Europe’s creditor nations believe that the debt problem is one of overhanging stock – a situation that might be resolved by a one-off pooling of existing debt. But the problem is far worse than that the situation given the permanent capital imbalances is one of flow – the debt support needed is long term perhaps even generational. As such pressure for Euro break-up will not just come from the citizens of southern debtor countries but from the taxpayers of northern creditor nations outraged that the cost of bailout will pass to not just themselves but their children also. Little wonder then that the latest Eurobarometer surveys show that just 30% of Europeans have a positive view of the EU – hardly a popular foundation for the travails to come.

In which case the position Britain is arguing for is clearly and demonstrably in the interests of all. Britain is simply saying that the interests of the EU and the Eurozone are different, and in order to save both we need to prevent the Eurozone supplanting the EU. For the EU will always be bigger than the Eurozone, 10 of the EU’s 27 nations are not yet Euro members and of them some may never join (Britain, Cezch Republic, Denmark and Sweden), others like Poland, Bulgaria and Hungary may simply want to wait, and since almost everybody agrees outside of new debt relief both Cyprus and Greece will need to exit the Euro there needs to be a place for them to go. Plus future EU expansion will be countries of the East weaker even than the present Euro periphery, why would they join the EU if they were forced to endure permanent euro impoverishment? By any account what Cameron in effect is arguing for: an EU solution that can account for its members’ economic divergence and bespoke needs is wise and much needed.

If Cameron is at fault it is that he does not recognise that what is in Britain’s interests is in everyone else’s as well – if he can revive Euro relationships this is a position that can win friends and allies. But and this is the problem – Britain has breached and broken too many relationships in its ideological hostility to the EU. Few nations are willing to help Cameron out – when he has spurned them so visibly and publically. But that said Cameron is far more likely to get concessions for Euro members than his detractors admit, nobody in the EU wants Britain to go, she is simply too big, too well connected and too important. The EU needs Britain on any number of levels. Leaving aside financial services and the UK’s diplomatic and global connections, perhaps the most obvious is defence. With the US’s pacific pivot – Europe quite simply cannot defend itself against the threats that as Libya showed the US will now expect Europe to lead on. The EU faces huge and dangerous instability on its southern border with failed states, tribal resurgence and warlordism, Islamic insurgency may find fertile ground at Europe’s southern border. France by herself cannot do much, Britain has the power projection and will to fight that Europe desperately needs.

Cameron needs to return to his party and the country with something – this is unlikely to wait until the UK election in 2015. European integration is proceeding apace and if the UK Government does not recognise its own vision and is therefore confused about how to achieve what it wants with EU members (not an unlikely outcome) it will not return with very much. Cameron needs to act now to build bridges, an EU ambassador trusted and liked by member states working in partnership with the very able minister for Europe David Lidington – should be authorised to build consensus around the role and status of non-Euro EU members then and only then can Cameron get the deal he needs.

If the PM plays his hand well in Europe it will bear fruit. Domestically Cameron’s position is not as weak or precarious as his detractors or supporters believe. Whenever offered the leave Europe option, either in party manifestos or in a direct referendum, the British people have voted resoundingly to stay in. A recent survey showed that if Cameron returned with a defensible offer (even a renewed principle of subsidiarity already enshrined in EU treaty would do) and backed the yes to Europe vote, the pro EU campaign would get a 27% swing and win a crushing victory to stay in. Business, a huge force in UK politics, would overwhelmingly back an ‘in’ position as would all of Britain’s international allies, chief among them the US which has already expressly stated as such. Cameron has quieted in one stroke the restive rebels on the right and created party unity for the 2015 election. The Labour opposition has already been wrong footed allowing itself to say it is against giving people the right to vote. If Cameron can get a deal he can defend he will in my view easily win an ‘in’ referendum and finally put the European issue to bed for a generation.

If so the argument that will win the day with the British public is not some granular analysis of the costs and benefits of the EU but a broad and truly radical vision for Britain’s membership. On certain demographic trends if Turkey does not join the EU, Britain by 2050 will be the largest country in the EU. For centuries Britain ensured global dominance through preventing the rise of a dominant power on the continent, now Britain must recognise it could be that power. If only the UK worked with Europe it would realise Europe is the path back to British global prominence and influence – and the overwhelming majority of Britons will always vote for that.

Social Europe Journal Article

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