Britain and the EU: At the Edge?


2013-02-03 By Dr. Harald Malmgren

We speculated months ago that the UK government would not be able to yield authority over the London financial market to the proposed new bank and financial market supervisory entity to be established in the ECB or in a Continental European city.

The continuing search for unified EU bank and financial market supervision led by France could not be agreed without significant damage to the UK economy.

On the other hand, we expressed the view that the London financial market was so vital to all European banks and financial institutions that they could not efficiently function without equivalent, open access to London.

We also indicated growing concerns in the UK about the elaborate EU legal framework of governance of relations between citizens and EU governments, including law enforcement, mandatory working hours and conditions, and immigration.

For example, the terms under which a citizen or resident under suspicion of unlawful activity may be incarcerated are far more flexible and potentially severe under EU regulations than under the rigorous UK law which protects personal liberties.

In recent weeks UK Prime Minister Cameron opened diplomatic dialogue with other EU leaders on the need for the UK and other individual EU member states to “claw back” some of the most rigorous or rigid regulations devised by the EU Commission and embodied in EU treaties.

A serious debate also opened within the UK about whether the British economy would benefit or be harmed by potential withdrawal from the EU. 

Cameron’s push for reexamination of some elements of the European Union treaties has generated varying responses from other capitals.

The French stated that “a la carte selection of European treaties is off the menu” and that EU member governments cannot pick and choose among agreed EU laws and regulations.

From the French point of view, there shall be no reconsideration or backtracking. It may be added that the French are particularly worried that opening of EU treaties will lead to opening of the Common Agricultural Policy (CAP), which might be disruptive to French domestic politics.

On the other hand, some leading Dutch politicians see merit in rethinking the details of the Union, especially in light of the continuing divisions and crises among financial markets of EU and Eurozone member governments.

Most important, German Chancellor Merkel has shown sympathy for Cameron’s quest for greater national autonomy in specified areas of authority. This should not be surprising; inasmuch as German voters are increasingly concerned that poor governance in other EU member states is increasingly having negative impact on Germany and its citizens.

Germans do not want more intimate involvement of their neighboring governments in German domestic affairs, and in particular are resistant to the French bias in favor of greater, stricter regulation of markets.

The German leadership has long wanted to restrain French government overreach by a degree of reliance on British commitment to liberal financial markets and open trade with the rest of the world. German voters are feeling growing anxiety about bearing greater responsibility for the consequences of bad management in Greece, Spain, Italy and other “peripherals.”

Moreover, there is growing German worry about the apparent deterioration of the French government budget and the French economy.

France is seen by many Germans as the “next Spain.”

Thus, Merkel has publicly declared that Germany wants to keep the UK inside the EU, and is ready to discuss specific issues of concern to Cameron. Her response to Cameron is convenient in terms of domestic German anxieties about excessive integration with dysfunctional neighbors.

Cameron has now opened the idea of a referendum on whether the UK should remain inside or exit from the EU, most likely to be held in 2017, after likely British national elections in 2015.

Some British businesses and foreign businesses operating in the UK have become alarmed by this new source of uncertainty about the future relationship of the UK to the European Continental economy.

On the other hand, a growing wave of EU skepticism is passing across the UK and playing a growing influence within the Conservative Party. Questions are growing about the expanding powers of EU bureaucrats without restraint from elected politicians, which threaten to undermine a long British preoccupation with defining “democracy.”

The possibility of Greek exit (Grexit) has long been a subject of news and media speculation, but until very recently the idea of a possible British exit (Brexit) was not considered at all. Our own reading has been that a period of reconsideration of EU membership by the UK was inevitable, and the only question was timing. Now Cameron has set a clock ticking.

In parallel, significant interest is growing among EU businesses about potential negotiation of a free trade arrangement between the EU and the US.

There has long been significant interest in such an idea inside the US industrial community, although this idea was held back by continuing US and EU confrontation over agricultural trade.

Whether such an FTA initiative takes off may have significant influence on the question of whether the UK “needs” to be a EU member or could alternatively have the open market benefits of a broader FTA without the high degree of interventionism being imposed by the EU Commission non-elected bureaucracy. Whether the US Congress could accept an open market without major changes in EU agricultural policy remains to be seen.

In the background, it is still expected in Berlin that Greece will eventually exit from the Eurozone, but that this event should be delayed until after this year’s German national elections.

More recently, a crisis in Cyprus posed possibility of imminent collapse of Cypriot banks and a potential Cypriot default and exit from the Eurozone. Cyprus is relatively a small element in the overall Eurozone picture, but there are two critical questions for Eurozone leaders:

  • First, Cypriot banking is closely intertwined with Greek banking. A Cypriot banking crisis could tip the Greek banking system back into crisis.
  • Second, Cyprus banking involves extremely close interaction with Russian financial markets, and in particular with “black money” emanating from Russian mafia and tax evasion.

A potential rescue of Cypriot banks might be viewed by Eurozone voters as a rescue of the interests of Russian “black money.” Although the German Finance Ministry has tended to view a possible crisis in Cypriot banking as inevitable and desirable, the ECB leadership has been particularly worried about possible Cyprus default and exit from the Eurozone as opening the gates for other Eurozone members to exit.

While markets have become complacent that exits from the Eurozone were unlikely, the reality is that potential fragmentation of Eurozone and even EU membership remains. 

Most likely the British suggestions for devolution of EU powers over local, democratic decision making will prove popular with voters among other EU and Eurozone countries, particularly in a context of continuing economic austerity and rising unemployment, and pressures from Germany to yield national autonomy to Eurozone non-elected officials.