Brexit could come before Grexit

By Hugo Dixon
November 12, 2012

Investors have been obsessed with the notion of “Grexit” – Greece’s exit from the euro. But “Brexit” – Britain’s exit from the European Union – is as likely if not more so. The country has never been at ease with its EU membership. It refused to join its predecessor, the European Economic Community, in 1957; it was then blocked twice from becoming a member by France’s Charles De Gaulle in 1960s; and shortly after it finally entered in 1973, it had a referendum on whether to stay.

The euro crisis has put further pressure on this difficult relationship. David Cameron’s Conservative Party, the governing coalition’s dominant group, delights in pointing out the flaws in the single currency. The party’s eurosceptics feel vindicated because they have long believed that monetary union was only possible with political union.

But “I told you so” is never a good way of endearing oneself to others. What’s more, the idea that greater integration in the euro zone has “remorseless logic” – as Britain’s finance minister, George Osborne, puts it – directly undercuts the country’s national interest. The more the 17 countries in the single currency club together, the more the UK will be left out on the fringe.

If the Tories weren’t so keen to prove the point about how right they had been, they would be able to articulate an alternative way of keeping the euro together based on two key principles: more flexibility at the level of both nation states and the single market so economies can weather shocks; and the use of market discipline rather than bureaucratic rules to prevent banks and governments borrowing too much money and hence requiring taxpayer bailouts.

Such a vision would play to the UK’s national interest. London has long wanted a more open, market-orientated Europe. But, unfortunately, the government has been urging the euro zone in the direction of further integration – only to realise belatedly how bad this could be for Britain’s interests.
This is most apparent with the euro zone’s current push to create a single banking supervisor. It’s far from clear that this will actually help solve the current crisis. But it will certainly create problems for Britain as all 17 members of the zone will vote as a single bloc on future banking regulations.

Given the importance of the UK’s financial services industry, such a prospect is extremely unappealing. But London hasn’t made any progress in persuading its partners to change the voting system to preserve its influence. This, in turn, is partly because the government has made a habit of burning rather than building bridges.

Cameron’s biggest error was to veto last year the so-called “fiscal compact”, which binds euro zone countries to budgetary responsibility. The proposal wasn’t even going to affect the UK. Moreover, the rest of the EU got its own way anyway by signing a new treaty that didn’t involve Britain.

The current battle over the EU’s budget could lose London further friends. Britain’s position that now is not the time to increase Brussels’ budget – given the strains on public finances – is reasonable enough. But its threat to exercise its veto again makes it look like a spoiler.

Matters have been made even worse by the way the Labour opposition has behaved. Last month, it backed a motion from dissident Conservative MPs calling for a cut in the budget. This unholy alliance makes Labour also look like an unreliable partner in continental European capitals.

The risk is that Britain gets into a series of ding-dong battles with the rest of the EU – in the process of which London feels marginalised and, in response, gets increasingly shrill in its demands. A fractious relationship would then be the backdrop to the next election in 2015.

Cameron is under pressure from large sections of his party to pull out of the EU – not least because UKIP, a staunchly eurosceptic party, is eating into its electoral support. The PM is attempting a compromise position: he wants to renegotiate Britain’s relationship with the EU by repatriating certain powers to London; he would probably then put the resulting deal to the people for approval.

The problem is that the UK is unlikely to secure big changes in its relationship with the EU. So the path Cameron is treading could easily lead to a vote on whether to stay in the EU at all.

Meanwhile, Labour is anxious that the Conservatives could score points in the next election if it doesn’t also promise a referendum on Britain’s relationship with the EU. Ed Miliband, its leader, seems to think he could win such a vote. But it would be an uphill battle: 49 percent of the electorate would vote to pull out of the EU compared to 28 percent who want to stay in, according to a poll last week by YouGov.

This wouldn’t matter if the UK had a rosy future outside the EU. But the country’s economy is closely entwined with the EU, which accounted for 47 percent of its trade last year. It is naïve to think that Britain would get full and fair access to the single market if it wasn’t a member. What’s more, it would still have to play by Europe’s rules to trade in its market.

Britain’s business community doesn’t seem to have woken up to the threat. If it waits too long, it may find the momentum for a Brexit is too strong to resist.

6 comments

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> “Cameron’s biggest error was to veto last year the so-called “fiscal compact”, which binds euro zone countries to budgetary responsibility. The proposal wasn’t even going to affect the UK. Moreover, the rest of the EU got its own way anyway by signing a new treaty that didn’t involve Britain.”
— Ludicrous posturing by the Conservative Party, guaranteed to do little but save them from the ire of Murdoch’s remaining gutter tabloids, at the cost of offending all of our European neighbours.

It’s quite possible Britain would be the first country to leave the EU. Think also of the huge gap between Britain’s position and the EU commission position on the EU budget:

BBC: EU budget talks for 2013 collapse
http://www.bbc.co.uk/news/world-europe-2 0269373

On the other hand, consider the Conservative Party’s current coalition with the Liberal Democrats (a pro-EU party — they believe in the vision of a united Europe). The Conservatives upset them previously on two fundamental parts of their coalition agreement (using dishonest propaganda to convince everyone to vote against electoral reform, and then playing hard-ball with Europe over a treaty that didn’t even affect us directly and which on balance would have been good for Britain by stabilising European fiscal arrangements & supporting market confidence).
The Liberal Democrats are now spoiling for a fight. If Britain leaves the EU, the coalition will certainly break down, there will be an early general election, and for once business will side with the political left and centre-left against the newly isolated Conservatives as Britain’s economic numbers start to take a nose-dive with investors fleeing the newly isolated UK market en-masse. The result would almost certainly be an electoral defeat for the Conservatives.

I think the Conservatives know this. So the chances of a UK exit from the EU any time soon are very small…

Posted by matthewslyman | Report as abusive

While your logic is impeccable, and that of the tory eurosceptics sadly lacking, I do not think Britain would easily vote to leave the EU.

The EU is an easy scapegoat, but if a person’s job depends on trade, they will vote to stay in while telling pollsters, friends and neighbours they are dead against.

So anyone who works in finance, manufacturing or tourism will be voting to stay in. Or anyone with a close family member working in those industries. That looks like a yes vote. I agree with Milband on this one.

Posted by Dafydd | Report as abusive

I’d like to draw reader’s attention to the following possible consequences of Brexit:
1) Bad emotions raising in EU after Britain’s show-up of abandoning Europe in integrational efforts in cultural and economical imparity.
2) British politicians seam had never understood the importance of English language in modern world (focused only on its opportunity for themselves), and so their mission for EU to maintain it. So, in my opinion, there would be the biggest damage of BREXIT for EU. People on continent will feel awkward to continue communicating using it.
Given above we should not be surprised when we’ll see:
- The raise of economic importance for Ireland as knowledge connector (the science relies far on English).
- Raising polarisation between English and non-English speaking group of nations, so maybe some side effects can appear.
- Deepening by EU of further partnership based cooperation with Russia (knowing that Russians, Germans, Poles and many other countries) would be happy to rebuild it on healthy basis. This could go for the vision of Russia becoming the connector with Asian economies.

Above draft vision makes me reluctant about long-term prosperity for UK, the language which I learned, the peoples I appreciate, and my hopes for ambitions in professional targets I saw there. Is Mr Cameron preparing historic turn for GB, turning it into gypsy state for incoming decades (oh yes people in EU will keep good souvenirs of English literature, song writing, golf culture, …)?

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