Brexit could come before Grexit
Investors have been obsessed with the notion of â€śGrexitâ€ť – Greeceâ€™s exit from the euro. But â€śBrexitâ€ť – Britainâ€™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 Franceâ€™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 Cameronâ€™s Conservative Party, the governing coalitionâ€™s dominant group, delights in pointing out the flaws in the single currency. The partyâ€™s eurosceptics feel vindicated because they have long believed that monetary union was only possible with political union.
But â€śI told you soâ€ť is never a good way of endearing oneself to others. Whatâ€™s more, the idea that greater integration in the euro zone has â€śremorseless logicâ€ť – as Britainâ€™s finance minister, George Osborne, puts it – directly undercuts the countryâ€™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 werenâ€™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 UKâ€™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 Britainâ€™s interests.
This is most apparent with the euro zoneâ€™s current push to create a single banking supervisor. Itâ€™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 UKâ€™s financial services industry, such a prospect is extremely unappealing. But London hasnâ€™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.
Cameronâ€™s biggest error was to veto last year the so-called â€śfiscal compactâ€ť, which binds euro zone countries to budgetary responsibility. The proposal wasnâ€™t even going to affect the UK. Moreover, the rest of the EU got its own way anyway by signing a new treaty that didnâ€™t involve Britain.
The current battle over the EUâ€™s budget could lose London further friends. Britainâ€™s position that now is not the time to increase Brusselsâ€™ 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 Britainâ€™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 doesnâ€™t also promise a referendum on Britainâ€™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 wouldnâ€™t matter if the UK had a rosy future outside the EU. But the countryâ€™s economy is closely entwined with the EU, which accounted for 47 percent of its trade last year. It is naĂŻve to think that Britain would get full and fair access to the single market if it wasnâ€™t a member. Whatâ€™s more, it would still have to play by Europeâ€™s rules to trade in its market.
Britainâ€™s business community doesnâ€™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.