UK faces five years of limbo-land
The UK faces half a decade of limbo-land. David Cameronâ€™s promise of an in/out referendum on Britainâ€™s membership of the European Union by the end-2017â€” provided he wins the next election – means an extremely long period of uncertainty for business. That will be bad for investment. It also heightens the risk of an eventual â€śBrexitâ€ť – a British exit from Europe – which would be even worse for the economy.
An in/out referendum is neither desirable nor necessary. Of course, if the UK was planning to hand further powers to Brussels, it would be a good idea to get the peopleâ€™s consent. But no leading British politician of either left or right is contemplating such a transfer of sovereignty. Cameron has been driven to promise such a referendum because of the pressure from eurosceptics within his Conservative party as well as fears that UKIP, a fringe political entity which wants Britain to leave the EU, could take votes away from the Tories in the 2015 election.
If Cameron had been promising a quick referendum, the uncertainty for business would be manageable. But he has decided that he first wants to see if he can negotiate a â€śnew settlementâ€ť based on a competitive, flexible and fair single market. Thatâ€™s why the referendum could be nearly five years away.
Cameron may come to regret this long period of limbo-land. Businesses from Britain and overseas will be reluctant to invest so long as there is uncertainty over the UKâ€™s membership of the EU which accounts for half its trade. Less investment could, in turn, make it harder for the economy to pull out of what could be a triple-dip recession. Thereâ€™s even a tail risk that financial markets might now look at Britainâ€™s still-high deficit more critically and push up gilt yields.
The long-term risk of a â€śBrexitâ€ť has also gone up. Cameron says he would campaign with heart and soul to stay in the EU if he can renegotiate Britainâ€™s relationship in the way that he wants. But he may not succeed in such a negotiation. And, even if he does, the British people may still vote to pull out of the EU – especially since the referendum would be held in the middle of the next parliament, a time when incumbent governments are typically unpopular.
Of course, it may not come to that – not least because Cameron may well lose the next election. But his decision to call for a referendum now puts the opposition Labour party in a spot. It, too, may feel it has to make a similar promise. And if Britain does eventually vote to quit, there will be yet more years of uncertainty.
Ultimately, the UK would probably stay in the single market. But it would have to abide by rules that it no longer had a say in making and there would be a high risk of it ending up with a second-class membership that damaged the interests of business, especially the City of London.
Now Cameron has dropped his bombshell, however, he needs to make the best of the current situation. Although the highlight of his speech was the mistaken promise of referendum, his vision for the EU had much to commend it. He argued that the whole of Europe would benefit from a more competitive single market at the forefront of global free trade. This is a message that Britainâ€™s trading partners should listen to.
Cameron also said that power should flow to nation states rather than always flow from them to Brussels. That is right. A successful Europe does not need to be centralised. Indeed, in order to increase democratic accountability, decisions should be taken at the most decentralised level that is consistent with efficiency. The prime minister made clear that his strong preference was for powers to flow back to all nation states – although he kept open the idea of pushing for special opt-outs for Britain.
But Cameron was inconsistent in this call for decentralisation. He repeated the view that euro zone countries will need further centralisation of powers in order to fight the crisis in the single currency. This is neither true, nor in Britainâ€™s interests. The best solution to the euro crisis is more competitiveness not greater centralisation. Whatâ€™s more, if the euro zone does integrate further, it would be hard for Britain to maintain its influence.
Itâ€™s not even clear that the euro zone is charging down the route of much more integration – especially since the crisis seems to be receding. There is resistance from Germany to anything that smacks of guaranteeing other nationsâ€™ debts, while there is resistance in France and other countries to giving Brussels the right to veto national budgets.
For the next phase of his campaign, Cameron should stick to this simple line: the EU needs more competitiveness not more centralisation. The worry, now he has set the UK on a path to possible â€śBrexitâ€ť, is that his partners across the English Channel just wonâ€™t listen to him.