Cameron’s dilemma

May 14, 2013

Britain’s David Cameron began the day on Monday gently slapping down two Cabinet colleagues who said if they had a vote today, they would opt to leave the EU. It was senseless, he said, to throw in the towel before he had had a chance to renegotiate Britain’s relationship with Europe. He ended it by caving into rebels in his Conservative party who are demanding legislation now to commit to an in/out referendum before the next election.

The 25 year history of the Conservatives and Europe – internecine warfare and successive election defeats as they obsessed about something which figures low on most Britons’ priority list – suggests no good can come of this and if Cameron wins the 2015 election it moves Britain incrementally closer to the EU exit door. The more immediate question is whether Cameron has lanced the boil. Again, history suggests that if you give ground to the eurosceptics they merely demand more. And what the PM’s pro-EU Liberal Democrat coalition partners make of this isn’t hard to imagine which means he might not even have the numbers to get the bill through parliament. One of the leading rebels seized on that point, saying the move could well fail.

The anti-EU fringe party UKIP, which could well not win a single seat at the next election but has seriously spooked the Conservatives with strong showings in recent local elections, must be laughing all the way to the bank. If it can remake the Conservative party in its own image, its job will be done. But just as likely is a split party. The irony of Cameron doing all this while in Washington to bang the drum for an EU/U.S. trade deal is hard to ignore. President Obama pointedly said the British premier should fix its relationship with the EU.  If Cameron believes Britain should remain part of its main trading bloc, as he says he does, he is going to have to start explaining why and that is difficult to imagine.

In the euro zone, all is not well of course. A poll of nearly 8,000 people in eight EU states by the Pew Research Center, released overnight, shows the debt crisis has wrecked faith in the EU although support for the euro is holding up. Interestingly, disillusionment seems to be growing fastest in France, hinting at a new schism with Germany.

There are differences over policy too. Spain and Portugal pushed yesterday for a full banking union while Germany continued to emphasise the legal hurdles and the head of the euro zone finance ministers said much of the work could be done now with issues surrounding treaty change dealt with later. Berlin wants a limited banking union based around cross-border supervision and only much later (never?) a bloc-wide system to deal with failing banks which it says will require treaty change. This has the fortunate effect of preventing Germany from taking on liability for others but it’s nothing like the structure that was proposed last year. The big imponderable is whether its stance softens after September elections or not.

EU officials are talking up an easing of austerity and have granted France, Spain and others more time to meet their deficit targets in an attempt to foster some growth. But they are also insistent the pace of structural reforms must be stepped up. French lawmakers will vote today on labour reforms, aimed at making hiring and firing more flexible. Later in the week, Spanish Prime Minister Mariano Rajoy meets labour union and business leaders to discuss reforms to pensions and public institutions.

But for both France and Spain and others in the euro zone, bond market pressure remains entirely absent with the ECB underwriting now augmented by a swathe of new Japanese money coursing around the world seeking a decent return. Spain, Greece and Slovenia are all selling short-term treasury bills today. The Netherlands will sell five-year debt.

After the Eurogroup, the 27 EU finance ministers have an Ecofin meeting where they will discuss the bank recovery and resolution directive (that’s the one setting out how the euro zone will coordinate national resolution schemes, until a single resolution mechanism is put in place, if it ever will now).

German Chancellor Angela Merkel addresses one of her favourite subjects – the demographic challenges facing Germany with its ageing and shrinking population. It sounds dry but it’s absolutely crucial for a country which will need more immigrants to continue thriving and pay for its pensioners. Other countries where the population is still growing, such as Britain, might be in much better long-term shape no matter how things look at the moment.


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