Euro crisis will sideline UK in Europe

The UK will be sidelined in Europe as the euro-crisis leads the Euro group to form the faster core of a two-speed Europe. Both Europe and Britain will be worse off for it
Shane Fitzgerald
11 August 2011

Europe's financial, sovereign debt and political crisis shows no sign of abating and could yet trigger a fresh global catastrophe. The range of endgame options runs from a costly and contentious closer union among members of the Eurozone to its chaotic fragmentation. There are no good solutions, and no agreement on what might be the least-worst one.

Debt writedowns, risk-sharing, austerity measures and growth initiatives must all play some part. Politically, it is clear that the Eurozone's governance systems need to be transformed as its leaders and institutions have been repeatedly unable to get to grips with the problems.

variety of proposals are now in the works that should overhaul and improve the way the currency bloc is governed. These measures will of course have foremost effect on the members of the Euro, but the considerations of non-Euro-using member states of the EU must also be taken into account. The UK is an interesting case. Until recently, its coalition government has maintained a careful detachment to the extent that it hasn't really been engaging publicly in the policy debate. It has now started to articulate its position more clearly. On Monday, in a column in the Daily Telegraph, British Chancellor George Osborne reaffirmed arguments he had earlier made in a July interview with the Financial Times:

As I've said, the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration. Solutions such as euro bonds now require serious consideration if investors are to be convinced about the long-term future of the currency. A disorderly outcome would be disastrous for everyone, including Britain, so we should allow greater integration to happen, while ensuring we are not part of it and our own national interests are protected.

This seems a reasonable sort of line to take, given the gravity of the situation, but it is a major reversal of UK policy towards Europe and demonstrates that the crisis has already dealt a major blow to European unity.

Support of closer Eurozone integration combined with stern opposition to joining the common currency amounts to the endorsement of a 'two-speed Europe', with Britain aloof in an outer circle and more economic policy being made at the level of the 17-member Eurozone. David Rennie, the Economist's political editor (who for a long time was its EU correspondent), provides a smart analysis of this shift in position on his Bagehot blog, acknowledging that Osborne and his government have little room for manouevre while lamenting the diminished impact that a 'second-class' UK will have within the EU. He fears that as more decisions are made by the Euro 17, and more money is sloshed around in intra-country transfers, the EU will become less of a liberal, open, free-trading project and succumb to 'darker, more nativist' forces of regional chauvinism, protectionism and corporatism. In this scenario, British detachment is in nobody's interest.

There has so far been little real pressure on Osborne and Cameron to involve the UK in the various Euro rescues (British financial support for Ireland was uncontroversial owing to historical and geographical considerations as well as clearly articulated self-interest). Britain's non-engagement has been allowed, perhaps even encouraged, by its European peers because they fear that the fitfully sleeping dogs of British Euroscepticism will snarl if any taxing demands are made. But as the crisis drags on at great political and economic cost to other leaders and their citizens, British detachment will become more and more problematic. Two facts will exacerbate this trend. The first is the rise of Eurosceptic sentiment elsewhere on the continent – why should Brussels indulge London with special consideration when anti-EU sentiment is on the rise from Athens to Helsinki to Lisbon and all points in between? The second is that UK may be about to drift from detachment into risky obstructionism.

After months of wrangling in both Houses, the European Union Act 2011 is coming into force over the coming weeks. Among other things, the act provides that an act of parliament will in future be required to ratify all types of EU treaty change and before the government can agree to the use of  'ratchet clauses' or 'passerelles' to amend existing treaties. It also commits the government to holding a national referendum before agreeing to any treaty change that transfers powers from the UK to the EU. However, the decision on whether an amendment transfers powers to the degree that it should trigger a referendum is subject to an amount of ministerial discretion, which in turn is open to judicial review.

The volatility of the crisis combined with the constraints of this legislation leaves Osborne and Cameron on shaky ground: calling for stronger supranational governance and broader risk-sharing among EU member states though refusing any part of either, all while a Europhobic wing of their party barks at them to use the crisis as a pretense for referenda or for wholesale renegotiation of UK-EU relations. They may find allies sympathetic to the UK's general attitude in countries such as Denmark and Sweden, but other non-Euro member states – like Poland, which currently chairs the European Council of EU heads of state and government – are in favour of showing more solidarity and oppose any major shift of decision-making from the EU 27 level to that of the Euro 17, on the grounds that they would be left absent from crucial policy negotiations. Poland and its neighbour the Czech Republic are therefore playing active lobbying roles and will be kept in the loop by Eurozone politicians keen to keep their Euro-membership ambitions on track.

Within the Eurozone, positions on a two-speed Europe are mixed. France is certainly keen for more decisions to be made at the Euro 17 level, as this would strengthen its relative position, especially with regard to Germany. Smaller member states will be more ambivalent. Stronger governance means a loss of sovereignty and many would prefer that this happened at the EU level. Generally, the more the merrier is the rule when it comes to protecting small states' rights in the face of big states' power.

 Regardless of how these dynamics play out, the UK's voice is clearly diminished. Osborne's Telegraph article portrayed Britain as a 'safe haven' in the crisis, whose government was enjoying the 'vindication' of its decision 'to get ahead of the curve' by embracing austerity (and, implicitly, of its decision to stay out of the Euro). That may be the case for the moment, but his government should still seek whatever influence it can over debates that are likely to transform the European Union more radically than any of its recent treaties.

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