European Affairs

Informal remarks by money managers at a London financial industry conference in mid-September illustrated British frustration if not distrust, at least within the City (the financial district of London, which vies with New York’s Wall Street as the world’s leading global financial center),  towards Brussels.  Many likened the United Kingdom’s vantage point to that of being poised precariously at the edge of a black hole, staring down at the bottomless financial costs Britain could share under various sovereign debt bailout and save-the-euro measures. Unless Number 10 either forges a far more limited EU membership, strictly defined by Britain’s national interests, or “Brexit,” short for “British exit”, the financiers are openly concerned that the UK risks being pushed over the brink by the velocity of events.

The United Kingdom’s ambivalence towards the European Union has heightened since David Cameron became Prime Minister.  Last December, he refused to support a German-engineered fiscal pact to safeguard the euro’s future. As The Economist reported then, “after much studied vagueness on his part about Britain's objectives, Mr. Cameron's demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation.”

This year in late October, Cameron promised Parliament he would wield the UK’s veto power over any EU budget increase above inflation, ensuring a showdown during the special European summit in late November.  (The EU Commission is pushing for a 4.8% hike over a seven-year period ending 2020, a budget package estimated at €1 trillion, or roughly US$1.3 trillion, but faces pushback from a number of member states including France, Germany, and the Netherlands which could trim the proposed budget by €200 million.) A group of 50-plus Tory backbenchers, joined by some Labor MPs, has rebelled against Cameron, charging that his stance is not strong enough, that EU spending must be cut.  In a symbolic, nonbinding parliamentary vote on the issue on October 31, Cameron narrowly lost, 307 to 294.  That defeat has exacerbated his domestic political woes while emboldening the Euroskeptics in Parliament to press even harder for an “up or down” referendum on EU membership.

Key to their argument is the contention that the direct cost of EU membership is a net loss for the UK: about €97 billion (£85 billion at today’s exchange rate) in 2010. Since 1979, according to the euroskeptic Daily Mail, “Britain has paid in about €260 billion (£228 billion) . . . and received back in benefits just €163 billion (£143 billion).”

UK Contribution to the EU

Looking at the 2010 budget, The Guardian broke down The UK’s contribution as follows:

€14.7bn is the total raised from the UK. This includes money raised in duties within the UK and passed on to the EU. The UK receives a 25% fee of €837.8m for this. Within that:

• €12.15bn is the UK's national contribution, which is largely based on the size of the economy. It also includes other adjustments and €2.63bn from VAT.

• €3.56bn in rebates negotiated by Margaret Thatcher in 1984, called the 'UK correction' in the official data. This is paid for by other EU member-states

EU advocates and opponents suggest that total costs and benefits are both much higher, but the assumptions and estimates vary wildly depending, for example, on the percentage of UK exports (valued at £13.9bn (€16.6bn) in November last year alone) to the EU attributable to accessing the common market.  That costs to business for complying with EU regulations and whether food costs are higher as a consequence of the Common Agricultural Policy are additional points of contention.

“Cui bono?”, the “EU Pragmatist” Asks

Self-labeled an “EU pragmatist,” Cameron has argued repeatedly that closer integration of EU member-states, such as new fiscal requirements, requires a “renegotiation of the terms” of UK membership. His party’s manifesto insists that a popular vote be held “on any transfer of powers to the European Union.”  “It’s very simple what I want: Europe is changing; the single currency is integrating rapidly,” he said during the Conservative Party’s annual conference in October according to Bloomberg News.  “I think this presents a great opportunity for Britain to get the sort of deal we’ve always wanted in Europe. That’s at the heart of a free-trading, open-market Europe, but we don’t want this endless political integration.”

Cameron has stopped short of endorsing a “velvet divorce” or a gradual withdrawal, particularly while the UK is in a recession.  In January, the Wall Street Journal quoted him saying: "We are committed members of the EU [and] committed members of the single market." In mid-October, he asked, “Am I happy with the status quo in Europe?  No I am not; I think there are changes that we need.”

Therein lies the dilemma:  How to “retain clout in areas such as the single market, trade and competition, but seek a looser EU relationship in other areas,” as a Financial Times writer aptly phrased the “two tier” or “two speed” approach.  Eurozone members are building financial structures – such as the European Stability Mechanism – and supporting the rise of the European Central Bank, initiatives vitally important to the UK given its global role as a financial hub.  By willfully sitting outside the Eurozone, however, the UK doesn’t have a voice in the bloc’s decisions.

The awkwardness can be seen in Britain’s demands for diluting the European Central Bank’s power and restructuring a proposed Eurozone banking union. Ironically, since Britain is outside the eurozone, it is not obligated to provide bailout funds to struggling banks within the eurozone or help fund either the $650-billion European Stability Mechanism or the European Central Bank’s liquidity-creating program. The Commission wants the ECB to supervise lenders as way of safeguarding deposits and preventing banks from becoming insolvent.  Britain has countered with an approach that would allow the 10 European countries outside the banking union to block eurozone members “from clubbing together to shape EU-wide regulations,” as Reuters reported.  "The concern is that the Bank of England can find itself outvoted by the ECB on aspects of rule making," one unnamed official told Reuters.   The UK has also been demanding a bigger eurozone rescue fund to act as a firewall against financial market contagion.

In response to non-eurozone members’ concerns, EU officials have circulated a proposal in late October, as Reuters puts it, “to break the impasse.”  A body to supervise lenders would be created within the ECB and non-euro zone members would have a vote.  ECB’s powers would be fenced off by emphasizing that national supervisors should “carry out regular operational tasks” in monitoring banks, with the ECB focused on banks that pose systemic risks and administering funding to either help failing institutions stay in business or close down and settle debts.

Ultimately, few see a complete UK pullout as likely or desirable, including the Conservatives’ Fresh Start Group, pointing to the severe costs that the UK’s withdrawal would have, as demonstrated by a study from the London-based think tank Open Europe.  “[F]rom purely a trade perspective, EU membership remains the best option for the UK. All the alternatives come with major drawbacks and would all, except for the ‘WTO option’, require negotiation with and the agreement of the other member states, which would come with unpredictable political and economic risks. This means that negotiating a new UK relationship with Europe outside the EU Treaties, i.e. leaving the EU, would present similar difficulties as renegotiating membership terms while remaining a member of the EU. Therefore, there is not currently a compelling trade case for EU withdrawal.”

Perspectives is an occasional forum of The European Institute reflecting views on topical issues.