Cameron Plays a Weak Hand, but Don’t Bet on a Brexit

Pity David Cameron. What is a British Prime Minister to do? The UK economy is stagnating even before the spending cuts in his fiscal consolidation program begin to bite. His central bank seems reluctant to provide more monetary stimulus — though that might change with his new handpicked Bank of England governor. Like GOP House Speaker John Boehner, he has fringe back-benchers demanding that he take Britain out of Europe. Small wonder that he wants to change the subject and placate his critics, as he has with his vow to debate a British exit from the European Union.

But look carefully beneath the surface, and you will see that Cameron may be playing a much more cautious game, one that ends up not only with the United Kingdom staying in the European Union but Cameron supporting that cause after he wins some concessions that will not seem unreasonable. As someone who has always dismissed the possibility of a Grexit, I would bet against a Brexit as well.

Cameron has opened this debate from a position of weakness, having decided that his party will lose the next election without this political gambit of trying to change the narrative to a debate about Europe with his long anticipated speech on the topic.

Substantively, Cameron proposes a political mandate at the 2015 election to negotiate a new EU settlement, and then to hold a UK referendum mid-way through the next UK parliament (e.g., around 2017) with a choice between staying in the European Union on new terms, or a complete exit. Cameron would like to appear as a good steward of UK national interest — using the euro area crisis and the institutional deepening it requires for the 17 euro area countries to have this discussion about Britain in Europe. Proposing the referendum after the next UK elections — and after a renegotiation of Britain’s terms in Europe — makes it appear that he wants the entire issue on the political backburner until then. The reality, however, is that the weak UK economy is driving Cameron to keep the issue front and center in order to neutralize the UK Independence Party. Had Cameron really wanted to keep Europe out of the political debate, he could simply have told his Europhobe backbenchers to shut up lest they bring down the government. With his new stance, he can hope that they fall in line, rather than merely mirror the right-wing UK Independence Party. Their initial comments suggest Cameron has succeeded in this goal.

Cameron also wants to force Labour and Liberal-Democrats to spell out their own “European vision,” hoping their views would be unpalatable to the electorate. Whether Nick Clegg of the Liberal Democrats and Ed Balls of Labour will play along remains to be seen. Both have rejected Cameron’s in/out referendum proposal, so unless the Conservatives win an outright majority in 2015, it will not come to pass.

Many in continental Europe are now furious and hurt over Cameron’s new tactic. Instead, they should see it as nothing more than a high-risk attempt to gain leverage to extract more concessions and seek more influence over EU policy.

Cameron’s strategy is risky. The added uncertainty could dampen the UK economic recovery as businesses hold off investing until the issue is settled. Because the terms of the United Kingdom’s access to the European Union’s Internal Market will be up for discussion in a UK exit, foreign direct investment (FDI) into the United Kingdom from outside the European Union may suffer. In addition, financial markets may decide that the United Kingdom is not such a safe-haven outside the European Union without access to the Internal Market. Their doubts could expose UK debts to credit downgrades and other volatility. Such market deterioration may then lead to a decline in the exchange rate of the British pound (GBP). Some economists would view a devaluation as a prerequisite for new export-driven growth. But it is hard to maintain one’s status as a credible global financial center if your own currency is dropping like a stone.

Another risk for Cameron lies across the Atlantic. The Obama administration has signaled that the United Kingdom should remain inside the European Union, raising doubts about Cameron’s ability to maintain the “special relationship” with Washington. As the United States focuses increasingly on the Asia-Pacific region, traditional security ties between the United States and the United Kingdom might count for less. Economically, the relationship is seen in Washington as predicated on the United Kingdom’s EU membership. Australia and other countries might try to upgrade their own “special” foreign and security policy ties to Washington in response. Finally, and by far the most important element, Cameron’s political strategy depends on forging a “new settlement” to put before the British people in his referendum. A rebuff by his EU partners would “make more likely our eventual exit,” as Cameron had put it, leaving unclear how he would handle that situation.

But is such a European rejection likely? Not really. Like Americans, Europeans love to gripe about how their government works. The United Kingdom’s grievances are probably shared by others. The French, Germans, and others should peruse what Cameron means when he talks about shaping a “21st Century European Union.” European leaders will surely dismiss new British demands for special treatment (“cherry-picking”) as a recrudescence of Margaret Thatcher’s demands for budgetary relief in the 1980s, or a veto over financial services regulation. But they may be receptive to other requests.

If they look carefully at Cameron’s speech, they might see that might of it is very pro-European. Would a Conservative Prime Minister and genuine euro-skeptic end with these lines?

And when the referendum comes let me say now that if we can negotiate such an arrangement, I will campaign for it with all my heart and soul.

Because I believe something very deeply. That Britain’s national interest is best served in a flexible, adaptable and open European  Union and that such a European Union is best with Britain in it.

Over the coming weeks, months, and years, I will not rest until this debate is won. For the future of my country. For the success of the European Union. And for the prosperity of our peoples for generations to come.

More important, the speech draws no red lines and makes no explicit non-negotiable demands for additional UK op-outs from existing institutions. The United Kingdom may not want to join new European institutions, but that is another issue related to increased future flexibility in Europe. This is hardly “cherry-picking.” Indeed, Cameron seems to have a pretty low bar for what he will accept as a “new arrangement” for Britain.

He cites five guiding principles, for example:

1. Competitiveness: Deepen the Single Market, cut red tape, open up trade, and reform the European Union’s institutions.

2. Flexibility: Embrace the diversity of the European Union, rather than insisting on one-size-fits-all.

3. Power: Must be able to flow back to member states; the European Subsidiarity Principle must work in practice.

4. Democratic accountability: A bigger role for national parliaments.

5. Fairness: The changes brought by the euro area crisis must not undermine the integrity of the Single Market (as was the case with the recent agreement on establishing a Single Supervisory Mechanism for banks), were adequate minority protection extended to non-euro area member states.

These principles are vague, but they signal that Cameron is not asking for things that are unacceptable to everyone else in Europe. Yes, many in Brussels and the EU parliament will hate the call for a bigger role for national governments (inter-governmentalism) and as good eurocrats and EU parliamentarians are against subsidiarity (which holds that policies should be executed at the lowest possible level of government) and the transfer of powers away from the Center. French dirigiste leaders may not like the idea of flexibility and can be expected to oppose compromises with non-euro members. But these give principles will find sympathy in many parts of Europe.

The same is true for the three major challenges Cameron outlined for the European Union. These were that the euro area crisis requires institutional deepening of the common currency area, necessitating changes for all members; that the European Union faces a competitiveness crisis; that that there is a democratic deficit in many of its technocratic but far reaching decisions. Undoubtedly, Brussels and some elected leaders concerned about public demands for direct democratic accountability in their own countries hate referenda for good reason. They dislike the uncertainty these invariably bring. But few in Europe would disagree with Cameron’s overall assessment. Chancellor Angela Merkel of Germany would likely echo the focus on competitiveness problems. Cameron has thus created political space for constructive negotiations on his proposed “new arrangement.”

The same is true for Cameron’s demands to expand the Internal Market into services, energy, and the digital economy; striking transformative free trade deals with the United States, Japan, and India; and perhaps exempting some of Europe’s upstarts from national and EU regulations. Several of these are already initiated and on a trajectory toward implementation by the time of a British referendum in 2017. Surely EU members will disagree on the details of these demands, but the Prime Minister has set up some assured successes that will help him claim that a “new arrangement” has been achieved.

The situation is similar with respect to a “flexible union,” because many EU member states are disappointed about the lack of subsidiarity to date. The United Kingdom will likely disagree with other member states on this. There will be wrangling over working times for hospital doctors or other environmental and social affairs issues, for example. But just because there is a great deal to discuss does not mean that an agreement can never be reached. Many EU leaders favor a new Treaty revision in the medium-term.

The French government will surely be unhappy about Cameron’s decision for its own reasons. Former President Jacques Chirac called the ill-fated French 2005 referendum on the EU Constitution in response to Prime Minister Tony Blair’s promised one in the United Kingdom. (Blair never had to hold one following the Dutch and French rejections.) President François Hollande will not want to revisit the referendum path, which split his Socialist Party in 2005. (The current foreign minister, Laurent Fabius, led the Socialist opposition.) But other EU leaders will be far more receptive to engaging with Cameron in the constructive spirit of his proposals.

Cameron’s vow to hold the referendum is of course meant to raise the stakes for other EU leaders and, more importantly, for the British people and his fellow Euro-skeptic Tories. Ironically, Euro-skeptic Conservatives have likely committed hubris in this demand, because British voters will likely think twice about voting no. They will have to face the severe consequences of a rejection. Unlike other European referenda — in Denmark, Ireland, and elsewhere, where the issue was adopting the euro or accepting a new EU Treaty, and a no vote meant continuation of the status quo — an in-out referendum in the United Kingdom would lead to the most dramatic changes in British voters’ lives. Even British voters will likely think twice before voting no to some relatively modest changes when the alternative is so stark.

Cameron has set a low bar for what he will accept in order to campaign in favor of a yes in any referendum. Given his control over what Britain might accept, he has a reasonable chance to withstand impossible demands from the Euro-skeptics. If Cameron gets concessions from Brussels, he can neutralize his backbenchers, who will be reluctant to split the Conservative party and doom it to electoral irrelevance over the issue of a British exit. Cameron, with the support of British business and the two other major UK parties, should feel confident of winning the referendum, settling the issue, and silencing the mossbacks for a generation.

It remains uncertain whether there will be a referendum, because Cameron must first win the next election in 2015, which seems unlikely. And it seems unlikely that a referendum can come as early as 2017, as the euro area timetable for any revision of the EU Treaty is probably only after German and French elections in 2017. Accordingly, 2018 or 2019 looks a more realistic timetable.

If there is a referendum following appropriate revisions in the EU arrangements sought by the United Kingdom, its chances look good. And so pundit projections of a UK exit from the European Union will turn out to be as misguided as their recent erroneous prophecies of other imminent departures from the euro. Just as the euro area has proven more resilient than many expected, so will the European Union. The United Kingdom will not end up leaving.

Copyright © 2013 the Peterson Institute.

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