On the face of it the Euro-Zone crisis will have served as a great boost for British Eurosceptics. They, and their supportive London media, can now argue that the original decision of the British government to stay out of the Euro-Zone has been vindicated. They can also argue that Britain’s best interests are served by retaining its central bank and its ability to vary – that is, devalue – its currency. Indeed this line of argument is the oft-repeated claim not only of Conservative Eurosceptic politicians, but also of opposition leaders like Ed Balls, Labour’s Shadow Chancellor – who was a leading voice in both the Blair and Brown government against entry.
Yet, to believe that the Euro-Zone’s woes make Britain more Eurosceptic, and more likely to distance itself from the continent, is rather superficial. For a deeper analysis will show that the Euro-Zone crisis may be having the exact opposite effect on British thinking – for, rather than creating a more isolationist approach it is simply reinforcing a basic truth: that Britain’s future is inextricably bound up with that of the continent.
Britain and Europe – We are all in it together
For instance, Europe’s crisis is serving to show just how dependent upon Europe the British economy has become. In many respects George Osborne, the Eurosceptic Tory Chancellor in the coalition government, may be inadvertently playing into this theme. For political reasons he has been promulgating the idea that the major threat to the British economy has been the sovereign debt crisis of the Euro-Zone – so that, should Britain’s economy worsen, he can then deflect the blame to Europe. Yet, by so elevating Europe’s importance to Britain he is simply reinforcing the notion of how intertwined we are with Europe – and how we share the same fate. To coin a phrase he is cementing the view that ‘we [Europeans] are all in this together’.
As indeed we are. The EU remains by far the largest market for British exports. Indeed it is a revealing fact, as recent Office of National Statistics figures show, that British exports to the ‘Club Med’ countries remains roughly four times the exports to China, and that over the last few months the percentage of our exports to the Euro-Zone has gone up and those into the rest of the global economy has gone down.
But, above all, it is Britain’s fragile banks that increasingly under-line the importance of our EU membership and our close relations with the Euro-zone. The fact is that the health of Britain’s large and over-extended banks in the City of London are inextricably bound up with the health of the Euro-zone. For instance, should any Euro-Zone country go bust then the knock on effect on the City of London would be immediate and devastating. Should Greece go bust then the crisis in the French banks would spread quickly to London. Should Ireland go bust then Britain’s largest bank, RBS, would be in serious trouble. And should Spain go bust then Barclays would be in the immediate firing line. With such deep financial interconnectedness now a reality, the idea that Britain and the Euro-Zone can de-couple is highly fanciful.
And then there is the role of the European Central Bank ( the ECB). The fact is that this Frankfurt-based Euro-Zone central bank, though not technically Britain’s central bank, has nonetheless played a major role in keeping the UK financial system afloat – certainly so since the arrival of its new Chairman, Mario Draghi. For, through its new ‘Three Year Financing’ operations for Euro-Zone banks (with some of this money going directly to British banks) the whole EU banking system has been stabilised. Indeed so aware is the British government of the ECB’s stabilising effect that London has become an advocate for the ECB taking a bigger, not smaller, role – and it has even called for the ECB to mutualise the Euro-Zone debt. The London government has also become a keen supporter of the Euro bailout fund – a major supranational measure that increases the role of the centre and can form the core of a future Euro-Zone Treasury.
The British Government seems to warm to the Single Market
The British coalition government, increasingly aware of this dependency on Europe’s health, is now becoming a major advocate for the country’s membership of the single market and the EU, just as the Eurosceptics are beginning to question our membership. Indeed the single market is now becoming the political battleground in Britain – as political debate begins to centre on the role of the EU in regulating the City of London.
In this connection David Cameron’s recent supposed veto of the Fiscal Pact looks utterly foolish. For he failed to block the pact; but at the same time he alienated Britain’s natural allies on the continent, and is now highly unlikely to secure a blocking minority to weaken and ‘lighten’ the coming regulatory touch. Therefore the Eurosceptics in the Conservative party are now faced with either having to accept EU rules for the City or start a serious political campaign for pulling out of the EU altogether. Already there is a school of thought that seeks such a pull-out from the EU and the development, instead, of a wholly ‘global role’ for Britain’s finance industry.
Yet, the truth of the matter is that there is simply no majority in Britain for pulling out of the EU single market. Apart from any other consideration such a move, or even an attempted move, would de-stabilise the government – as the the Lib-Dems would not agree to it – split the Conservative party and cause a serious financial panic. Indeed, as global markets turn down, and protectionism rises in the global East, British industry, including its financial sector in the City, is likely to become more, not less, integrated in the single market.
And, in the medium-term future, the next step will be for the Euro-Zone to regularise its relationship with the peripheral outs like Britain and Poland. The Kohl compromise at Maastricht – in which Britain could enjoy the fruits of the single market but still devalue its currency when things get tough, has lasted longer than many imagined. But it must soon run out. Ultimately, the single market without a single currency will not be possible. And although the current problems of the Euro-zone may have given British Euroscepticism something of a temporary boost, Britain’s future – especially in this dangerous, increasingly protectionist world – still lies with Europe (and that, ultimately, must mean with the Euro too!)