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Britain and the EU: In or Out?

By FT reporters

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By undertaking to put EU membership to a referendum by the end of 2017, David Cameron has opened the possibility that Britain may quit an organisation that has been vital to its political and economic life for four decades.

The Tories began falling out love with Europe more than 30 years ago when Margaret Thatcher demanded cuts in Britain’s contribution to Brussels. Then came the Iron Lady’s clashes with Jacques Delors, the head of the European Commission, a treaty on monetary union she always opposed and Britain’s humiliating departure from the European exchange rate mechanism.

The political reality is that for too many Tories, Europe has become an obsession.

Mr Cameron may find it hard, if not impossible, to stay on his European tightrope.

The thousand years of history so beloved of Margaret Thatcher and the Eurosceptics are central to a myth created by the Victorians as an explanation of the historical inevitability of the British empire. This version of the past casts England as a nation always cut off from the European continent; sees parliamentarianism and democracy as a uniquely English invention; and deliberately ignores the central role of our continental neighbours – as well, incidentally, of Scotland and Wales – in shaping the present.

Coming to terms with what is now known as the European Union demanded that Britain also come to terms with the retreat from past glory. Political leaders have shunned the challenge.

Alongside superiority lies insecurity. The psychology is that of the victim – the nation is ever under attack from Brussels.

The politicians are not alone to blame. Much of what might be called call the Whitehall establishment was long a bastion of the Euroscepticism that came with Britain’s innate sense of its own superiority.

The European Union has now set in stone a two-speed Europe. Britain will be outside a new intergovernmental treaty which has the backing of the EU’s 26 other member states: the nine other non-euro members said they were looking to join the 17 that use the single currency, subject to parliamentary approval. Britain looks to be on its own.

“Nobody understood what Cameron wanted – nobody,” said one diplomat from a central European country that might be considered a natural ally of the UK. “We were talking about big things, saving the euro, and he was asking for peanuts. It was not the time or place.”

European parliament, said Mr Cameron’s plan would have gone down like “a rat sandwich”. He added: “David Cameron has today relegated Britain to the second division of Europe.”

If there was a moment when the shape of the EU’s next long-term budget began to reveal itself through a haze of spreadsheets and obscure jargon, it may have been Thursday afternoon about 4pm.

When the deal was finally agreed – after more than 25 hours of frenzied bargaining – Mr Cameron emerged the principal victor in a €1,000bn contest that had played out in the corridors of Brussels and the Europe’s other capitals for more than 18 months. Above all, he can claim to have won the first-ever reduction in EU spending – a trophy for a British Conservative premier – while defending the sacrosanct UK budget rebate negotiated by Margaret Thatcher when she was prime minister at a French-chaired summit in Fontainebleau in 1984.

The final compromise fell almost precisely on the lines that Berlin had set out months ago, by setting the spending ceiling at 1 per cent of EU gross national income, or €960bn. (The package also includes a further €37bn in off-budget items). That was more generous and more flexible than Mr Cameron wanted. *

The British establishment would unite behind a “yes” campaign if a vote occurs in 2017, with the unions and CBI employers’ group signalling that they would join the Tory, Labour and Lib Dem leaderships in doing so.

Tory and Labour nerves could be shredded in 2014 if Ukip wins the European elections, only a year before the next general election. Many at Westminster now believe it is only a matter of time before Labour and the Liberal Democrats are forced to match Cameron’s promise of an EU referendum.

How the banking union will evolve remains uncertain. Much will depend on the European Central Bank’s view of its mandate. Yet when asked what the implications were for London, Christian Noyer, France’s central bank governor, was candid: there is “no rationale” for the City remaining an “offshore” financial centre to the eurozone. “We’re not against some business being done in London, but the bulk of the business should be under our control,” he said, citing financial stability reasons. One British diplomat said the comments “at least show we are not paranoid”.

The banking union debate is one skirmish in a longer battle to clear space for Britain and an integrated eurozone to coexist. “It is quite important for the UK to be realistic about what is at stake and realistic about what the UK prospects are if it should leave the EU,” said Thomas Huertas, a former senior UK bank regulator now at Ernst & Young. “There is no God given right for London to remain the financial centre of Europe.”

“We fear that a tenuous bond between Britain and the rest of the EU will lead to fewer foreign companies, especially the small and medium-sized ones, operating in the UK, as it will lead to a higher administrative burden for them,” said Klaus Peter Fouquet, chairman of the German-British Chamber of Industry and Commerce.

A poll by the British Chambers of Commerce found almost half backed renegotiation, while 26 per cent wanted to retain the status quo and 12 per cent want to leave the EU.

The Obama administration’s surprise intervention into Britain’s debate about Europe reflects mounting anxiety in Washington that its most reliable European ally could be on a path to international isolation and even irrelevance, according to officials and analysts.

“The worst-case scenario for the US is that the UK leaves the EU and Scotland leaves the UK,” said Charles Kupchan, former director of European affairs at the National Security Council, who now teaches at Georgetown University in Washington. “The fear is that the UK will become a bit player in global affairs. That is a worry to an America that essentially sees the UK as its go-to partner.”

“Europe is the cornerstone of our global engagement, so the conversation about Europe’s future is critically important to the US.”

Over the past two decades, the US and UK have had similar interests in many of the key EU issues, with both governments keen to see continued market liberalisation and enlargement to include central and eastern Europe.

The United Kingdom has long been a reluctant European. From the moment of accession to the then European Economic Community, four decades ago, its membership has been marked by misguided assumptions and missed opportunities.

For the foreseeable future, therefore, the EU will be divided not only between those inside and outside the eurozone “core”; but also between an area of strong northern European creditors led by Germany and one of weak southern European debtors including Cyprus, Greece, Italy, Portugal and Spain.

The benefits stretch across national frontiers. Thanks to the single market, the British can live, work, travel and study freely across Europe. Enlargement of the EU southward and eastward has consolidated democracy in Spain, Portugal and Greece and created a zone of peace and prosperity in former communist central and eastern Europe. Nonetheless, today’s EU is vastly different from the one the UK joined in 1973, or indeed the one Britons voted to stay in when they were last given a chance to express their views in a referendum in 1975.

The national interest may well dictate that Mr Cameron – or a future government – codifies the relationship between the UK and a new bloc led by Germany and France.