Fret not, Britain has yet to isolate itself

Donaldson Tan

David Cameron, Prime Minister of the United Kingdom

David Cameron: EU membership is vital to Britain

Deputy Prime Minister Nick Clegg has lashed out against Prime Minister David Cameron over the apparent isolationist stance the Prime Minister took on the new revisions to the Lisbon Treaty, reason being that the other European Union (EU) leaders would not agree to the safeguards he demanded for the European Single Market and the British financial sector.

According to the Guardian, Clegg had spent the weekend contacting European leaders in order to recover lost ground, in response to the Prime Minister’s diplomatic manuevre. In Clegg’s view, Britain risks becoming isolated and marginalised from the European mainstream and, along with senior Liberal Democrats,

The underlying theme behind the dispute is the Eurozone debt crisis. EU member states are unwilling to fund budget deficits due to the belief that the money lent will never be returned. The crisis has affected Greece, which has now defaulted in all but name. Germany is not spared too. In November 2011. the German government was unable to sell 35% of the €6B 10-year bonds it offered to the market.

The British veto is no less controversial than the revision to the Lisbon Treaty as the revision indicates a shift towards a closer fiscal union among EU member states. Such a fiscal union would dilute the sovereign powers of member states. For example, national budgets will require EU-level approval while member states will have to coordinate on all areas of economic policy as well as taxation. Yet, the purpose of these measures is to avoid EU member states from issuing unsustainable public debt in future.

The abovementioned point is often overlooked because the fiscal compact came at a time of growing public indifference about the value of the EU for pulling member states out of the current economic quagmire. Populist political parties are also tapping into the growing Eurosceptic undercurrent and their support are on the rise, especially in France, Netherlands, Finland, Sweden and Austria. Securing parliamentary approval for the fiscal compact arrangements may not prove straightforward over the coming months.

Moreover, the fiscal compact features prominent political oversight which may not be favoured by the financial markets. A process replete of political haggling over the arrangements to make the compact as credible as possible over the coming months may drive the interest rates of sovereign debts into unsustainable territories while the outlook for European economic growth continues to be bleak.

Last but not least, the fiscal compact agreed in Brussels does not appear to create the homogenous “Federal” core that Paris had envisioned as an antidote to the unruly band of EU-27 member states. In fact, when the Euro currency was just launched back in the 1990s, few EU member states (including Britain) chose to opt out of the Eurozone lest it proves to be a success in future.

It will be very difficult for EU member states to collectively deliver and maintain the fiscal discipline and political cohesion required for the fiscal compact, given the different levels of economic competitiveness and heterogenous approach towards European integration. As a result, there will be plenty of opportunities for Britain to influence the European integration process. Britain is probably the first EU member state to officially acknowledge there will be difficulties in implementing the fiscal compact. In another words, the negotiation table actually remains open to Britain.

Photo courtesy of Andrew Yates, AFP Photo.