12 November 2012

Hugo Dixon: Brexit could come before Grexit

Investors have been obsessed with the notion of "Grexit" – Greece's exit from the euro. But "Brexit" – Britain's exit from the European Union – is as likely if not more so, comments Dixon for Reuters.

David Cameron’s Conservative Party, the governing coalition’s dominant group, delights in pointing out the flaws in the single currency. The party’s eurosceptics feel vindicated because they have long believed that monetary union was only possible with political union.

But “I told you so” is never a good way of endearing oneself to others. What’s more, the idea that greater integration in the eurozone has “remorseless logic” – as Britain’s finance minister, George Osborne, puts it – directly undercuts the country’s national interest. The more the 17 countries in the single currency club together, the more the UK will be left out on the fringe.

If the Tories weren’t so keen to prove the point about how right they had been, they would be able to articulate an alternative way of keeping the euro together based on two key principles: more flexibility at the level of both nation states and the single market so economies can weather shocks; and the use of market discipline rather than bureaucratic rules to prevent banks and governments borrowing too much money and hence requiring taxpayer bailouts.

Such a vision would play to the UK’s national interest. London has long wanted a more open, market-orientated Europe. But, unfortunately, the government has been urging the eurozone in the direction of further integration – only to realise belatedly how bad this could be for Britain’s interests.

This is most apparent with the eurozone’s current push to create a single banking supervisor. It’s far from clear that this will actually help solve the current crisis. But it will certainly create problems for Britain as all 17 members of the zone will vote as a single bloc on future banking regulations.

Given the importance of the UK’s financial services industry, such a prospect is extremely unappealing. But London hasn’t made any progress in persuading its partners to change the voting system to preserve its influence. This, in turn, is partly because the government has made a habit of burning rather than building bridges.

The problem is that the UK is unlikely to secure big changes in its relationship with the EU. So the path Cameron is treading could easily lead to a vote on whether to stay in the EU at all.

This wouldn’t matter if the UK had a rosy future outside the EU. But the country’s economy is closely entwined with the EU, which accounted for 47 per cent of its trade last year. It is naïve to think that Britain would get full and fair access to the single market if it wasn’t a member. What’s more, it would still have to play by Europe’s rules to trade in its market.

Britain’s business community doesn’t seem to have woken up to the threat. If it waits too long, it may find the momentum for a Brexit is too strong to resist.

Full article

© Reuters