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22 November 2012

Graham Bishop: Is Cameron setting course ever more firmly for de facto Brexit?


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The 'final act' of the EU budget negotiations is now underway in Brussels. In economic terms, this is something of a 'hurricane in a teacup', as the spending itself amounts to just 1 per cent of the combined GDP of the EU. But the political nuances may be critical for Britain's future in the EU.


Discussions on the Van Rompuy Final Report 'Towards a Genuine EMU' (link to my comments on the Interim Report in October) have virtually halted while the Multi-annual Financial Framework (MFF) dominates attention. Yet the Summit to decide on this far-reaching Report is only three weeks away! In fact, there may not be enough time to have a formal final report, as it would have to be circulated for comment shortly.

The work streams associated with this report illustrate its potential significance:

  1. Integrated Financial Framework (including single banking supervision, common deposit insurance and a resolution framework);
  2. Integrated Budgetary Framework (including a qualitative move towards a fiscal union);
  3. Integrated Economic Policy (including labour mobility and tax coordination);
  4. Democratic legitimacy/accountability (including close involvement of the European and national Parliaments).

The financial topics that will fall under these discussions include public spending averaging 49 per cent of GDP in the euro area, public debt at 94 per cent, and a banking system that is around twice GDP. So the MFF is really a political event, rather than of any great economic significance.

The significance of the MFF debate

The European Commission describes the budget process as “Annual EU budgets shall comply with the multiannual financial framework laid down in a unanimously adopted Council Regulation with the consent of the European Parliament. The financial framework sets the maximum amount of commitment appropriations in the EU budget each year for broad policy areas ("headings") and fixes an overall annual ceiling on payment and commitment appropriations.”

The political significance flows on two counts:

  1. The well-known need for unanimity amongst all 27 Member States that gives rise to the opportunity of vetoes from individual Member States – including the UK.
  2. The requirement for the consent of the Parliament to any deal. The Parliament has repeatedly shown itself to favour a `federation of nation states’ – with the natural result of a relatively larger central/federal budget at the expense of the national budgets. Any agreement amongst the States should not be assumed to be rubber-stamped by the Parliament.

Indeed, a failure to agree a new budget does not mean a halt to spending – just a continuation of the present pattern until something new is agreed. Some may argue that would be a good outcome until the much larger debate about the future of Europe is settled in the next couple of years. No new agreement would result in a rise in the UK contribution to Europe  – probably causing apoplexy amongst the Conservative back-benchers – allied to the opportunistic Labour Party of last week rather than this week’s pro-European version – who boxed Cameron into his 'veto' position.

The UK’s European policy is now achieving results rather swiftly – and perhaps on the brink of acquiring an unstoppable momentum. The trend is clear:

  • 9 December 2011: Cameron cast a celebrated veto to stop something, but no-one was quite sure what it was that stopped. Since then, 25 States have agreed (and the Czech Republic will probably join in when the President changes in a few months) a Treaty on economic governance (TSCG) that does NOT require unanimity to come into force – only 12 of the 17 euro area states. The plan is to fold this into the main European Treaty (TFEU) within five years. Will that new Treaty abandon unanimity as well?
  • The UK recently announced its intention to opt out of a swathe of Justice and Home Affairs (JHA) measures.
  • ECOFIN has just decided to proceed with a financial transaction tax (FTT) under `enhanced cooperation’ – principally to exclude the UK from the decision.
  • Banking Union is enmeshed in a theological debate about how to accommodate the non-euro area members in the governance arrangements. It looks increasingly likely that the legal uncertainties are such that it may be safer to roll some of the regulatory changes into the new Treaty that seems probable in about 2015. Would that new arrangement require unanimous assent or follow the TSCG approach of say a two-thirds majority?
  • The latest thinking on the MFF has already moved to the possibility of a new arrangement that excludes the UK in some way. Would that be under `enhanced cooperation’ that still requires a qualified majority of the existing states to proceed for a subset that must include at least nine states? Or just carry on with the existing pattern rolled over year by year until a 2015 Treaty revision can settle several issues at once.

In just under a year, the UK has forced the rest of the EU to find ways of excluding it from several major areas. As negotiations get underway on the profound proposals likely to flow from the agreement on the HvR Report, has Prime Minister Cameron succeeded in creating an irreversible momentum to Brexit [British exit  from the European Union] in about 2017? Should foreign holders of UK assets – financial or industrial – begin to wonder (and then plan) about how to deal with this momentum?



© Graham Bishop


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