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On Monday, Prime Minister Cameron will brief the House of Commons on the Summit results. Doubtless, cheers from the “band of 81” backbenchers will ring out. How long before the cheers turn to tears? All the talk in Britain is about contingency planning for the probability (?) that the eurozone breaks up. Perhaps there should also be a corresponding amount of planning for the consequences if “they” succeed in keeping it together.
This note[1] is based on the assumption that the set of agreed economic governance measures does succeed in stabilising the euro area in the next year or so and then creates a firm foundation for rising competitiveness, associated with sound public finance. At that stage, the 17 euro area states will be operating as a cohesive economic unit, and the other adherents to the new “international agreement” may well support the euro area on many occasions.
In 2014, the new double-majority form of Council voting weights will become operational and the non-euro states will not have a blocking minority - even if they wish to act together. The fact that six non-euro states have signed up for the agreement already suggests the signatories will almost always have a massive weighted majority. The statement by the euro area Heads of State or Government (euro HOSG) committed to “active use of enhanced cooperation…without undermining the internal market”.
In the future, the UK can expect to be systematically out-voted on single market measures that are properly within the text of the existing Treaties – unless the force of the UK’s intellectual arguments is extremely powerful. Naturally, cautious Commission lawyers will not permit proposals that breach the letter of the Treaty, but the spirit may matter just as much in practice. The risk to the UK – both the City and industry – is the application of “murky protectionism”. The risks of this type of problem were spelt out in the 2009 book[2] “The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20”.
It is still not clear exactly what the UK “red lines” were. Certainly, 30 Tory Parliamentarians wrote to the Daily Telegraph on the day of the Summit and argued that: “The most troubling [EU proposals] include a unilateral, EU-wide financial transactions tax …, a ban on some short selling and a European Central Bank proposal that transactions on euro-denominated financial products are only cleared in the eurozone".
These UK Parliamentarians seem unaware that the short selling measure was agreed by the European Parliament in Plenary on 15th November and only awaits the final, but now only formal, agreement of the Council. The location of the clearing of euro-denominated securities hardly seems to rank amongst the major issues facing the UK economy today. This spat is the more surprising as the final clearing of sterling securities takes place in the UK, and everyone feels that to be perfectly natural. As for the FTT, EU officials always point to the long-standing and successful application of stamp duty in the UK. (Ironically, the tax was introduced in 1694 to fund a war against the French!)
It is certainly true that there is a great wave of regulatory change sweeping across the EU – but the impetus for that came from the G20 agreements after the financial crisis struck. These agreements were signed by the UK government of the day. Indeed, Prime Minister Brown claims some of these as his greatest achievements. But the current government has not sought to repudiate these agreements and Prime Minister Cameron happily signed the G20 communiqué in Cannes in November.
Extracts from Cannes Communiqué of G20: “In Washington in 2008, we committed to ensuring that all financial markets, products and participants are regulated or subject to oversight, as appropriate. We will implement our commitments and pursue the reform of the financial system …. We have agreed on comprehensive measures so that no financial firm can be deemed “too big to fail” and to protect taxpayers from bearing the costs of resolution…. We have decided to develop the regulation and oversight of shadow banking. We will develop further our regulation on market integrity and efficiency, including addressing the risks posed by high frequency trading and dark liquidity. We have tasked IOSCO to assess the functioning of Credit Default Swaps markets. We have agreed on principles to protect financial services consumers…. We will not allow a return to pre-crisis behaviours in the financial sector and we will strictly monitor the implementation of our commitments regarding banks, OTC markets and compensation practices.”
At the corresponding Summit 20 years ago, the Treaty of Maastricht was agreed and the UK gained an opt-out from joining the single currency. Markets and media may react in a flash, but society and politics march to a slower beat. The splits that opened up in 1991 have now become a crevasse. In August, this author warned[3] that the death knell for Britain’s membership of the EU might be tolling. The sound of the bell is now deafening.
Is it too late for the UK to change course and think more of the 3 million jobs that depend on physical trade with the EU? The consequences of today’s decision may have to be felt in practical, painful terms before there can be any reconsideration. But it is difficult to imagine Prime Minister Cameron retracting his historic words. So it may fall to a new Parliament in 2015 to revisit the matter.
[1] Another note will be issued shortly assessing the significance of the summit for the euro area.
[2] Edited by Richard Baldwin and Simon Evenett, Vox
[3] Graham Bishop: Merkel/Sarkozy letter - historic steps for the eurozone… but could they spell the death knell of Britain in the EU?