Investors have been obsessed with the notion of Grexit — Greece’s exit from the euro. But Brexit — or Britain’s exit from the European Union — is as likely, if not more so. The country has never been at ease with its E.U. membership. It refused to join the Union’s predecessor, the European Economic Community, in 1957; it was then blocked twice from becoming a member by Charles De Gaulle, the former French president, in the 1960s; and two years after it finally entered in 1973, it held a referendum on whether to stay.
The euro crisis has put further pressure on this difficult relationship. The Conservative Party of Prime Minister David Cameron, the governing coalition’s dominant group, delights in pointing out the flaws in the common currency. The party’s euro-skeptics feel vindicated because they 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 is more, the idea that greater integration within the euro zone has “remorseless logic” — as George Osborne, the British chancellor of the Exchequer, puts it — directly undercuts the country’s national interest. The more the 17 countries in the common currency club together, the more Britain will be left out on the fringe.
If the Tories were not so eager 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 common market so economies can weather shocks; and the use of market discipline rather than bureaucratic rules to prevent banks and governments from borrowing too much money and hence requiring taxpayer bailouts.
Such a vision would play to Britain’s national interest. London has long wanted a more open, market-oriented Europe. But, unfortunately, the government has been urging the euro zone in the direction of further integration — only to realize belatedly how bad that could be for Britain’s interests.
This is most apparent with the euro zone’s current push to create a common banking supervisor. It is far from clear that that would actually help solve the current crisis. But it would certainly create problems for Britain, because all 17 members of the zone will vote as a single block on future banking regulations.
Given the importance of Britain’s financial services industry, such a prospect is extremely unappealing.
But London has not made any progress in persuading its partners to change the voting system to preserve its influence. That, in turn, is partly because the government has made a habit of burning, rather than building, bridges.
Mr. Cameron’s biggest error was to veto the “fiscal compact” last year. It binds euro zone countries to budgetary responsibility. The proposal was not even going to affect Britain. Moreover, the rest of the European Union got its own way anyway by signing a new treaty that did not involve Britain.
The current battle over the E.U. budget could lose London even more friends. Britain’s position that now is not the time to increase Brussels’s budget — given the strains on public finances — is reasonable enough. But its threat to exercise its veto again makes it look like a spoiler.
Matters have been made even worse by the way the Labour opposition has behaved. Last month, it backed a motion from dissident Conservative lawmakers calling for a cut in the budget. This unholy alliance makes Labour also look like an unreliable partner in Continental capitals.
The risk is that Britain will get into a series of battles with the rest of the European Union — in the process of which London would feel marginalized and, in response, would become increasingly shrill in its demands. A fractious relationship would then be the backdrop to the next election in 2015.
Mr. Cameron is under pressure from large sections of his party to pull out of the European Union — not least because the United Kingdom Independence Party, a staunchly euro-skeptic party, is eating into its electoral support.
The prime minister is attempting a compromise: He wants to renegotiate Britain’s relationship with the European Union by repatriating certain powers to London. He would probably then put the resulting deal to the people for approval.
The problem is that Britain is unlikely to secure big changes in its relationship with the European Union. So the path Mr. Cameron is treading could easily lead to a vote on whether to stay in the European Union at all.
Meanwhile, Labour is afraid that the Conservatives could score points in the next election if it does not also promise a referendum on Britain’s relationship with the European Union. Edward Miliband, Labour’s leader, seems to think he could win such a vote. But it would be an uphill battle: 49 percent of the electorate would vote to pull out of the European Union, compared with 28 percent who would want to stay in, according to a poll last week by the research group YouGov.
This would not matter if Britain had a rosy future outside the European Union. But the economy of the country is closely entwined with that of the European Union, which accounted for 47 percent of its trade last year. It is naïve to think that Britain would get full and fair access to that common market if it were not a member. What is more, it would still have to play by Europe’s rules to trade in that market.
The British business community does not seem to have awakened to the threat. If it waits too long, it may find the momentum for a Brexit is too hard to resist.
Hugo Dixon is the founder and editor of Reuters Breakingviews.
Article source: http://www.nytimes.com/2012/11/12/business/global/12iht-dixon12.html?partner=rss&emc=rss