F E

May 2013

The EuroFuture Project

Paper Series
The Difficult Case for British Membership in the EU
by Hans Kundnani
Whether or not David Cameron wins a second term as prime minister in the general election that must take place by 2015, it now seems likely that there will be a referendum on British membership of the European Union at some point. The promise that Cameron made in January 2013 to hold an in/out referendum strengthened him and his party against the increasingly popular United Kingdom Independence Party (UKIP), which until then was the only mainstream party calling for a referendum.1 But the Labour Party now risks being seen as the anti-referendum party, as a senior Labour figure told The Economist last year.2 It will therefore come under increasing pressure to promise a referendum or lose Euroskeptic voters to the Tories. Leading Labour figures are clearly conflicted. For example, Peter Mandelson last year endorsed a referendum but has since described it as an insane idea.3
1 Camerons speech on January 23, 2013 is available at http://www.number10.gov.uk/news/eu-speech-atbloomberg/. 2 See Britain and Europe: making the break, The Economist, December 8, 2012, http://www.economist. com/news/briefing/21567914-how-britain-could-fall-outeuropean-union-and-what-it-would-mean-making-break.

Summary: This paper discusses a possible British withdrawal from the European Union. It argues that such a withdrawal is now a real possibility but would be against Britains interests. However, it is difficult to see how Britain can remain at the heart of Europe, as some have urged it to. Rather, given that the U.K. is unlikely to join the single currency in the foreseeable future, pro-Europeans will need to make a more difficult case that the U.K. can retain influence from the margins of Europe. They will need help from sympathetic continental Europeans in trying to imagine a meaningful role for Britain in the third tier of a three-tier Europe.

However, though a referendum is increasingly likely, its outcome remains difficult to predict. Euroskeptics certainly have the upper hand in the debate at the moment. Above all, they have been strengthened by the euro crisis. Euroskeptics feel vindicated by the turmoil in the eurozone in the last three years and now argue that far from joining an economic powerhouse, weve shackled ourselves to a corpse, as the Conservative MP Douglas Carswell put it last year.4 As long as the crisis remains unresolved and the eurozone struggles to create economic growth, it will be the most powerful argument the Euroskeptics will have. The debate about the EU also now involves difficult issues such as immigration, which is increasingly associated not so much with the former British empire, as it used to be, as with central and eastern Europe. Meanwhile the left the natural constituency for the EU in the U.K. since the 1990s is struggling to find a way to make the case for British membership of the EU. Few even on the left want the U.K. to join the single currency and must therefore make the case for a role for Britain in the third tier of a three-tier Europe
4 Rowena Mason, Britain shackled to corpse of EU, says Douglas Carswell, Daily Telegraph, October 26, 2012, http://www.telegraph.co.uk/news/politics/9636417/Britain-shackled-to-corpse-of-EU-saysDouglas-Carswell.html.

1744 R Street NW Washington, DC 20009 T 1 202 683 2650 F 1 202 265 1662 E info@gmfus.org

3 Patrick Wintour, Mandelson calls for EU referendum, Guardian, May 3, 2012, http://www.ft.com/ cms/s/0/15a168c8-9545-11e1-ad38-00144feab49a. html#axzz22lltXbgP; George Parker, Mandelson attacks EU referendum move, Financial Times, March 27, 2013, available at http://www.ft.com/cms/s/0/0669bb1696ee-11e2-8950-00144feabdc0.html#axzz2OvTeQJbm.

F E

The EuroFuture Project

consisting of eurozone countries, pre-ins such as Poland, and opt-outs such as the U.K.5 Moreover, they must make the case for Britain to be part of an EU that is evolving in a way with which they feel uncomfortable. In particular, through the fiscal compact and other measures that have been taken in response to the euro crisis, the eurozone, led by an increasingly powerful Germany, has institutionalized austerity. Most on the left view macroeconomic questions in more Keynesian terms: they think simultaneous austerity at a time of recession is likely to increase rather than reduce government debt. However, with the debate about a possible British future outside the EU just beginning, it is by no means a foregone conclusion that the British population will vote to leave the EU. In fact, if the only precedent the referendum held on British membership of the European Economic Community (EEC) in 1975 is anything to go by, there are good reasons to think that the British may ultimately vote in favor of the status quo. Polling ahead of the referendum in 1975 showed most British voters wanted to leave the so-called Common Market, but in the end, two-thirds of them voted to remain in it. Peter Kellner, the president of the polling organization YouGov, predicts that although the campaign is likely to be scrappy and negative, something similar might happen again.6 This brief will argue that the U.K. should remain in the EU. But it is difficult to see how Britain can remain at the heart of Europe, as some, such as U.S. Assistant Secretary of State for Europe Philip Gordon, have urged it to.7 Rather, given that the U.K. is unlikely to join the single currency in the foreseeable future, pro-Europeans will need to make a more difficult case: that the U.K. can retain influence from the margins of Europe. In particular, they will have to show why, even as the EU evolves in problematic ways from a British perspective and perhaps even because of this it is in Britains national interest to remain within it. In
5 On the emergence of a three-tier Europe, see Charles Grant, A three-tier puts single market at risk, Financial Times, October 25, 2012, http://www.ft.com/cms/s/0/ eb4d532a-19dd-11e2-a179-00144feabdc0.html. 6 See Peter Kellner, Who might win a British referendum on Europe? European Council on Foreign Relations, October 5, 2012, http://ecfr.eu/content/entry/commentary_who_ might_win_a_british_referendum_on_europe. 7 See Jim Pickard, George Parker, and Richard McGregor, Stay at heart of Europe, U.S. tells Britain, Financial Times, January 10, 2013, http://www.ft.com/cms/ s/0/36314b08-5a70-11e2-bc93-00144feab49a.html#axzz2LTJEay5G. See also the letter by business leaders including Sir Richard Branson to the Financial Times, January 8, 2013, http://www.ft.com/cms/s/0/5fa57fbc-58e6-11e2-99e6-00144feab49a. html#axzz2LuVQ4fmO.

It is by no means a foregone conclusion that the British population will vote to leave the EU.
order to do so, pro-Europeans in the U.K. will need help from sympathetic continental Europeans in trying to imagine a meaningful role for Britain in a rapidly changing EU. From the Happy Situation to Halfway In Britains notorious semi-detached approach to Europe and its ambivalence about European integration are older than the EU. They go back to its traditional geopolitical role in Europe as offshore balancer. As a sea power, Britain sought to remain aloof from the European continent while maintaining a balance of power on it. In particular, it sought to stay out of continental European conflicts in order to pursue trade, and later an empire, beyond Europe. Thus Britain was, as Henry Kissinger put it, the one European country whose raison dtat did not require it to expand in Europe.8 However, Britain was nevertheless periodically forced to intervene in Europe order to prevent the emergence of a dominant continental power that could threaten its own security. Each time the balance of power had been restored and Britain was secure, it tended to revert to splendid isolation in relation to Europe in order to concentrate once again on its global empire. As the U.S. strategist Nicholas Spykman put it, its focus was the problems of the Congo rather than problems on the Vistula.9 The danger, however, was that when London thought it was in a commanding position in relation to its continental counterparts and focused on the world, it often took its eye off the European ball.10 As equilibrium in Europe eventually gave way to the

8 Henry Kissinger, Diplomacy (New York: Simon and Schuster, 1994), p. 70. 9 Nicholas Spykman, Americas Strategy in World Politics (New York: Harcourt Brace, 1942), p 105. I am grateful to James Rogers for this reference. 10 See James Rogers, British geostrategy for a New European Age, RUSI Journal (Vol. 156, No. 2, April 2011), pp. 52-58.

F E

The EuroFuture Project

domination of another continental power, Britain would once again be forced to intervene. Thus, Spykman wrote in 1942, British policy towards the European continent seems to move in a long series of cycles in which with monotonous repetition occur the stages of isolation, alliance, and war; shift of powers, isolation, alliance, and war; and so on ad infinitum.11 Spykman thought Britain would always choose isolation from Europe if it could. If Great Britain had her wish, she would never leave the stage of isolation, that happy situation that gives her freedom from worry about the eternal quarrels of the continental states, freedom to attend to her imperial affairs.12 However, although Britain sought to avoid alliances for as long as possible, the enchanting illusion of splendid isolation would always eventually be shattered. Ultimately, Britain was geographically part of Europe how much, she is now learning reluctantly under constant air-bombardment, he wrote.13 After World War II, everything and nothing changed. Even as it lost its empire, Britain continued to aspire to a global role, and trade with the Commonwealth was more significant than that with the countries that were to form the EEC. However, in the 1950s, as European economies grew, trade with the former empire began to decline. Following the Suez Crisis in 1956, British foreign policy focused above all on the special relationship with the United States and collective security through NATO, which also changed the British attitude to Europe. Although Britain remained aloof from the first steps in European integration in the 1950s, in 1973 it joined what was then the EEC a decision endorsed by two-thirds of voters two years later. Thus Britain seemed to choose to give up the happy situation of isolation of which Spykman had written. However, even after 1973, the U.K. remained halfway in what became the EU. As a latecomer to European integration, Britain struggled throughout the 1980s to make the EU budget and the Common Agricultural Policy whose terms had already been set by the original six member states fairer from a British perspective.14 Then, as
11 Spykman, p. 104. 12 Spykman, p. 104. 13 Spykman, p. 105. 14 On Britains relationship with the EU during the period, see Stephen Wall, A Stranger in Europe. Britain and the EU from Thatcher to Blair (Oxford: Oxford University Press, 2008).

deepening as well as widening continued in the 1990s after German reunification, Britain negotiated opt-outs of Economic and Monetary Union (EMU), social policy, and justice and home affairs. This approach frustrated European partners, who saw it as anti-communautaire (though some, such as Denmark, also emulated the approach). But, although the creation of single currency made the British balancing act more difficult, it allowed Britain to remain within the EU even as Euroskepticism increased on the British right from the 1990s onwards. However, 40 years after Britain joined the EEC, the euro crisis and the renewed process of accelerated integration undertaken by the eurozone in response to it now threatens to lead to a complete British withdrawal from the EU. Thus Britain is once again manifesting its traditional pathology of disengagement. But, this time Britain is retreating into isolation not at a moment at which it is in a commanding position in relation to its continental counterparts, for example after a shift of power following war. Rather it is doing so at a moment at which a dominant continental European power appears once again to be emerging what British foreign policy had always sought to prevent. In other words, it is fleeing at a moment when it should be fighting: not so much splendid isolation as desperate isolation.

Britain is once again manifesting its traditional pathology of disengagement.

Britains Conflict of Interests Since the euro crisis began, Britain has faced a dangerous conflict of interests. Its overwhelming economic interest is in the survival of the eurozone and the resolution of the euro crisis. In particular, nearly half of the U.K.s exports of goods and services, which total 30 percent of GDP, are to the EU. With the British economy already in a doubledip recession, a collapse of the single currency, which would lead to a further slowdown in demand for British goods and services, would be a disaster for the U.K. Thus the British government has urged the eurozone and in particular Germany to take steps that it sees as necessary

F E

The EuroFuture Project

to resolve the crisis. In particular, in July 2011, Chancellor of the Exchequer George Osborne urged the eurozone to follow the inexorable logic of a currency union and push ahead with the creation of a fiscal union. However, these steps that the U.K. has urged the eurozone to take have led inevitably to a further marginalization of the U.K. within the EU. At the December 2011 European summit, Cameron already marginalized, not only because of the U.K.s opt-out from EMU but also because of its refusal to contribute to the European bailout funds failed to secure guarantees that would protect the U.K. financial services sector. But by threatening to veto the creation of the fiscal compact within the European Treaties and thus forcing the eurozone to create a separate international treaty, he prompted the creation of a new union within the union from which the U.K. is excluded.15 In particular, there is an increasing danger that decisions affecting key British interests, and in particular on singlemarket issues, will be taken by the eurozone rather than at the level of the EU 27. In his speech in January, Cameron called for greater institutional flexibility in other words, variable geometry. This is a double-edged sword for the U.K. On the one hand, it could make it easier for Britain to opt out of further steps in integration that it does not want to take and therefore reduce the chances that it will seek to block such steps. But it will likely further marginalize the U.K. within the EU. In particular, flexibility will reduce British leverage: the U.K. will be less likely to be able to threaten to veto further steps in integration, and thus win concessions or guarantees, if such steps take place through international treaties (as was the case with the fiscal compact) or through so-called enhanced co-operation. Consequently, the U.K. may find itself increasingly unable to prevent the EU taking steps that it does not like. Measures affecting financial services, which account for around 10 percent of Britains GDP, are a particular concern for the U.K. Last year, Osborne encouraged the eurozone to create a banking union but also expressed concerns that the eurozone countries might set banking rules without reference to countries outside the eurozone.16
15 Almut Mller, A Union within a Union, IP Journal, September 27, 2012, https://ipjournal.dgap.org/en/ip-journal/topics/union-within-union. 16 George Osborne, Pldoyer fr fiskalische Integration, Frankfurter Allgemeine Zeitung, July 16, 2012.

There is an increasing danger that decisions affecting key British interests, and in particular on single-market issues, will be taken by the eurozone rather than at the level of the EU 27.
In December, member states agreed to create a single supervisory mechanism, but Osborne won an agreement to revise the rules of the London-based European Banking Authority (EBA) so that in the future, a double majority (that is, a majority of countries outside the banking union as well a majority of countries inside it) will be required to make decisions. However, this double majority is dependent on there being a minimum of five member states outside the banking union. It is not clear whether this will be the case.17 The U.K. could find itself seeking similar guarantees in relation to other measures on financial regulation. One such measure is a Europe-wide financial transactions tax (FTT), which many in the U.K. oppose and Cameron called quite simply madness.18 The measure is backed by 11 EU member states and is being agreed upon using enhanced co-operation and therefore should not in theory affect the U.K., which has chosen not to participate. However, the tax would apply to transactions outside the tax area if the share, bond, or exchange derivative is issued in one of the countries that has adopted the tax. The British government is concerned about these extra-territorial aspects of the proposal and has therefore indicated it will challenge it in the European Court of Justice.19

17 So far only the Czech Republic, Sweden, and the U.K. have said they would not join. What happens if there are fewer than five member states outside the banking union is unclear. In any case, a review of the EBA will take place in 2014. 18 Giles, Parker and Wiesmann, Cameron criticises European financial tax. 19 James Fontanella-Khan and Chris Giles, Britain challenges EU over Tobin tax, Financial Times, April 19, 2013, http://www.ft.com/cms/s/0/08322fa0-a913-11e2a096-00144feabdc0.html#axzz2RGctuTtB.

F E

The EuroFuture Project

The recently agreed upon limits placed on bankers bonuses are in a sense even more worrying from a British perspective. Unlike the FTT, this measure is being reached against British objections through secondary legislation passed using normal qualified majority voting. Regardless of the merits of this particular proposal, it illustrates the danger for the U.K. and thus provoked fury from Conservative Euroskeptics, who see it as setting a dangerous precedent in which the U.K. could increasingly find itself outvoted on issues affecting the City. For example, Andrea Leadsom, a key figure in the Fresh Start group of moderately Euroskeptic MPs, argued that it was the thin end of a wedge of more than 40 looming EU directives and measures that threaten to restrict or curtail the U.K. financial services industry.20 What complicates matters further, however, is that the British government may seek not only to opt out of, or seek guarantees in relation to, further integration, but also to roll back steps in integration that have already been taken. Last July, under pressure from Euroskeptic backbenchers who resent measures such as the Working Time Directive and the European Arrest Warrant, Cameron launched a so-called Balance of Competences Review that will investigate which powers could and should be repatriated to the national level. This idea of a wider renegotiation of Britains relationship with the EU represents a much more fundamental challenge to the EU. Some, particularly in Germany, oppose any attempt to change the balance of competences because they fear conjuring up forces we cant control, as German Foreign Minister Guido Westerwelle put it in response to Camerons speech.21 Others in Europe are sympathetic to the idea of devolving some powers back to member states, but they urge the U.K. to do it together with your partners in Europe, as Dutch Foreign Minister Frans Timmermans recently put it.22 Commissioner Olli Rehn also urged Britain to use its energies for reforming Europe rather than seeking to undo our Community, which would leave
20 Andrea Leadsom, Britain must fight off the bonus cap, Financial Times, March 4, 2013, http://www.ft.com/intl/cms/s/0/a891d42e-84f0-11e2-891d-00144feabdc0. html. 21 Guido Westerwelle, Britains narrow view of the EU is wrong, The Times, January 30, 2013, http://www.london.diplo.de/Vertretung/london/en/__pr/Latest__News/01/ WW-Times.html. 22 Speech by Minister of Foreign Affairs Frans Timmermans, London, February 28, 2013, http://www.rijksoverheid.nl/documenten-en-publicaties/toespraken/2013/02/28/speech-policy-network.html.

What complicates matters further is that the British government may seek to roll back steps in integration that have already been taken.
us all weaker.23 Thus even continental Europeans who are sympathetic to British concerns about the EU want reform rather than repatriation, as Rehn put it.24 Not least because of a fear of a British attempt to renegotiate its relationship with the EU, others in Europe, such as European Council President Herman Van Rompuy, now appear to be backing away from the idea of a change to the European Treaties (though a worsening of the crisis could put treaty change back on the agenda).25 But even if Britain does not attempt to repatriate significant powers, this will not change the reality that the U.K. will almost certainly remain outside the single currency and the fiscal compact. This, therefore, is the ground on which the case for continuing British membership of the EU must now be made: it is not a question of whether it can be at the heart of Europe as pro-Europeans in Britain and those beyond Europe sympathetic to British ideas and values would ideally like, but rather whether it can retain sufficient influence from the margins of Europe to protect and pursue key British interests.26 A Future Outside the EU? British pro-Europeans should recognize the reality that the case for British membership of the EU is not overwhelming. They need to engage in detail with Euroskeptic
23 Deeper Integration in the Eurozone and Britains Place in Europe, speech by Olli Rehn, London, February 28, 2013, http://europa.eu/rapid/press-release_ SPEECH-13-174_en.htm. 24 Ibid. 25 See for example, Hannah Kuchler, Van Rompuy hits at Cameron on treaty change, Financial Times, February 28, 2013, http://www.ft.com/cms/s/0/9b420228-81b511e2-904c-00144feabdc0.html#axzz2Okyg8NwL. 26 As well as the comments by Philip Gordon, see the letter by business leaders including Sir Richard Branson to the Financial Times, January 8, 2013, http://www.ft.com/ cms/s/0/5fa57fbc-58e6-11e2-99e6-00144feab49a.html#axzz2LuVQ4fmO.

F E

The EuroFuture Project

arguments and actively make what is a difficult argument for why it is in Britains national interest to remain in the EU even as Britain is marginalized within it. The discussion is likely to focus primarily on the impact of a withdrawal from the EU on the British economy. Although a withdrawal would certainly transform the British economy, there is little consensus about whether it would do so in a positive or negative way. Much depends not just on difficult counterfactuals above all, would Britains economy perform better outside the EU as the center of the global economy shifts eastwards? but also on what type of economy Britain wants.

Although a withdrawal would certainly transform the British economy, there is little consensus about whether it would do so in a positive or negative way.
It is likely that, whether or not the U.K. leaves the EU, the City will struggle to remain the main center for settling euro-denominated trading as a tighter eurozone emerges from the crisis. French Central Bank Governor Christian Noyer said last December that there was no rationale for London to remain the eurozones financial hub. The bulk of the business should be under our control, he said.27 However, some imagine that, were the U.K. to leave the EU, the City would be able to reinvent itself as a hub for financial services for emerging economies around the world Singapore on steroids, as the Economist has put it.28 Some hedge funds that have left London might return. But regulators worldwide are becoming less tolerant of unregulated offshore financial centers. The impact on manufacturing in the U.K. is slightly easier to assess. There is a post-crisis consensus in Britain about
27 Josh Noble and Alex Barker, U.K.s euro trade supremacy under attack, Financial Times, December 2, 2012, http://www.ft.com/cms/s/0/736bd72a-3c9a-11e2-a6b200144feabdc0.html#axzz2Lia5fRjp. 28 Britain and Europe: making the break, The Economist (see footnote 2).

the need to rebalance the economy and in particular to increase the contribution of manufacturing to GDP. Although Europe may in future become less important as a destination for British exports Jim ONeill of Goldman Sachs projects that by 2020 each of three biggest European economies will trade more with China than with each other the EU is nevertheless likely to remain a large export market for the U.K. If the U.K. left, many of the manufacturers that use the U.K. as a base to export to Europe, for example Japanese automakers, could relocate. Europe should therefore be viewed as the launch pad from which our global trade can expand, not the landmass from which we retreat, as Sir Roger Carr, the chairman of the Confederation of British Industry, put it in a speech last year.29 Although the economic cost-benefit analysis is complex, it does seem clear that, in the long term, a Britain outside the EU would lack influence in a world dominated by continental-sized powers such as China, India, and the United States. Even if the U.K. were able to prosper outside the EU, it would be unable to shape the world and in particular help to write the rules of the international system from which it benefits. In particular, Britain needs a liberal international order to prosper. Thus one of the most powerful arguments that pro-Europeans make is that the EU, the worlds largest trading bloc, amplifies British influence in the world, for example in trade negotiations. As Tony Blair put it in January, Europe gives us an ability as a mediumsized country to play a big-sized role.30 However, not even this argument that the EU is an influence multiplier is straightforward.31 Rather, it rests on the assumption that Britain has the same objectives as its continental European counterparts. It is true that all EU member states share an interest in opening markets in emerging economies such as China. But compared to most other EU member states, Britain tends to export services not just financial but also legal, professional, and educational rather than manufactured goods. Pro29 Sir Roger Carr, CBI Annual Conference speech, November 19, 2012, http://www.cbi. org.uk/media/1846330/sir_roger_carr_speech_to_cbi_annual_conference_2012.pdf. 30 Spiegel Interview with Tony Blair: Leaving Europe Would Be Very Bad for Britain, Spiegel, January 29, 2013, http://www.spiegel.de/international/europe/interview-onbritain-and-europe-with-former-prime-minister-tony-blair-a-880047.html. 31 On the idea of the EU as an influence multiplier, see Philip Stephens, British foreign policy should be realist, Financial Times, September 20, 2012, http://www.ft.com/ cms/s/0/edf5a3d6-0261-11e2-b41f-00144feabdc0.html#axzz2M6BC86DP.

F E

The EuroFuture Project

Europeans have not yet provided much detailed evidence that the EU helps in opening up such markets in services to European companies. Euroskeptics, on the other hand, point to specific cases of liberalization without EU pressure for example Indias decision in 2011 to allow foreign companies such as Tesco to open supermarkets and invest in multi-brand retail. As well as the type of economy Britain wants, much also depends on what type of role in the world that the U.K. wants to play in the 21st century. Most Euroskeptics tend to reduce Britains national interest to economic interests. It is striking, for example, that the models they usually cite Norway, Singapore, and Switzerland are small countries that are rich but have little wider influence. In a report for the Centre for European Reform, David Rennie writes that one Conservative MP told him: Whats wrong with being a big Switzerland? Im sure thats what my constituents would like.32 Admittedly, the U.K. would continue to have significant military capabilities it would therefore be what Euroskeptics call Switzerland with nukes but it is not clear it would have the economic or strategic basis needed in order to maintain or project this military power.33 Cameron has rightly rejected the idea of the U.K. as a kind of greater Switzerland as a complete denial of our national interests.34 Ultimately, the idea of a British withdrawal from the EU is what Spykman called an enchanting illusion. It may seem to some Euroskeptics to offer an escape from Britains post-imperial burdens.35 But ultimately, as Cameron recognized in his speech, continental Europe is simply too close and Britain too closely connected to it in multiple ways to think that it is in Britains long-term interests to disengage from it. There is of course no danger of war as in the past; nevertheless, history suggests that, in the end, what happens in Europe will directly affect Britains national interests. Although the EU may be evolving in problematic ways from a British perspective, these are
32 David Rennie, The continent or the open sea. Does Britain have a European future? Centre for European Reform, May 2012, p. 2, http://www.cer.org.uk/sites/default/files/ publications/attachments/pdf/2012/rp_096-5185.pdf. 33 Rennie, pp. 47-48. 34 Robert Winnett, David Cameron: Ill never campaign to take us out of Europe, Daily Telegraph, July 18, 2012, http://www.telegraph.co.uk/news/politics/david-cameron/9410061/David-Cameron-Ill-never-campaign-to-take-us-out-of-Europe.html. 35 On Britains post imperial burdens, see Mark Leonard, Camerons backwardlooking speech, Reuters, January 23, 2013, http://blogs.reuters.com/mark-leonard/2013/01/23/camerons-backward-looking-speech/.

Continental Europe is simply too close to think that it is in Britains long-term interests to disengage from it.
not arguments for withdrawal, which would not protect the U.K. from decisions made by the EU, but for renewed British engagement in Europe. Better Off Without Britain? If, on balance, it is in Britains interests to remain in the EU, it is also in the European interest. Many in northern Europe want to keep the U.K. in because they see Britains liberal instincts as a counterweight to the regulatory reflect which still sometimes surfaces, as Rehn put it.36 Similarly, Frans Timmermanns, the Dutch foreign minister, said that the U.K.s presence creates a better balance between those countries who, shall we say, have a protectionist inclination and those countries who are oriented towards trade.37 A British withdrawal from the EU would also have huge implications for European foreign policy. The German journalist Jan Ross argues that an EU without the U.K. would likely be one that is not just less liberal but also one with shrunken horizons that is less open to the world.38 Some continental Europeans argue that a British withdrawal could actually help the EU improve its powerconversion capability, in other words, its ability to convert power resources to produce outcomes it wants. In particular, without British obstructionism, it might be able integrate its foreign policy more quickly and make more effective use of the European External Action Service (EEAS), the new European diplomatic service created by the Lisbon Treaty. But the price would be a huge loss in power resources, particularly in terms of the military
36 Speech by Olli Rehn, London, February 28, 2013 (see footnote 22). 37 Speech given by the Minister of Foreign Aggairs Frans Timmermans, Policy Network, February 28, 2013, London, http://www.rijksoverheid.nl/documenten-en-publicaties/ toespraken/2013/02/28/speech-policy-network.html 38 Geht es auch ohne die Briten? Matthias Krupa und Jan Ross zur Frage der EU-Mitgliedschaft, Die Zeit, December 9, 2011, http://www.zeit.de/2011/50/EuropaeischeUnion-ohne-Grossbritannien.

F E

The EuroFuture Project

and other hard-power resources that the EU lacks. An EU without the U.K. would thus be one that relies on soft power even more than it already does at a time when it is losing soft power because of the crisis. However, few continental Europeans actively want Britain to leave the EU; the real danger is that they do not see they can, or should, try to influence its choice. In fact, Britains future in the EU depends on its European partners as much as on the political dynamic in the U.K. The EU they create and the space for the U.K. they create in it will go a long way to determining the outcome of a referendum on British membership. In particular, the willingness to compromise by the rest of Europe and specifically by Germany both the most powerful member state in the EU and one that shares British attitudes on some issues such as trade policy will be crucial. To make the difficult case for British membership, pro-Europeans in Britain will need the help of sympathetic continental Europeans in trying to imagine a meaningful role for Britain in a rapidly changing EU.

and making Europe as a whole more competitive.40 In particular, it could take measures to complete the single market in services and to seek to use the weight of the EU to liberalize services markets in emerging economies such as China and India, which would benefit the U.K. However, even if Europe becomes more competitive in the way Cameron hopes, there will remain difficult institutional questions related to the role of the eurozone outs in general and the U.K. in particular. Continental Europeans are right to push back against any British attempt to use treaty change to unilaterally repatriate powers that could lead to an unraveling of the EU, but they should keep an open mind about new areas of integration. In such areas, British Euroskeptics have a strong case when they say that we are not leaving Europe, Europe is leaving us. Continental Europeans should therefore be prepared to consider new opt-outs or guarantees in where British interests are sufficiently different from their own and to accept messier solutions to institutional questions than those with which many in Europe, especially in Germany, are comfortable. One particular problem is that the 25 member states that have signed the fiscal compact have committed to take steps to incorporate it into the European Treaties within five years.41 If they do so, it would in effect reopen the issue that prompted Cameron to force them to create the fiscal compact outside the European Treaties in December 2011. It is possible that a different British government would take a different view of the fiscal compact than Cameron did at that time and agree to sign it because its provisions do not affect EU member states that are not in the eurozone unless they choose to apply them. More likely, however, is that the U.K. would once again seek to negotiate a protocol guaranteeing that decisions affecting the U.K. financial services sector will be taken by unanimity at the level of the EU27. Thus there is likely to be a need for a new settlement that guarantees the rights of the eurozone outs (even if that means the U.K. and perhaps only one or two other member
40 Robert Zoellick, Camerons critics should extol his European vision, Financial Times, February 3, 2013, http://www.ft.com/cms/s/0/71873bce-6ba8-11e2-a70000144feab49a.html#axzz2Lia5fRjp. 41 Article 16 of the fiscal compact states: Within five years, at most, of the date of entry into force of this Treaty, on the basis of an assessment of the experience with its implementation, the necessary steps shall be taken, in accordance with the Treaty on the European Union and the Treaty on the Functioning of the European Union, with the aim of incorporating the substance of this Treaty into the legal framework of the European Union. The full text of the fiscal compact is available at http://european-council.europa. eu/media/639235/st00tscg26_en12.pdf.

Britains future in the EU depends on its European partners as much as on the political dynamic in the U.K.
As Gideon Rachman has argued, a few eye-catching changes in Britains relationship with Europe could alter the nature of the debate in the U.K. and save both Britain and the EU from a mutually damaging divorce.39 The easiest part of the agenda laid out in Camerons speech for continental Europeans to accept may be his call to increase competitiveness. As former World Bank President Robert Zoellick has argued, continental Europeans should take up this challenge to them as a way of keeping Britain in

39 Gideon Rachman, Europe would lose if Britain left the union, Financial Times, November 19, 2012, http://www.ft.com/cms/s/0/d97d4058-323b-11e2-916a00144feabdc0.html.

F E

The EuroFuture Project

states such as Sweden). There are various forms this could take. One option would be a protocol that guarantees that some decisions, for example those involving financial services, must be taken at the level of the EU 27 rather than the eurozone. As Nicolai von Ondarza has suggested, this could be framed as a guarantee against discrimination against eurozone outs within the context of the single market.42 Another option would be an updated version of the Luxembourg compromise, the informal agreement made in 1966 following the empty chair crisis.43 A member state might be able to require unanimity in votes on matters affecting important national interests, as the Fresh Start group has suggested, or at least to at least force a discussion before a vote is taken.44 There is understandable frustration with the U.K., and therefore unwillingness to consider further special treatment for the EUs most difficult member state. But, if other EU countries genuinely want Britain to remain in, they should be prepared to keep an open mind. Clearly, the most important priority for eurozone countries is to solve the crisis and restore growth. No one, even in the U.K., is suggesting that the British question should take priority over this. But it would be a tragedy if, in saving the euro, the EU were split. There are steps that could be taken that would not undermine the eurozones ability to solve the crisis but would increase the likelihood that, if and when a referendum takes place, the U.K. chooses to remain within the EU. The price to pay for keeping the U.K. in may be a small one relative to the loss to the EU of one of its biggest member states.
42 Nicolai von Ondarza, Rote Linien und eine ausgestreckte Hand, Stiftung Wissenschaft und Politik, February 2013, http://www.swp-berlin.org/fileadmin/contents/products/aktuell/2013A12_orz_01.pdf. 43 The Luxembourg Compromise stated: Where, in the case of decisions which may be taken by majority vote on a proposal of the Commission, very important interests of one or more partners are at stake, the Members of the Council will endeavour, within a reasonable time, to reach solutions which can be adopted by all the Members of the Council while respecting their mutual interests and those of the Community. 44 Fresh Start Project, Manifesto for Change. A new vision for the U.K. in Europe, January 2012, p.24, http://www.eufreshstart.org/downloads/manifestoforchange.pdf.

About the Author

Hans Kundnani is the editorial director at the European Council on Foreign Relations. The author would like to thank Susi Dennison, Agata Gostyska, Thomas Kleine-Brockhoff, Jana Kobzova, Alba Lamberti, and Sir Michael Leigh for their comments on earlier drafts of this paper.

About The EuroFuture Project

The German Marshall Fund of the United States understands the twin crisis in Europe and the United States to be a defining moment that will shape the transatlantic partnership and its interactions with the wider world for the long term. GMFs EuroFuture Project therefore aims to understand and explore the economic, governance and geostrategic dimensions of the EuroCrisis from a transatlantic perspective. The Project addresses the impact, implications, and ripple effects of the crisis in Europe, for the United States and the world. GMF does this through a combination of initiatives on both sides of the Atlantic, including large and small convening, regional seminars, study tours, paper series, polling, briefings, and media interviews. The Project also integrates its work on the EuroCrisis into several of GMFs existing programs. The Project is led by Thomas KleineBrockhoff, Senior Transatlantic Fellow and Senior Director for Strategy. The group of GMF experts involved in the project consists of several Transatlantic Fellows as well as program staff on both sides of the Atlantic.