Analysis: Britain outside the EU - Switzerland with nukes?

Reuters News
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Posted: Jun 27, 2012 8:39 AM
Analysis: Britain outside the EU - Switzerland with nukes?

By Guy Faulconbridge

LONDON (Reuters) - Without a coherent plan for going it alone, Britain may be drifting towards its biggest strategic move in a generation: a disorderly exit from the European Union.

Prime Minister David Cameron wants Britain to remain inside the EU, but if the British people ever get a referendum on whether to stay inside a Europe that sees its survival in closer unity then polls suggest they would vote "No".

Even if the politicians, jittery at a stagnant economy before the 2015 election, avoid promising a referendum, attempts to renegotiate Britain's relationship with the EU are unlikely to be countenanced by Germany, the bloc's dominant power.

Britain might well take the plunge, but beyond exhilaration there is little realistic sense of what may lie below.

"We are sliding towards the exit without any strategizing about what comes afterwards," said Charles Grant, the pro-European director of the Centre for European Reform, an influential think-tank which seeks to make the EU work better.

"(Finance minister George) Osborne and Cameron actually want to stay in the EU so I don't think they have a sort of plan B. There is no strategy and the skeptics can't agree on what to do."

Leaving the European Union was once farfetched: only a decade ago, British leaders were arguing about when to join the single currency and talk of an EU exit was the reserve of a motley crew of skeptics on the fringes of both major parties.

But the turmoil of the euro zone crisis and the prospect of the currency bloc forming a closer political union that London would not want to join have convinced some wiser heads that Britain is in danger of heading to the exits.

Such is the concern, that a senior banker was photographed leaving a breakfast at Cameron's Downing Street office on Tuesday carrying a document stating: "What would most threaten the City? i) the UK leaving the EU."

Deputy Prime Minister Nick Clegg warned this week that Britain could be sidelined or forced out of the door.

The coalition between Cameron's more sceptical Conservatives and Clegg's pro-European Liberal Democrats was formed in 2010 on the basis of standstill pact to move neither forward nor backward in European integration.

But the EU has inconveniently refused to stand still. And the euro zone crisis is driving the 17 members of the currency area towards much closer political and economic union.

SWITZERLAND WITH NUCLEAR WEAPONS?

Dropping out for a future as an off-shore Switzerland or quixotic dreams of an making London a world trading center for Chinese currency and Russian oil money would sit badly with the British elite's post-imperial penchant for global statecraft.

"The rationale for Europe today is not peace anymore - it is power," former British Prime Minister Tony Blair, whose ambition to be the first president of the European Council of EU leaders was thwarted in 2009, told the BBC.

"The European project of integration is going to go ahead, like it or not, and it is important that we are part of that because we as a country - 60 million people in a small island nation - if we want to exercise weight and influence we have got to do it through our alliances in part and one of those is the European Union."

Ditching a 60-year strategy of trying to hedge European integration with national beliefs about a special relationship with Washington or a brittle Commonwealth of former colonies would undermine what remains of Britain's global influence.

The United States would take less notice of the world's sixth largest economy if it were no longer inside the EU, while British leaders might find trade talks with China or gas talks with Russia altogether more intimidating without EU backing.

A source close to Britain's leaders said talk of an imminent exit was overblown and that London would continue to hedge its bets. The source said the government would seek to redefine its relationship with the EU when it became clear how the bloc would look after reforms mainly driven by Germany.

"We are not going to be part of a fiscal union, so where could we be? We are not talking about leaving the EU but of being part of a different, perhaps looser EU that could result from this euro crisis," the source said.

"And we can do it. Those who say there is no alternative for Britain are wrong: we can still trade with Europe and the rest of the world."

The prospect of Britain's $2.5 trillion economy, one seventh of EU gross domestic product, slipping away would damage both the EU and Britain.

Britain might come off worst, especially if the euro zone can somehow resolve the debt crisis.

Armchair dreams of splendid isolation might turn out to be hollow: a former imperial power stranded just 21 miles from continental Europe having to pay for market access to its biggest trade partner and with no seat at the policy table.

TRADING PLACES

The options outside are limited: following the path of Norway, Switzerland or Turkey or even a full break leaving Britain stranded in the World Trade Organization.

Open Europe, a Euro skeptical think thank which says it wants to save British membership by reforming it, said in a paper entitled "Trading Places: Is EU membership still the best option for UK trade", that all options were inferior to EU membership.

It argued for a new "UK model" which would see Britain retain the benefits of the single market and the customs union but allow London to pick-and-mix its own EU policies.

Such an approach would be hard to sell to European partners and could lead to confrontation, especially if British leaders were backed by a referendum demanding a new deal they could not deliver. Britain has already renegotiated its entry terms once.

Facing such a failure, Cameron could be vulnerable to more sceptical leadership rivals plus the electoral threat from the UK Independence Party, which has drawn voters away from his Conservatives with its promise to take Britain out of the EU.

Cameron told City of London financiers he was a skeptic a month before he vetoed a new EU fiscal treaty in December, forcing euro zone states to set their new rules outside the formal EU structure, although using its institutions.

But the prime minister insists it is not in the national interest to leave the EU, the destination for half of Britain's exports.

"Outside, we would end up like Norway, subject to every rule for the single market made in Brussels but unable to shape those rules," he said in his most nuanced speech on Europe.

Skeptics say pan-European financial regulation and talk of a banking union already threaten the City of London, which they see as Britain's strongest card at the world's top table.

Outside, London might market itself as a low-tax, offshore trading center and a playground for the international rich, but that may not sell to a local population which expects London to pay its way in tax revenues for a welfare state.

Many of the banks trading there would also be subject to EU rules formed without London. Foreign investors who use Britain as a springboard for an EU market of half a billion people might find Britain a much less interesting proposition.

Britain would be alone in the open sea.

(Edited by Paul Taylor)