By Andrew Osborn
LONDON (Reuters) - The European Union must hand back some powers to nation states while strengthening its role in other areas if it is to regain public trust and reverse a tide of skepticism in countries like Britain, the president of the European Parliament said.
Martin Schulz, a German Social Democrat, is worried by Prime Minister David Cameron's plan to hold a referendum on Britain's EU membership if re-elected in 2015, but said Cameron's Conservatives might not win, so the vote might never take place.
Even if it did, he said, Britons would probably vote to stay in given the prospect of early reform of the 28-nation bloc, the trading advantages membership gives Britain, and the inability of any one country to defend its interests alone.
"My advice to all of us is not to underestimate the dissatisfaction of a lot of people with ... the form in which the EU is for the time being," Schulz told Reuters in an interview on a visit to London.
"But the moment we improve it, and people see that we are committed to improving it, I think we will regain trust."
His foray into a debate that has divided Britain's political establishment comes ahead of elections for the European Parliament next year in which the UK Independence Party (UKIP) - which wants Britain to quit the bloc - is expected to do well on the back of deep public disenchantment.
Schulz, a potential candidate to head the executive European Commission when its president, Jose Manuel Barroso, steps down in October 2014, said meaningful EU reform would marginalize parties such as UKIP, which he accused of "dangerous rhetoric".
UKIP casts the EU as a meddlesome bureaucracy that thwarts Britain's ability to control its borders and strangles its firms in damaging red tape.
Opinion polls show a narrow majority of Britons would opt to leave the club they joined in 1973 if given a choice now.
Faced with a rebellious eurosceptic faction in his own Conservative party over the issue, Cameron has promised to try to renegotiate Britain's membership of the EU before holding an in/out referendum by the end of 2017 if re-elected.
Germany, Schulz's home country and the most powerful EU member state, is likely to be pivotal to any renegotiation.
Conservative German Chancellor Angela Merkel, running for re-election on September 22, has hinted she wants reform too though Schulz cautioned against taking her comments at face value.
Often described as a federalist, Schulz said he would be willing to help strip the EU of certain powers and return them to member states, the very thing that Cameron is promising to deliver. But unlike the British leader, he said he also wanted to strengthen the EU's powers in other areas at the same time.
Schulz was reluctant to be drawn on which powers could be repatriated to member states but was more explicit about areas that should remain in Brussels' hands or come under EU control.
"I agree with those who say the EU in Brussels must not do everything," he said. "I was 11 years a mayor in Germany. What you can do locally, do it there," he said, adding he understood people who fretted that the way the EU was administered had subverted the Union's ideals.
"But where we reach a limit of defending our interests alone, where we need a community of strong countries, then let's define what these areas are: climate change, world wide trade relations, the fight against tax evasion, the migration question, security questions, (and) external border controls."
Britain insists on retaining full national control over its borders and has stayed out of the continental Schengen area of passport-free travel.
'STOCK-TAKE OF EU POWERS'
Such a redistribution of powers could be achieved without a politically fraught process of changing EU treaties, which requires unanimity among all 28 member states, Schulz added.
"If we define a share of responsibility I am prepared to use the subsidiarity possibilities to re-transfer responsibilities," he said, referring to the EU's principle of acting only in areas where it can do things better than member states.
The incoming European Commission could conduct a stock-taking of those areas where EU competences could be rolled back after next year's European elections, he added.
"The next Commission should start by saying we'll have an overview now and we'll decide now where we could re-transfer," said Schulz, adding that member states would also have to consider which powers they were willing to transfer to Brussels.
"The EU must be constructed in a global dimension and not deal with specific small elements," Schulz added, citing regulation of the quality of olive oil as an example of unnecessary interference.
He winced visibly when asked what Britain would be like if it left the EU.
"The UK will not be a member of the single market but 50 percent of UK exports go to the EU market or even more. That means customs fees for British products, no free movement for British citizens in the Schengen area, the UK having no access to the EU's worldwide relationship in international trade ...
"It means a lot of economic barriers for the British economy, so to which extent is this useful?," he asked.
(Editing by Paul Taylor)