Eurozone crisis challenges UK role in Europe

Britain is buzzing with talk of a referendum on “Europe”. In May Peter Mandelson was advocating a national vote some time after 2016, when a new Europe of fiscal union will have been defined. He sees it as a way of resolving divisions within Britain’s political parties.

Last week it was David Owen’s turn. He called for a dual option: Question One on UK membership of the “European Community”, which would essentially be the single market plus extras; and Question Two on belonging to the “European Union”, which he defines as the eurozone group of countries in an economic federation. Once Britain’s foreign secretary and one of the Gang of Four which split from Labour to form the Social Democratic party in the early 1980s, Owen was always an advocate of Britain’s place in Europe, but was consistently opposed to joining the euro. He would want “yes” to his EC, “no” to his EU.

The fact is that Owen’s EC and EU cannot be so easily disentangled from each other, and while the referendum option may seem a decisive way of determining Britain’s future in Europe, there is nothing decisive about it. A negative vote would confront the nation with some deeply painful choices and be a recipe for long-term decline.

There is no doubt that the eurozone crisis is a fundamental game-changer for Britain, as it is for the whole European Union. This is the watershed. If the euro is to survive there must be significantly closer economic integration, more discipline over national budgets and a more robust European banking system. Angela Merkel is now talking of political union as well.

Britain and some other countries may wish to keep their distance, but the UK government must tread warily, for this is marshy ground. Such closer integration is bound to have far-reaching consequences for the British economy, especially over financial services. It also has implications for Britain’s influence at a global level and its role in the world.

Although British adoption of the euro is clearly out of the question, at least for the foreseeable future, it remains a fundamental responsibility of any UK government to maximise its influence over the direction of the European project. British ministers may express fierce indignation over the impact of the euro crisis on Britain’s economy (while the German economy, by the way, continues to flourish), but it remains crucially important to maximise leverage over policy and to engage with European partners, not just to shout from the sidelines.

It is hard to see any British government voluntarily choosing the referendum option. Cameron surely had no choice but to opt out of the fiscal treaty last December if he wished to avoid such a vote, but there remains a real danger that his hand will be forced by political pressures within his own party and the inroads which UKIP could make in Conservative seats in a general election. For the coalition government it would be a deal breaker, but at least legislation adopted last year to hold a referendum (only) if further powers were to be transferred to Brussels provides a useful firewall.

The right formula for Britain is as a committed member of the European Union, but with some options kept open.  Schengen, the Charter on Fundamental Human Rights and monetary union are policy areas where opt-outs have been effectively applied. Europe’s direction of travel is unpredictable. Today’s bail-out of the Spanish banks may be a sign of more decisive action, but we still await the Greek general election result, which has come to seem very much like a referendum on the survival of the euro.