What will be Britain's new role in Europe?

In an effort to protect bankers, the U.K. opts out of a summit to solve the euro zone's financial crisis

Published December 9, 2011 4:10PM (EST)

This article originally appeared on GlobalPost.

LONDON, England — After ten hours of negotiations at the European Union summit in Brussels — starting with canapes on Thursday evening and lasting past four in the morning today — the heads of the 27 European Union countries reached a decision to forge ahead with a two-tier solution to the euro zone’s debt crisis.

Global Post

Crucially, the leaders of all 17 euro zone countries concluded that the only way to fix the euro's flaws is by establishing a fiscal union that includes centralized control of national budget deficits.

But Britain will not be part of the negotiations defining the new fiscal union, setting the stage for a two-tier Europe.

Britain’s opt-out is a monumental development for Europe, and a significant defeat for Prime Minister David Cameron.

At other crisis moments over the last quarter century, as the drive towards closer economic and political union were being negotiated, the EU's big three — Germany, France and Britain — always found ways to paper over their differences, issuing special opt-outs for Britain, or postponing decision making until the Brits got their house in order. Likewise, Cameron had sought a deal with Europe that would provide special exemptions for the U.K..

But that is not what happened this time. With the EU and the global economy facing unimaginable consequences if the euro were to fail, this was not the moment to fudge and play politics with the solutions. There was no time to postpone a decision either. So Britain will not be part of the process.

The question that remains is whether that decision will lead to a solution of the crisis.

It was agreed overnight that the 17 members of the euro zone along with the six other countries will forge a new treaty linking them in a fiscal union with tough rules on debt. To achieve this will require some surrender of national control over the budget process.

In addition to Britain, Hungary said it wants to consider the details before deciding whether to participate. The leaders of Sweden and the Czech Republic will consult their parliaments before deciding. In the meantime, all three countries are now expected to take part in the negotiations.

There were polite quotes and expressions of regret when the marathon meeting ended. European Commission President Jose Manuel Barrosso told reporters in Brussels, "Having seen it was not possible to get unanimity, it was the proper decision to go ahead at least with those ready to commit immediately." He added, "We would have preferred a unanimous agreement."

British Prime Minister David Cameron, who just a week ago was insisting that all 27 EU nations should be involved in negotiations to fix the euro's flaws, explained his about face this way: "Britain's interest in the European Union, keeping markets open, free trade, selling our goods and services with rules over which we have a major say, all those things are protected, they don't change."

Cameron's phrase "selling our goods and services" doesn't quite mean what it says. Britain doesn't make a lot of goods to sell these days. It's manufacturing sector is barely 10 percent of the economy and shrinking by the month as the country heads back towards recession.

It is services that Britain sells: financial services. The City of London, Britain's financial heart is the world's largest financial services center, largely because regulations are light and taxes are minimal.

Cameron was acting to protect the City when he withdrew from the agreement last night.

Britain's continental European partners want tighter regulation of the banking industry. They also want to impose a "Tobin" tax on financial transactions. Cameron was seeking an opt-out for the City on that rule.

French President Nicolas Sarkozy told reporters this morning, "We would have preferred an accord of the 27 but that was not possible because of the position of our British friends." Sarkozy added, "We can't have a waiver for the U.K. because in our view it would have undermined a lot of what we've done regarding the financial sector."

The euro-sceptic British newspaper The Daily Telegraph quoted one unnamed French official saying Cameron was, "like a man who wants to go to a wife-swapping party without taking his own wife."

That anonymous quote gives a hint at the other main reason for Cameron's inflexibility at the summit. Cameron's Conservative Party — and its house newspapers like the Telegraph (aka the Torygraph) — are fundamentally anti-European Union. (Some of Conservative MP's are fundamentally anti-Europe but that is a different thing.)

In the days leading up to the summit his own backbenchers were demanding a referendum on whether Britain should even stay in the EU. Two members of his cabinet even argued that any treaty deal to fix the euro should be broadened to completely renegotiate 2007's Treaty of Lisbon, which is essentially the EU's constitution.

Britain's EU membership has been poison inside the Conservative Party since Margaret Thatcher was prime minister. The party was split between pro-Europe Tory grandees, who endorsed Britain playing a larger role in EU integration, and Thatcher and her supporters, who saw Europe as something alien that needed to be controlled if it couldn't be avoided.

Thatcher’s anti-European views were among the main reasons her party's grandees deposed her in 1990. Ever since, Conservative Party leaders have been caught between the two factions.

Cameron is no different. His skill as a politician is demonstrated by the fact that no one is quite sure what he thinks about the EU. The question of whether he was acting on deeply held belief or out of pragmatism is one worth trying to answer.

So with Britain and a handful of others out of the equation, will the remaining countries find a solution to the euro's flaws?

German Chancellor Angela Merkel seems to think so, "I have always said the 17 states of the euro zone need to win back credibility. And I think that this can happen, will happen, with today's decision."

As usual, it is the details that are missing. The leaders of the 17 euro zone countries are going back into session today to work on them. Hopefully, by the end of the day we will know more.

By Michael Goldfarb

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