Cameron’s EU Gamble The big news over the weekend in the United Kingdom (UK) is that, after having secured some kind of deal from his European Union (EU) partners, Prime Minister David Cameron has called for an “in-out” referendum on EU membership to be held on June 23. The betting has to be on the UK staying in, but shit happens. … and sometimes, it not only happens, but comes in a sandwich. First, a little bit of history. The referendum fulfills a campaign promise that Cameron made in the 2015 general election. Although he may come to regret it, the purpose was to put an end to Conservative Party squabbling over the EU, at least until after the vote. It was also a response to the slow advance of the United Kingdom Independence Party, which was polling stronger and had actually succeeded in poaching two Conservative Members of Parliament (MP). The pledge had two parts. The first was for Cameron to trek to Brussels to try to change the EU rules or at least to negotiate more “outs” (exemptions) for the UK. The second was to submit the revised terms to the UK public. In a tangentially related matter, Cameron also announced that this would be his last parliament as the leader of the Conservative Party, firing a starting gun in the race for his succession. He may also regret this announcement for reasons that I will explain below.
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Cameron’s EU Gamble
The big news over the weekend in the United Kingdom (UK) is that, after having secured some kind of deal from his European Union (EU) partners, Prime Minister David Cameron has called for an “in-out” referendum on EU membership to be held on June 23. The betting has to be on the UK staying in, but shit happens.
… and sometimes, it not only happens, but comes in a sandwich.
First, a little bit of history. The referendum fulfills a campaign promise that Cameron made in the 2015 general election. Although he may come to regret it, the purpose was to put an end to Conservative Party squabbling over the EU, at least until after the vote. It was also a response to the slow advance of the United Kingdom Independence Party, which was polling stronger and had actually succeeded in poaching two Conservative Members of Parliament (MP).
The pledge had two parts. The first was for Cameron to trek to Brussels to try to change the EU rules or at least to negotiate more “outs” (exemptions) for the UK. The second was to submit the revised terms to the UK public. In a tangentially related matter, Cameron also announced that this would be his last parliament as the leader of the Conservative Party, firing a starting gun in the race for his succession. He may also regret this announcement for reasons that I will explain below.
The renegotiation with the EU can only be described as a damp squib. After rounds of meetings with other EU members to test their appetite for reform, Cameron announced a disappointingly modest group of four goals.
The first was a commitment that the 19 members of the EU that use the euro would not use their majority to the detriment of the nine members of the EU, including the UK, that remain outside of the currency union. This included an explicit recognition that the EU has multiple currencies and a commitment that the non-euro zone members would not have to contribute to any euro zone bailouts. Cameron was also looking for assurances that the City of London would not be automatically subject to EU rules designed to promote further financial union within the euro zone.
The second was an exemption for the UK from the commitment, contained in the first treaty establishing the EU, to move towards an “ever closer union.” Cameron also wanted enhanced powers of national parliaments to block EU legislation.
The third was a nebulous commitment to competitiveness and a reduction of regulations. This was a response to the notorious EU rules such as e.g. those on the curve of cucumbers and the bends of bananas, which the English view as emblematic of a pernicious Eurocratic mission creep.
David Cameron presents himself for tough negotiations in Brussels.
Finally, and most controversially, Cameron wanted the ability to deny social and housing benefits for any EU citizens migrating to the UK for the first four years of residency; he also wanted to avoid paying child benefits for any children not residing in the UK. As I have pointed out before, this is an attempt to fight a perhaps fictional “welfare tourism,” the movement of citizens from some of the poorer EU countries to the UK just to enjoy the higher benefits available in this country.
Perhaps more importantly, from the standpoint of Cameron’s political calculus, it was an attempt to show that he is doing something to meet his 2010 pledge to reduce net migration to the UK to less than 100,000 per year, a goal that he is far from meeting: a record 336,000 net arrivals came in the twelve months to mid-2015.
Modest Beginnings, Modest Ends
From modest beginnings came even more modest ends. Cameron got his commitment on competitiveness, but these have been made before with little effect. He also got a largely symbolic pledge to exempt the UK from the “ever closer union” language when the treaty is next revised. Along with this, he was granted a “red card” – the EU politicians love to use football metaphors – system whereby 55% of the national parliaments could band together and block EU directives. But the already existing “yellow card” (warning) system has rarely been used.
On the relationship with the euro zone, Cameron got his request that EU members outside the currency union would not be asked to pay for its myriad shortcomings. This includes a commitment to reimburse non-euro zone states for any central EU money used to bail out the euro zone. But he encountered firm French résistance on the applicability of new financial rules.
Cameron got the strongest pushback on the benefits changes. Within the EU, the UK normally allies with the recent entrants from central Europe, such as Poland, to fight the ossifying tendencies of the older members of the union. But this was a case of national pride and the leaders of central Europe could not stomach a rule that so clearly identifies their countrymen as second-class Europeans.
So Cameron got the right to apply a “emergency break” and limit benefits over the first four years of residency, but only on a sliding scale “to take account of the growing connection of the worker with the labor market of the host Member State.” Cameron also got the right to index child benefit to the levels available in the country of residence of the child, but the UK is still required to pay it. These rules will stay in place for 7 years, far short of the 13 years the English requested.
Well, perhaps not quite.
Premature Declarations of Victory
Predictably, Cameron has declared victory and he, and his government, will now fight for an “in” vote. In his announcement of the referendum, he pointedly referred to a “reformed Europe” and the UK’s “special status” at every opportunity. It will be interesting to see if the UK public agrees with him when new polls are published. Prior to the weekend, the latest polls show a majority for the “in” vote of 54% to 46%. But these numbers are volatile. As recently as a week ago, the results were a dead heat.
Whenever polls are this close, the status quo has the upper hand. It is easy to opt for change when answering a pollster’s question but a lot harder to actually pull the voting handle. The devil that you know will almost always beat the unknown one. This is particularly true since the UK’s business leaders and media will line up squarely on the side of the “in” vote, warning of economic and national security risks if the UK leaves the union, in return for few benefits.
They will have strong arguments since the “association agreement” that the UK will need to maintain free access to the Common Market, similar to the agreements applicable to Norway and Switzerland, will subject the UK to many of the rules that it is currently trying to avoid. With the important difference that the English would lose their vote in determining these rules.
So, the coldly reasoned choice will be for the UK to stay in. But there is a saying attributed to Charles de Gaulle that politicians can control the question asked in a referendum, but they can’t control the question the voters will answer. And therein lies the risk of a British exit (Brexit).
The answer is yes! What was the question?
Nasty News Flow
There is a good chance that the referendum will become a general vote on whether the EU is the kind of club to which the English would like to belong. Therefore, much of the vote will depend on the type of headlines the EU is getting at the time of the referendum. In addition to the unknown unknowns, there are at least three areas that could generate some very nasty news flow in the summertime.
The first is the ongoing refugee problem. Although the EU is trying to address this issue, including through greater cooperation with/bribery of Turkey and strengthening procedures in the arrival states of southern Europe, so far only winter weather has proven to be an effective deterrent. If, come summer, the pace has returned to the roughly one million per annum arrivals experienced in 2015, and if this is combined with more news like the Parisian terrorists who snuck in as refugees or the immigrants who ran wild in Cologne or the immigrants camping out in Calais and trying to sneak into the UK, then EU membership will not look very appealing.
The Greek crisis is also on a slow boil. Things had been quiet but some of the most controversial reforms still need to be implemented. The changes to pensions, the most sensitive of all, have recently caused protests. The Greek preference to plug the pension gap with additional taxes, as opposed to the creditor demand to cut benefits, is also looking more problematic: The Economist has just run an article pointing out the Greek businesses are already upping stakes in response to heavier tax burdens. And the vexed issue of further debt relief, potentially including loan write-offs, has to be tackled at some point.
Finally, there are the problems on the Iberian Peninsula. Although the Spanish economy is ticking along nicely, it is without a government two months after the last election and there is no clear path to getting one; the related issue of Catalan independencealso lurks. In Portugal, a left-wing, anti-austerity party is on a collision course with the EU, exposing the union to the type of political and economic convulsions that Greece’s similar Syriza party has already produced.
Et tu, Boris?
Before, a generalized anti-EU sentiment would have struggled to find a leader. But Boris Johnson, the former Mayor of London and current MP, has just changed this by joining the “out” campaign. Cameron had previously agreed to allow Conservative politicians to follow their conscience – or their political expediency – in the EU vote. Over the weekend, six cabinet ministers came out against staying in the EU, but these were relative light weights. Boris Johnson boxes in a different class. He is one of the most popular politicians in the UK and he is a fearsome debater and polemicist.
Et tu, Boris?
Although Johnson has characterized his decision as one of principle, it is hard not to see the political calculation behind it. As mentioned, Cameron is stepping down after this Parliament, which ends no later than 2020 and much sooner if he loses the EU vote. With the opposition divided between the secessionist Scottish National Party (SNP) and a leftward-lurching Labor Party, the next Prime Minister will almost certainly be a Conservative.
This is the role that Johnson has always coveted and until recently he was the heir apparent. However, the rising star of the Chancellor of the Exchequer George Osborne means that the conventional path to leadership may now be blocked. There is a very good chance that Johnson decided to risk an unconventional one. Had Cameron not announced his retirement, Johnson may have seen less of an opportunity in the referendum.
The British pound vs. the USD (a.k.a. “cable”), 10 minute candles over the past week. Traders got whipsawed, at first buying “hope” and then getting surprised by Boris Johnson joining the “out” campaign.
Potential Consequences of a BREXIT
What are some of the consequences if the UK leaves the EU? Most are evident, but here are some of the less obvious ones:
- If the UK votes to leave the EU, then the SNP will certainly ask for another referendum on Scottish independence. There is a good chance that the independence movement would win this time. Scotland is much more pro-EU than the rest of the UK. An “out” vote would be taken as yet another sign that the rest of the country does not care about the Scots. This could be sufficient to tip the 55%/45% “no” vote from 2014 in the opposite direction.
- The UK vote, and certainly any Scottish follow through, would embolden other regional movements, notably the Catalans. An anti-EU vote in the UK could threaten the territorial integrity of more than one European nation.
- A successful UK referendum would strengthen the hand of anti-EU parties on the continent, such as the Front Nationalin France, which would argue for the same democratic rights as the English. This argument would be doubly powerful since it is now evident that the UK has made much better choices about the EU than, say, the French or the Germans. The UK has stayed out of the passport-free Schengen zone, sparing themselves an influx of refugees. The UK has also stayed outside of the euro zone, avoiding the costs and volatility of the euro zone crisis. If the relatively protected English still find the EU intolerable, then the message to the remainder of the countries is clear.
- Finally, without the UK, the EU is likely to follow its worst instincts in matters of economics and politics. This is the big fear of the United States and why Secretary of State John Kerry has again come out in favor of unity. But it is not just the US that fears an EU without its UK ballast. The CEO of Lufthansa certainly expressed the sentiments of many continental business leaders when he recently told a UK audience that German businesses would “feel alone without you guys” and “we will only have the socialist people around us like the French.” This is not only a German sentiment. A Brexit would further the “north-south” divide that the euro zone and migrant crises have already opened wide enough.
Put all of this together and the hopes for a year with no risk of European black swans is now thoroughly dashed. In fact, it is not unimaginable that 2016 could be as consequential for Europe as 1989. 1989 saw the beginning of the end of the Soviet empire in the east and the fragmentation of Yugoslavia. 2016 could be the beginning of the end of the EU and the fragmentation of several states. All of this seems unlikely, but we live in a world where voters are increasingly inclined to follow the punchline from the movie The Commitments: “They had absolutely nothing. But they were willing to risk it all.”
Oops! There are more of those than we thought!
Photo via goldtentoasis.com
 A major restriction on reform was that no leader wanted to modify the EU treaties, which would have required approvals from national parliaments or, in some cases, national referenda. These are always bruising battles that not even EU leaders who are sympathetic to the UK’s demands wanted to see.
 So far, the evidence for widespread welfare tourism is scant, with studies showing that immigration by EU citizens has actually improved the fiscal position of the UK since at least the first wave of EU immigrants pay more in taxes than they consume in government services. In a way that would warm the heart of Donald Trump, this has nevertheless become a political issue.
 Finance minister by any other name.
Chart by: BarChart.com
Chart and image captions by PT
All Cartoons by Steve Bell
This article was originally posted at Economic Man.