Christopher Howarth: The Conservative Party should drop its short-sighted support for Euro Fiscal Federlalism

Christopher Howarth is a senior Political Analyst at the think tank Open Europe. Prior to Open Europe he worked as a Conservative Foreign Affairs Adviser and senior researcher to a Shadow Europe Minister. Follow Open Europe on Twitter.

Following interventions by David Cameron and Liam Fox most Conservatives now think that EU renegotiation and an EU-related referendum are necessary, though they may differ on timescale. As I’ve set out before here, there are a number of different options for an EU referendum that can go into the next Tory manifesto but on substance, the final outcome of any negotiations will largely depend on the nature and speed of eurozone integration, and the Treaty change that entails (over which the UK will have a veto). Judging from his remarks over the last few days, David Cameron genuinely wants to reform the UK’s relationship with Europe.

However, on one point the Conservative leadership is a bit lost: its explicit support for Euro fiscal federalism, which threatens to complicate any renegotiation.

Preserving the balance of power in Europe was a traditional British policy, practiced ever since Henry VIII who effortlessly switched from traditional support for Spain to France in order to prevent the emergence of a continental hegemon. However, like a lot of British tradition, it has (despite Sir Humphrey’s attempt at revival) gone out of fashion. But it is still startling to hear a Conservative Prime Minister and Chancellor – alongside euro socialists such a Francois Hollande or EU federalists such as Jean-Claude Juncker - leading calls for a European fiscal union, albeit one in which the UK would not be involved.

It is true that it was widely predicted, not least by the current Foreign Secretary, that currency union would lead to a common government, but for the Conservatives – some of the greatest opponents of giving EU more powers - to actively support moves to Eurozone fiscal integration is contradictory and risks locking the UK into a weak negotiating position over future EU reform.

First, it amounts to ‘do as we say not as we do’. Why in the world should a state take Britain’s advice to undertake further integration when it is clear Britain believes, for itself, this is harmful? Do we even believe that backing up the Eurozone with tight fiscal rules, eurobonds, a banking union and ultimately fiscal transfers can produce political stability or the structural, pro-competitiveness reforms that Europe so desperately needs? Present experience, as well as fiscal conservative economic thought (i.e. the need for budget responsibility and risk of free riding), would say no. Debt pooling in the Eurozone would probably take the pressure off Spain, Italy and others to reform.

But more fundamentally, the Conservatives, including the current Foreign Secretary, were vocal opponents of implementing the Lisbon Treaty without the consent of voters. They’re now asking eurozone leaders to pursue a “single economic policy”, despite the fact that public opinion in many euro countries is clearly against such a move. 80% of voters in Germany are against Eurobonds according to a new opinion poll – that’s more than the share of Britons opposed to the UK joining the euro.

Finally, a full-scale banking and/or fiscal union probably requires treaty change – possibly a series of treaty changes - something Britain has pledged to veto unless it gets safeguards to protect its interests. In particular, a banking union would most likely cut across the single market in financial services, something again that Britain has pledged to prevent. In other words, this locks Britain into a weak negotiation position over the type of reforms both Cameron and Fox probably have in mind. How can Britain stake a claim for a new relationship with the EU, in return for acquiescence in a treaty change we were the foremost supporter of?

So why is the Coalition backing Eurozone integration? Fear of something worse? A desire to pin the blame for the UK’s own slowdown on the Eurozone? Fear of the short term damage caused by Eurozone breakup, or simply the desire to say something – the culmination of the politician as a commentator on rather than an instigator of action?

Whatever the motivation, it is short-sighted. After having spent a decade in opposition, calling for a more dynamic European economy and a slimmed-down, more democratic EU, the Conservative leadership has now invented a new political belief-system: Eurosceptic fiscal federalism.

Instead, whatever their personal thoughts, the Conservatives should leave this question about further fiscal integration open to the eurozone to decide. It should tell Germany and others the following: we understand the need for you to seek guarantees in return for how your money is being spent in Europe. But Britain has legitimate requirements as well. Since we will never join the euro, Britain will need a different – and more flexible – set of arrangements than euro members. This is the only way to reconcile continued EU membership with UK public opinion. Let’s strike a deal.

Rather than waste his time irritating the Germans, David Cameron needs to set out the vision for the UK in a new Europe, which he himself – encouragingly - now has called for. Tactical support for Euro Fiscal Federalism is not it.