Andrew Lilico: After the veto - So now what?

Having recovered from our weekend hangovers, through some combination of over-excitement about the veto and abandonment of austerity for the duration of our office Christmas parties, we emerge this week, blinking, into a strange new world. How did it all happen? What does it all mean? And where do we go from here?

I guess the first point to make is the rather obvious one that this doesn’t appear to have been planned by anybody — with the possible exception of Sarkozy. Cameron appears to have hoped, until very late, that he could get away with either there being no full new Treaty or, if there were one, to be able to argue — as he did in respect of the major Treaty amendment last year — that since it applied formally only to the Eurozone, then it didn’t change anything for the UK.

The point of that appears to have been the desperate need to avoid having a referendum — a referendum would be likely to produce the triple result of (a) leaving the EU; (b) splitting the Coalition; (c) splitting the Conservative Party. On this narrow point, I have been fully aligned with Cameron, though we have disagreed up to now about the best tactics for avoiding it. My view was always that the way to avoid a referendum was to renegotiate our position within the EU. His and Hague’s view appears to have been that the way to an easy life on Europe was to do as little as possible.

But it was always an error to imagine that doing nothing was an option. The only result of doing nothing was to strengthen the hand of get-outers and to increasingly empower and embolden back-benchers to make the running on EU policy. The most visible recent manifestation of this was the 81 that voted against the government on the referendum bill a few weeks ago. But that group was merely a symptom of a much wider unhappiness within the party, that was becoming entwined with other unhappiness about the front bench leadership.

Many commentators pointed to the aggressive barrage of backbench Europe questions at Prime Minister’s Question time on Wednesday. But in truth the front-bench already knew where it was going by then. The All Party Parliamentary Group on European Reform on the Monday (as Anthony Browne reported) was attended by a number of key loyalists, already signalling the interest of the Front Bench in the proposals presented there by Mats Persson of Open Europe.

Open Europe had been exploring a number of options for repatriation. But by the Monday it had come out with a specific recommendation for Cameron’s tactics at the forthcoming Summit. Whereas I, for example, had long argued for an abstract constitutional repatriation of powers, with specific traditional Eurosceptic concerns about agriculture, fisheries, employment legislation etc being left as matters that would cure themselves once the fundamentals were right, Open Europe had previously felt obliged to focus upon more bread-and-butter forms of repatriation, including the possibility that Cameron had previously mentioned of repatriating certain social and employment legislation. But on the Monday Open Europe’s focus was upon financial services regulation.

Open Europe’s report argued that, although it could be contended that EU-level setting of financial services regulation had, in the past, been to the UK’s benefit, that was much less likely to be so over the next decade. There were a number of reasons for this, but in particular Open Europe focused on three things:

a) That whilst both the UK and EU-level policymakers intended to change financial regulation very considerably in response to the crisis, they intended to do so in different directions. The UK sought to empower supervisors and market processes, whilst at the EU level it was much more about rules to establish control and curtail allegedly undesirable activities. Open Europe highlighted some examples in which the result of this clash was that UK regulation sought to impose more restriction on banks than EU rules allowed (e.g. in respect of capital requirements).

b) Whilst in the 1990s and 2000s the EU was a potential growth market for UK financial services businesses, this was much less likely to be the case over the next decade, and in particular was unlikely to be the case relative to China and India — the real growth opportunities and threats to London of regulatory arbitrage (under-cutting regulation to attract business to relocate) now lay outside the EU.

c) Whereas in the past, EU-level policymakers had been reluctant to over-rule Britain in respect of such a major industry, that was no longer true. Many continental politicians blamed “Anglo-Saxon finance” and Anglo-Saxon regulatory norms for creating the crisis. Their last interest would be in reluctance to impose on these. Once that instinctive reluctance were removed, then the low weight that the UK carried in QMV votes, relative to the size of the Financial Services sector, left it almost uniquely vulnerable. That would be exacerbated by Lisbon, with the increased role of the European Parliament and changes to QMV rules that meant the Eurozone 17 would have a qualified majority from 2014 on if they voted as a block.

Open Europe emphasized that the finance sector, at over 10% of GDP, is vastly larger than industries of traditional Eurosceptic interest such as agriculture or fisheries. They urged that political capital should be expended on the big sectors, not the small.

To reflect the risk that EU-level policy making might fundamentally take financial sector regulation away from the direction that the UK sought (again, I emphasize, not in order to regulate the financial sector less) Open Europe recommended the introduction of either a special protocol into the Treaty or some Britain-specific legal safeguard to prevent Britain being over-ruled in respect of Financial Services regulations.

On the Thursday morning a letter appeared in the Telegraph, signed by 30 MPs, including many that had attended Persson’s presentation on the Monday, and in particular including the PPS of both PM and Chancellor. This letter is simply a restatement of the Open Europe case and proposal in epistle form. The British government, as a reader of the Telegraph letter ought to have expected, duly submitted a proposed protocol.

The French and Germans appear to have been amazed and rather bemused at the idea that the British would turn up at a Treaty negotiation that was intended to be about saving the euro and, on the face of it (and indeed de facto, though on a smaller scale than Sarkozy, in particular, seems to have thought) seek to repatriate certain powers over financial services regulation, without having trailed in advance their intention to do so. From their perspective, it must have been difficult to comprehend how they could agree to such a measure with so little notice. They had not been able to debate it internally in their political parties, or even have their lawyers study it in any detail. What would the ramifications be, really?

Then comes the veto and the 23 (soon to be up to 26, perhaps?) forming their own new Treaty. Forthcoming we have the chaos as to whether these 23-26 will be able to use the institutions of the EU, such as the Commission and European Court of Justice, to police their new arrangement. We shall also fairly quickly face the issue of whether the UK government can really pass any EU financial services Directive through Parliament, having been willing to exercise the veto to repatriate (albeit to a small extent) financial services regulation. I can’t see how it can.

Over the weekend, the Lib Dems have started to crawl out of the woodwork — and in none too good a mood. One problem the Lib Dems face is that, because the UK government position was trailed with such limited fanfare, the press has pitched Cameron’s position as being “to protect the City of London from excessive EU regulation”. That was absolutely not either what Open Europe had recommended or what the UK government protocol demanded. Read it again. One of the main things the protocol seeks is to provide a legal safeguard for “the UK’s decision to impose higher capital requirements [than EU rules permit] on certain [financial] institutions”. But because of the press spin that this is about protecting the City, the Lib Dem position — which has been consistently and vehemently anti-City — is made doubly difficult. Vince Cable has suddenly to swallow being seen as a member of an anti-EU pro-banker government.

I had long urged that we fight on completely different ground. I’d hoped we might seek to be able to repudiate judgements of the European Court of Human Rights (doing so is forbidden by the Lisbon Treaty). In particular, I wanted to be able to repeal the Human Rights Act and reject what would be a subsequent ECHR judgement against the UK regarding control orders. (Control orders exist in the UK because of a judgement that the previous regime involved impermissible discrimination.) If we had fought a battle with the EU so that we could repeal Control Orders, Lib Dems would have found that very difficult to oppose.

However, I fear that the last realistic time one could have achieved renegotiation/repatriation was at the time of the major Treaty amendment agreed last year, which is, of course, still awaiting ratification (indeed, Cameron is reported as having told Merkel, during Thursday evening’s negotiations, that he was not confident of being able to pass that Treaty amendment through Parliament). Realistically, once no attempt was made to renegotiate or repatriate anything of substance at the time of that amendment — especially given that Cameron argued that he should not do so because of the euro crisis and because the amendment affected only the Eurozone — it was always unlikely that subsequent Treaty changes, affecting only the Eurozone and intended to save the euro, would be believed as bases for the UK to renegotiate. If we didn’t renegotiate when we had the better chance in 2010, what on earth did they think we were doing in 2011?

By the time of last week’s summit, we were definitely in “I wouldn’t be trying to get to Dublin from here” territory. Cameron had little option but to seek to repatriate something. The French and Germans were always going to turn it down if it hadn’t been argued for in advance. But could Cameron announce in advance that he would be seeking to repatriate anything and not have Lib Dems resign?

But, as it is, it seems like the Lib Dems on the front benches are not going to resign their ministerial cars over this. That being so, it’s hard to see what would, in fact, have induced them to resign. If exercising a veto and probably now (unless we buckle) being chucked out of the EU, on an issue where we have been painted as “protecting the bankers” doesn’t induce Lib Dem ministerial resignations, you’d struggle to come up with anything much Cameron might feel tempted to do that would, indeed, see them go. Attacking Iran, maybe?

It’s a mess, to be honest. I think our EU Membership is probably now done — which is a pity and was avoidable if we’d sought renegotiation earlier. Unless there is a dramatic turnaround, it’s probably more likely than not that we’ll have exited formally within five years. De facto, it could come much sooner. Some financial services directive will come before Parliament. The Conservatives will mainly vote against it. The first one might pass with Lib Dem and Labour votes. Conservatives will be incandescent, and a referendum bill will come forward. If that doesn’t pass, there will be a General Election, which the Conservatives will win. The Conservatives may even run at the General Election proposing to leave, but might be content with proposing a referendum. The referendum will presumably vote for exit.

(Bound up with this, the SNP may well take the opportunity to have its own referendum on independence, just before the UK-wide EU referendum, trying to increase the independence vote because Scotland would presumably vote to stay in the EU. Another tactic might be to wait until we left the EU, then have the independence referendum proposing that Scotland would re-join the EU. Either way, EU exit runs a good chance of being paired with break-up of the Union. On the other hand, there is also the possibility of re-establishing a currency union with the Irish if the euro breaks up, so the permutations here are legion.)

I’ll say it again: this is a mess, and was avoidable. Having painted himself into his corner by the refusal to renegotiate when he could, Cameron probably had no choice by to press the financial services point last week, and to exercise the veto when he was turned down. But the consequence is likely to be our avoidable exit from the EU over the medium-term (and possible contemporaneous break-up of the Union). Then again, it is widely reported that many of Cameron’s senior advisors have, for a while now, wanted to leave the EU. Perhaps (if only unconsciously) that was Cameron’s plan all along?