Britain and Europe: united but divided

David Cameron remains stuck between a rock and a hard place on Europe, says Lucy Mair

Six weeks ago, the 27 leaders of the European Union emerged triumphantly from talks on the eurozone, having agreed on a "comprehensive and solid" package to rescue Europe from the sovereign debt crisis. It was the third such package this year, and fell by the wayside even faster than its predecessors. This week, Europe's leaders are back in Brussels for a fourth (and, apparently, final) summit on the eurozone, billed as the "last chance" to save the single currency from collapse. But the Franco-German proposal to revise the Lisbon treaty - the constitutional agreement ratified by all 27 members of the EU - has been a contentious issue for David Cameron and caused uproar in the House of Commons, where members of the prime minister's party staged a rebellion over Britain's relationship with Europe in October.

Fresh proposals

As part of a new effort to find a cure for the eurozone's poor economic health and prevent similar problems from recurring, German chancellor Angela Merkel and French president Nicolas Sarkozy are calling for the eurozone countries to form a fiscal union with budgetary and disciplinary powers over its members. According to their joint blueprint, the fiscal union will hold monthly summits to tackle the crisis and install a permanent president and ministerial structure. Member states will also have to surrender national sovereignty over their budget to Brussels, and will face automatic penalties if their budget deficit breaches the 3 per cent of GDP limit agreed in the Maastricht treaty. Furthermore, the German and French leaders suggest regulating fiscal policies throughout Europe and implementing a financial transaction tax.

To establish a fiscal union between the 17 members of the eurozone, Germany advocated a renegotiation of the Lisbon treaty by all 27 members of the EU in order to guarantee the use of the European court of justice to enforce the new euro rulebook. However, under pressure from Conservative eurosceptics and determined to safeguard Britain's position in the single market, in the early hours of Friday morning the British prime minister refused to allow "a treaty within a treaty" and vetoed the revision.

David's dilemma

Since the beginning of the week, Cameron has come under intense pressure from both sides of the Channel. European leaders have urged him to contribute to an agreement to save the euro and preserve European unity, while members of the Conservative party demanded that the prime minister wield his veto to put the interests of Britain before Brussels. In a dramatic Prime Minister's Questions on Wednesday, Tory backbenchers called on Cameron one by one to use the re-opening of the Lisbon treaty as an opportunity to repatriate powers over social policy, employment law and fishing regulation. However, the decision to stand in the way of a euro rescue package, which could potentially damage Britain's relationship with the rest of the EU, is unlikely to have been taken lightly. The British economy depends heavily on Europe, our closest neighbour and most important trading partner, and the Treasury warns that if the single currency collapses, it could cause Britain's GDP to contract by 7 per cent and cost the economy £100 billion.

The most significant concession Cameron hoped to receive at the summit was a safeguard for London's financial services industry. The prime minister promised to show British "bulldog spirit" to oppose the implementation of the financial transaction tax and to make a separate protocol to protect the City from EU financial regulation his "price" for agreeing to a fiscal compact in the eurozone. However, the failure to win this safeguard, blocked by the French president, proved to be the sticking point which forced Cameron to reject the deal. London is home to three quarters of Europe's financial transactions, meaning that the "Robin Hood" levy would have a disproportionate impact on the UK and threaten the prosperity and competitiveness of the City, which accounts for 11 per cent of Britain's GDP.

With or without you

Eurozone leaders made clear from the start that, although they would have preferred to reach a deal involving all 27 EU states, in the event of difficulties they would forge their own pact. With the Lisbon treaty shelved, the road should be less rocky both for the prime minister at Westminster, and for the leaders of Europe in Brussels. However, the establishment of a fiscal union between the 17 members of the eurozone could still spell serious political discord in Britain and trigger a referendum on our membership of the EU.

Under the European Union Act (2011) passed in July, a referendum is required if significant UK powers are transferred to the EU. By blocking the revision of the Lisbon treaty, Cameron avoided directly passing powers to Brussels. But concerns remain that a 17-member fiscal union will upset the balance of power in the 27-member EU and create a two-speed Europe with the interests of Britain marginalised on the edge of the eurozone core, prompting a number of calls for a referendum from inside Cameron's cabinet. In an interview with the Spectator published today, Northern Ireland Secretary Owen Paterson suggests a referendum will inevitably be triggered by "the creation of a new bloc which would be effectively a new country from which we were excluded." Meanwhile, Cameron's decision to opt out of a European agreement threatens to damage the coalition government by souring relations with pro-European Liberal Democrats.

As the summit moves ahead without Britain, the proposals for a fiscal union are neither guaranteed to be accepted in their entirety by the 17 members of the eurozone, nor to save the currency bloc from the deepening debt crisis and looming recession. The agreement on the new eurozone accord is timetabled for March, yet a resolution to the eurozone crisis seems much more distant.