Mr Cameron’s Gamble

On 29 October we learnt from the BBC, that the Prime Ministers of both Finland and Estonia (snowy Baltic neighbours) had no idea what Mr Cameron was talking about.

This was not due to some egregious Foreign Office failure to translate Mr Cameron’s speeches into all the major Finno-Ugric languages; but rather the simple omission by Mr Cameron himself to tell these gentlemen what were the issues he wanted to re-negotiate ahead of the planned UK-Europe In-Out referendum that is supposed to take place before the end of 2017.

If the esteemed Prime Ministers are in the dark, so are the British public. Apparently Mr Cameron hasn’t told anyone else, either.

David Cameron has set in train the biggest political gamble since Harold Wilson asked the same question – in a much more straightforward way – in 1975. At question is the future role of the UK in the world – and actually, though the French and Germans do not see it this way, yet – the future of Europe, too.

So the British are heading for a blind vote on the renegotiated terms of renewed membership of the EU. As we head into winter, with every shortening day, it seems to me that the risk of an OUT vote gets more likely.

I don’t want to judge Mr Cameron’s prime ministership definitively yet – there is still much to play for – but the kindest thing that one can say about it, so far, is that he has been extremely lucky.

He was lucky to scrape home in 2010 against the lugubrious and unloved Gordon Brown. And that a like-minded (and like-schooled) Liberal-Democrat leader was prepared to risk all to sustain him in power. (Look what happened to him).

He was lucky that the economy eventually started to recover from the melt-down of the financial crisis of 2008-09. (The core resilience of the British economy resides in the uncomplaining, ‘get-on-with-it’ English character, in my view). He was lucky to have an outstanding Chancellor, who has a deep understanding of the British economy – and an equally keen understanding of where the welfare state had gone wrong.

He was lucky to have unelectable Leaders of the Opposition. (All is forgiven, Mr Miliband, you look like a serious leader figure beside Jezza – but then the angry young disagree, or so we are told…).

He was lucky to win a majority in the House of Commons in May 2015 on less than 38% of the vote, despite all the odds. (Mr Wilson scraped back with the same percentage in 1974.) Especially since many staunch Tories of my acquaintance don’t seem to like him very much.

But if his luck runs out, he might go down in history as a reckless gambler, like his ancestor, King William IV. One thing is for sure: namely, that nobody now knows how Mr Cameron’s gamble might turn out.

What do we know of his objectives? The Economist (17 October edition) recently summed up Mr Cameron’s aspirations, though their summary as far as I could judge was not based on inside information, but rather on the same speculation pumped out by the BBC. The esteemed journal (to which I no longer subscribe, anyway, thanks to its increasing eccentricity – I read this copy on an aeroplane) enumerated six aspirations, as follows:

• He doesn’t want to limit the flow per se (as Theresa May, Home Secretary, signalled that she wanted to do in her speech to the Tory Party Conference). He just wants to limit the right of new immigrants to claim benefits, including Tax Credits.

• Mr Cameron opines that there should be less of it. Generally speaking, that is.

• The single market. It is still basically non-existent in services, digital technology and energy. Actually, the Germans are some of the biggest transgressors here.

• Ever Closer Union. No thank you, says Mr Cameron.

• National Parliaments. They should have the power to block EU legislation.

• The Eurozone. Mr Cameron wants a guarantee that the Eurozone will not act against the interests of those EU members who retain their national currencies (that’s the UK, Sweden and Denmark, though Denmark has pegged the Danske Kronor to the Euro anyway. Forget Poland, Croatia et al – they apparently don’t know what they want).

Now, even if The Economist has got this right, this doesn’t add up to a serious negotiating strategy. Here’s why.

• Immigration and benefits. The issue of paying benefits to newly arrived EU migrants could very simply be addressed without any agonising treaty change at all. Virtually all EU members style their own welfare systems as contributory – meaning that citizens get paid out in accordance with what they pay in. The UK system is, in essence, contributory, in so far as, since the advent of the Welfare State under the post-WWII Labour Government (1945-51) benefits are notionally a function of citizens’ National Insurance Contributions. Even after the new arrangements coming into force next year, your State Retirement Pension will be determined by how much NICs you will have paid. Our system is described internally as universal because the state – naturally – has the right to determine which residents (not just citizens) have the right to which benefits. So some citizens of foreign origin, for example, have, on merit, been granted Pension Credit. Mr Cameron could decree tomorrow, if he wished, by secondary legislation (statutory orders) that the entire UK benefits system is contributory – and the problem would be solved. Of course, the bishops might oppose from the House of Lords. They normally do.

• The overwhelming anecdotal evidence is that the UK parliament is quite adept at imposing regulation on the country without help from Brussels. The Scottish Parliament and the Welsh Assembly have learnt a few tricks too. Of course, banning smoking and charging for plastic bags (where England was well behind the devolved governments) seems sensible to many people. And restaurant hygiene rules (imposed from Westminster and Holyrood) also seem quite sensible. Again, it seems reasonable to harmonise the licensing of pharmaceutical products at a multinational level. In the real world, taxes are the real regulator, and these are still determined at the national level, as is the level of the Minimum (sorry, Living) Wage. I must admit: it is strange that our farmers are not allowed to shoot magpies; and yet our Maltese friends are permitted to slaughter song birds by the million. But are songbirds really on Mr Cameron’s agenda? My guess is that the regulation argument is a shibboleth, with nothing substantial behind it.

• The single market in services. Of course the Germans never agreed to a single market in legal services, advertising or accountancy. Their provincial Mom & Pop Shops would be slaughtered. They won’t even come to the table. Solution: a statute of reciprocity. If our people can’t do business in your land, your people can’t do business here either. Actually, the economic consequences of all this are quite marginal.

• Ever Closer Union. Politicians spin phrases to bolster solidarity. And this was framed, after all, in the shadow of WWII. That’s normal. It would have been a funny Europe which encapsulated its aspirations in the words Rapid Divergence. It’s just an aspirational message, God dammit. For a country which opted out of the Schengen Agreement and then the Eurozone – it doesn’t count for much. Forget about it!

• National parliaments. One of the greatest British Prime Ministers of my lifetime – Sir John Major – (I’m quite serious – you can’t read his memoirs without admiring the man) ensured that the Maastricht Treaty (1992) on European integration included a clause on subsidiarity. In plain English, that means that European law upholds the idea that national parliaments do have the right to block EU law where EU law is deemed to be better devolved to a national parliament. There is a legal mechanism in place to enforce just this aspiration, though, as far as I am aware, it has never been used. That’s partly due to the fact that about 23 of the 28 member states are net recipients of EU funds. Of course, they don’t want to upset the apple cart. The UK, a big-time net contributor to EU coffers has never flexed its muscles. Why? One possible answer: our civil servants are overwhelmingly Francophile pussies.

• The Eurozone. Now we get to the real nub of the problem. This is the only issue which will never go away. It’s complicated, but let me have a go. It’s one thing to be a member of a common trading area of 28 states, where tariffs and rules are harmonised. It’s another thing to be a member of a common trading area where 18 of those states have a single currency and where, by reason of the internal (and irreconcilable) disharmonies amongst the 18, the entire 28 are periodically de-stabilised, even though there are 10 states which do not participate in the single currency. (Historically, this is simply unprecedented). Does that help?

So, there is actually only one issue. But it is a big one. I met an Irishman earlier this year, (who lives in France) who told me that EU members who refuse to join the Eurozone should get out of Europe. (He was mortified when I told him that dear old Sweden would have to leave, too).

The Irish gentleman had a very serious point. When the EU adopted the Euro on 01 January 2002, it effectively became a federation of states whose mutual interests were entwined for evermore. You’ve only got to consider the Greek tragedy – about which I’ve written – to see that even though the Euro has condemned Greece to penury, the Greeks themselves can see no way out of the Cretan labyrinth…There already are two Europes.

A successful monetary union requires, as we now know, not only a common monetary policy, but common banking supervision and capital adequacy regulation. Furthermore, it requires a substantially uniform fiscal policy (aka taxes), universal labour market regulation and almost continuous governmental intervention in the money markets in the event of any disequilibrium. In other words, it entails Ever Closer Union – on steroids.

I’m not sure that this currency union can be made to work in the long term without a very different type of Europe emerging – one to which I don’t think my fellow countrymen would sign up. The Euroland 18 will always put the stability of the single currency first. Call Me Dave’s Gamble could be the parting of the ways. In fact, I find myself thinking the unthinkable.

How did we get here? David Cameron thought he could steal the Eurosceptics’ thunder. Like Disraeli, he could dish the Whigs. If he were to win on the ticket of renegotiated terms he would give the Tory Europhobe Right nowhere to go and UKIP no reason to live. If the Tories could win back even half of UKIP’s nearly four million votes, they would be in power for a generation.

But if those renegotiated terms turned out to be a damp squib – as seems increasingly likely – the proverbial ordure could hit the rotary ventilation system. Mr Cameron’s premiership could yet end in abject failure.

I’d like to explore, going forward, how the advent of the Euro changed the game. I want to examine how Dave’s referendum will play in the markets (it will cause perturbations – but may have a quite unexpected conclusion); how a number of dormant forces may come into play; and how the world, not least for investors, five years hence, might seem like a changed landscape.