Market Analysis

In Defense of Britain

An open letter to EU officials.

To the esteemed European officials:

Looks like you’ve had a frustrating few days since UK Prime Minister David Cameron vetoed amending the Lisbon Treaty. Your frustration is understandable—you believe tougher eurozone budget rules could help prevent (or at least mitigate) future sovereign debt crises, and enshrining them in the EU treaty would have aided enforcement. But Cameron’s veto meant you had to settle for a side agreement, which may prove tougher to execute. Frustrating indeed! But here are some thoughts that might help.

First, to those who found Cameron’s decision impudent, try thinking of it as a victory for democracy. Remember what the European Union is: 27 (soon 28—congrats, Croatia!) autonomous countries who’ve agreed to trade freely and harmonize some economic policies and judicial processes. It’s not a federal state. Individual heads of state answer to their constituents, not Brussels technocrats. As prime minister of a sovereign nation, Cameron’s job is to safeguard Britain’s best interests, and I don’t think anyone can fault him for doing what he believed right for his country.

In a funny way, this may be the best-case scenario. It was always unlikely every EU nation would easily agree to the new rules, and if one nation had to opt out, better Britain than anyone else. The euro’s health doesn’t depend on Britain’s adherence to your new fiscal oversight. Nor do the Brits seem to need much policing. After all, they don’t use the euro, and ye olde British pound has a sterling (pun intended) reputation. The government has demonstrated it’s willing and able to enact tough austerity measures voluntarily, without orders from Brussels. Lest we forget, the current coalition ran and won on deficit reduction. Britain’s economy is also already highly competitive, so you don’t need to push pro-growth reforms through its parliament. In addition to being an important European economic partner, the UK does serious business with the rest of the world. As a financial center, London rivals New York and Hong Kong.

Which brings up what’s likely, in my view, the real sticking point: Many of you really wanted to impose a financial transactions tax on London. The sheer volume of capital markets activity that takes place there makes it a big possible revenue source—perhaps helping you shore up peripheral Europe. Cameron refused the tax because of its potential knock-on effects on Britain’s economy and citizens (who’d ultimately pay the tax, which banks would pass to consumers, as always). Now, some have suggested that’s selfish (please re-read paragraph two of this letter if that’s you). But you’re probably not missing as much as you think. If you tax something, you typically get less of it. Make financial transactions more expensive in London, and at least some market activity likely migrates to tax-friendlier shores, eventually leaving the EU with lower tax revenue from this channel than hoped. And probably a bit less GDP, especially in the UK. Think of it this way: By not taxing transactions in Britain, you’re helping one of your biggest trading partners stay stronger.

That’s important because it’s clear—despite what many headlines suggest—you’re not planning to boot Britain from the EU over this. Angela Merkel and Nicolas Sarkozy have said they want the UK to stay. Cameron plans to stay. That’s a good move, in my view—neither the EU nor UK would be well served by cutting Britain from the single market. Those trade barriers are better left down.

Plus, for all the talk of a “new, two-speed Europe,” after the dust settles you’ll likely find Britain’s EU status hasn’t much changed. If a two-speed EU is one where the UK opts out of some regulations, taxes and some other broad agreements, then you’ve had a two-speed Europe for decades. There’s the 1984 “Thatcher Rebate,” which partly exempts Britain from paying continental farm subsidies to this day. The UK didn’t sign the Shengen Agreement on border controls, waived the Lisbon Treaty’s Charter of Fundamental Rights and isn’t part of the area of freedom, security and justice. And since Britain said “no thanks” to the euro during Maastricht Treaty negotiations, it isn’t bound by the Stability and Growth Pact, which governs only eurozone member states...and your new fiscal compact is just that old agreement with a few more teeth. In short, since you’re smarting now, the divide between Britain and the Continent feels super wide, but to me it looks like the status quo.

To close on an encouraging note, let’s look beyond Britain—after all, this summit was really about keeping the eurozone together, and your actions showed how committed you are to this. I know you’re getting some grief for your gradual approach, but it’s good you’re taking your time. This monetary union is a work in progress, and finding the right long-term solution is better than settling on a quick one. So chin up! And be kind to the Brits. They’re your friends.


Elisabeth Dellinger
December 15, 2011

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.