Market Analysis

On David Cameron’s Vision for Europe

In a landmark speech, UK Prime Minister David Cameron drew a blueprint for nations that like the EU’s single market but not its bureaucracy.

UK Prime Minister David Cameron unveils his plan to renegotiate the UK’s relationship with the EU. Photo: Olly Scarff/Getty Images.

Pop quiz: What do David Cameron and Herman Van Rompuy have in common?

No, Cameron doesn’t share Van Rompuy’s poetic prowess (that we know of). Rather, and perhaps unintentionally, the two men have combined to (likely) pave the way for countries to leave the eurozone.

It started last summer, when Van Rompuy, the European Council President, released a rough draft of his roadmap for “A Genuine Economic and Monetary Union.” At the time, many leaders cheered the prospect of tighter integration and pledged to have a plan in place by year-end. But when Van Rompuy released an updated, fleshed out version of his whitepaper at a December EU summit, improvements in Europe’s periphery seemed to sap the enthusiasm for immediate integration, and leaders merely asked him to write another one in six months. And in their summit statement, they made a reference to a subgroup of “participating Member States” in Van Rompuy’s scheme. The subtle message: Some nations aren’t on board with more integration, and for perhaps the first time in the EU’s history, it seems ok for member states to start backing away.

Enter, stage right, David Cameron. Last Wednesday, he gave a long-awaited speech on his plans to renegotiate the UK’s place in the EU and present the new deal to UK voters in a membership referendum by 2017.

The UK has long been a somewhat skeptical member of the EU, which has evolved considerably since the UK joined the then-European Economic Community in 1975. The UK joined for access to the single market—a perfectly well-advised move, given the obvious economic benefits of free trade across Europe and coordinated international trade negotiations—the larger the region, the more clout. But bureaucracy grew as Brussels “harmonized” regulations and countries quietly surrendered sovereignty over various items, and in 1988 Margaret Thatcher famously warned the more powerful EU was “a European superstate exercising a new dominance from Brussels.” It was Thatcher who secured the UK’s rebate of some of the UK’s contributions to the EU budget, which started the UK’s pattern of opting out from various EU practices and laws. Her successor, John Major, secured the UK’s opt-out from the euro, and Tony Blair and Gordon Brown continued the tradition with several opt-outs from the Lisbon Treaty.

In short, the UK doesn’t want to give up sovereignty to Brussels’ largely unelected leaders. It’s a very self-determined nation—much like the US in that regard. But it still wants the economic benefits of the single market—hence why Cameron’s not looking for exit signs. He and his cabinet want to remain in the EU as much as the EU still wants Britain—he just wants more freedom for his constituents. For example, he’s not keen on signing the UK up to the EU’s forthcoming law enforcement and policing measures, which include a European Arrest Warrant. He’s also not enamored of the eurozone’s centralized bank regulators (which, at times, leaders have suggested should apply to systemically important banks throughout the entire EU, i.e., not just eurozone members) or proposed labor reforms, which would present a much stricter code at a time when Cameron’s trying to move the UK in the opposite direction.

And now, by vowing to renegotiate a looser EU relationship for the UK and let voters decide whether to stay, Cameron’s setting a precedent for other nations that want to back away. Not just Denmark, which shares the UK’s euro opt out (the Maastricht Treaty currently requires all other EU nations to adopt the common currency), but EU or even eurozone nations wary of plans for tighter eurozone integration (which even current non-euro EU states would eventually be subject to under Maastricht).

In my view, there’s ample reason for nations to be skeptical—Van Rompuy’s plan is problematic for a variety of reasons. It discusses political and economic union in broad strokes with pie-in-the sky references to strengthened democratic legitimacy. But even after months of discussions with the EU and eurozone’s national and institutional leaders, Van Rompuy can’t articulate how to improve democracy at the supranational level. What he can articulate likely scares any national leader wishing to preserve their country’s sovereignty. He writes: “Decisions on national budgets are at the heart of Member States’ parliamentary democracies. At the same time, the provisions for democratic legitimacy and accountability should ensure that the common interest of the union is duly taken into account; yet national parliaments are not in the best position to take it into account further.”

Those two sentences seem to draw a line in the sand. On one side, nations who think EU common interest—and EU political institutions—should drive domestic economic and fiscal policy; on the other, those who value self-determination.

Thus, perhaps counterintuitively, it’s possible the EU simultaneously comes together and comes apart over the next several years. Given the incredible will among the EU’s unelected institutional leaders—Van Rompuy and European Commission President José Manuel Barroso—to force a deep political and fiscal union in the eurozone, it’ll probably happen at some point. Because the economic integration among eurozone members is already much tighter than among EU members, eurozone nations have already sacrificed some economic independence, and some will likely see sacrificing political and fiscal independence as natural extensions of this. For them, the trade-off will likely be more than worth the benefits of the euro—particularly the free and easy cross-border trade it fosters.

But some nations that signed the Maastricht Treaty and later balked at the common currency—like, perhaps, Hungary or the Czech Republic—might decide not to sign up. And some current eurozone nations—perhaps increasingly bailout-fatigued states like Finland—might wish to take their leave. At least some nations will rightfully be skeptical of a supranational body with the “ability to take rapid executive decisions to improve crisis management in bad times and economic policymaking in good times.” They won’t agree “reinforcing the capacity on the European level to take executive economic policy decisions for the EMU is essential.”

Now, an exit strategy seems ready to enter the conversations. The December EU summit declaration opens the door for self-determined nations to reject Van Rompuy’s vision, and Cameron’s actions provide a path for renegotiation—in fact, should Cameron win the next UK election and proceed with his plans, the new treaty he negotiates could end up the blueprint for a more devolved EU. Nations valuing the EU’s single market but not its political and social bureaucracy will perhaps devolve into EU-lite. Maybe a European free trade zone that also negotiates global trade deals as a bloc, but doesn’t do much else. Members could access the single market and capitalize on its other free trade deals, but they wouldn’t be bound to common agricultural policy, regulatory schemes, labor codes and the like—or shackled by political or fiscal union. (And, despite what some eurozone officials think, these nations might find themselves the preferred destination for much European commerce.)

Yes, this means that at some point—and it may be quite a few years from now—the eurozone may finally have to face the elephant in the room: The eventual exit of some member-states. As long as any exit happens in an orderly fashion though, markets should be fine, and orderly seems to be the direction of choice. EU leaders are already moving at a snail’s pace, and as they start drafting the new treaty required for political and fiscal integration, progress will slow further. These treaty deliberations will likely include lengthy discussions on an exit provision and mechanism for countries currently in the eurozone, and opt-out provisions for those who committed to join years ago but no longer want to move forward. Countries will potentially have to hold national referendums on participation in the new scheme—even Germany has signaled an intent to let its people decide. Markets seem likely to have years to digest pending changes and referendum results—the world will know who’s in and who’s out long before the administrative and potential currency changes take place. And any currency changes will likely take place slowly, perhaps with the new national currencies starting out pegged to the euro, and then incrementally moving toward a free-float. National central banks should have ample time to unwind their Target2 liabilities. If done right, pandemonium need not ensue.

In a way, an orderly partial eurozone breakup could be a long-term social positive for some nations. In nations where the benefits of euro membership aren’t as obvious, nationalism is on the rise. Far-right parties have made electoral strides in several European nations, both in and out of the eurozone, over the past year. The same goes in some of the eight EU nations betrothed to the euro. Without a supranational bureaucracy to use as a wedge issue with voters, however, proto-fascists should lose their appeal, allowing cooler heads to stay in charge.

As always, any number of things could happen in the coming years to alter the EU’s course—hence why we’re not in the business of making long-term predictions. But if Cameron’s speech ends up sowing the seeds of a vibrant, productive two-speed Europe, we’re likely watching history in the making.

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