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Remorseless logic

7 June 2012 By Hugo Dixon

The UK could be limbering up for its next European clash. As Prime Minister David Cameron flies to Berlin to tell Germany’s Angela Merkel that the euro zone needs to make up or break up, his finance minister is demanding “safeguards” if the zone forms a full banking union. Other countries won’t like either the UK’s lectures or pleas for special treatment for its lenders.

Britain is in a bind. The government talks about the “remorseless logic” of fiscal and banking union within the euro zone. It believes that is necessary to prevent an explosion which would severely damage bystanders such as the UK. But it also realises that greater integration across the English Channel could marginalise Britain. A key principle of UK foreign policy for hundreds of years has been to play divide and rule, to prevent the rest of Europe ganging up against it.

This conflict of interest last played itself out disastrously at December’s European summit where Cameron threatened to veto plans for the euro zone’s fiscal compact unless he got concessions in return. In the end, his European partners just sidestepped his veto by agreeing a new treaty that didn’t include Britain. But they were irritated, Cameron left empty handed and the UK’s influence was diminished.

The current discussions over banking union are even more important because financial services form such a large part of the UK economy. Despite wanting the euro zone to form its own banking union, the government is clear that it wants no part of it. The snag is that the UK also wants its lenders to have continued access to the European Union market. And here’s the rub: will the euro zone be prepared to give British banks a passport to operate freely within its banking union if they are not subject to the same regulations and supervision?

George Osborne, Britain’s finance minister, is calling for safeguards. And if the UK plays diplomacy better than it did in December, it may gain some reassurances. But that will only blunt another remorseless logic – namely that, if the euro zone gets its act together, Britain will find itself progressively squeezed.


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