Britain’s EU Veto Will Feed Demand For A Referendum
In a remarkable move during the EU’s latest summit, the French President Nicolas Sarkozy and the German Chancellor Angela Merkel appear to have chosen to risk the quick implementation of measures that would increase euro-zone fiscal discipline over an attempt to impose EU regulation and a transactions tax on the UK’s financial services industry.
Sacrificing the ability to use existing treaty mechanisms to deliver speedy solutions to the euro’s economic problems in an attempt to gain control over, and income from, the majority of Europe’s financial sector that is based in the City of London will no doubt be seen by the markets as an extraordinary demonstration of misplaced priorities from the EU at a time when the urgency of euro-zone restructuring is paramount.
Instead of coming away from this latest summit with a deal to calm market fears of national defaults and the disintegration of the euro, the determination of the so-called ‘Merkozy’ partnership to regulate Britain’s financial services industry has introduced a delay of more than three months for replacement ‘fiscal compact’ structures to be planned.
A look at how vital financial services are to the UK economy shows clearly why UK Prime Minister David Cameron had to resist the EU’s ambition to take the lead on City regulation and a transactions tax.
A recent Price Waterhouse Coopers study highlighted that, in the 2009-10 tax year alone, the UK financial services sector made a tax contribution of over AÃ¯Â¿Â½54 billion ($84 billion), or 11.2% of the government’s income from all taxes during that year.
The industry also contributed a AÃ¯Â¿Â½35 billion ($54 billion) trade surplus in 2010, playing a critical role in Britain’s trade balance and according to The City UK, an independent membership body promoting the UK financial services sector, nearly 2 million UK jobs are involved in financial companies.
But it’s also clear from the same report why other EU leaders want to force Britain to concede to EU rules in this area. The City hosts a huge proportion of European and indeed global activity in many financial markets.
It is home to the largest foreign exchange market in the world, the largest insurance market in Europe, dominates the continent’s private equity industry and around 80% of European-based hedge fund assets are managed in the UK.
Many EU politicians blame the financial sector as a whole and indeed Britain’s more laissez-faire regulatory culture for the credit crunch and the bloc’s consequent economic problems. They have rightly concluded that there is little point in EU financial regulation and an EU financial transactions tax, the proceeds of which EU institutions hope to pocket, if the UK is allowed an opt-out.
Due to Mr Cameron’s hardline defence of the City of London, a separate deal outside the EU’s architecture will now have to be established by the countries who wish to participate in the new euro-zone ‘fiscal compact’. This will not just set down new rules imposing stronger EU controls over national budgets but also how to enforce them.
Either other EU leaders will realise the scale of the task of putting together such an inter-governmental deal and will conclude that they were too hasty to force a British veto over financial regulation. Or, alternatively, the countries who have expressed a wish to participate in ‘fiscal union’ will forge ahead regardless and the result will raise new questions about how that will affect the balance of power between the UK and the ‘euro plus’ group of other EU member countries.
Should such a new voting block also work informally within the European Union institutions as well as outside in order to consistently out-vote Britain on financial services regulation and in a range other policy areas, this will very likely feed popular demand for a more full reconsideration of Britain’s membership of the EU.
If this situation serves to clarify Britain’s lack of influence over EU law-making deriving from having only 10% of the votes in the main EU decision-making institutions, politicians could struggle to justify why the UK should continue to accede to EU laws or pay the billions of pounds every year that Britain contributes to the EU’s budget.
Beneficially, the result of these latest developments could be that holding an EU referendum and debating Britain’s membership of the EU will start to look all the more appealing.