The Euro Crisis: Was Cameron Right?

In yet another effort to solve the euro crisis, France and Germany last week agreed on a stability pact that essentially offers increased bailout funds in return for even stronger fiscal austerity on the part of the major debtor countries of Europe. 

But the deal arguably necessitated changes to the Treaties governing the European Union and as such required assent from all 27 EU member countries, ten of which are not members of the euro zone but whose economies are nonetheless closely integrated with it. To get around this problem and to provide the markets with a united front of governments, Germany and France wanted to make the deal an EU-wide agreement and sought to obtain a unanimous agreement to seek appropriate Treaty changes. 

Britain's David Cameron, however, believed that some aspects of the deal would harm the City of London's position as a financial center contributing something like 10% of Britain's GDP. He was also under pressure from a resurgent euro-skeptical right wing in his Conservative party to recover powers over policy-making rather than to agree to cede any more sovereignty to Brussels.

He therefore decided to threaten to veto changes to the Treaty unless it included some protection for the City's interests. Germany and France, whose governing elites at heart suspect that Anglo-Saxon speculators are aggravating the euro crisis, would have none of it and called Cameron's bluff, probably feeling that in the end, like his predecessors, Cameron would not be prepared to deliver on his threat. Cameron, however, felt that his political credibility would be irretrievably damaged if he were not to follow-through on his threat and consequently vetoed any EU deal. He was alone in his dissent.

The upshot of that veto is that the euro zone and nine of the ten other EU members will go ahead with a separate deal, effectively creating a two-speed Europe, with only Britain going at the other speed. Mr. Cameron claims that Britain's position is uncompromised by this veto, as it remains a full EU member with all rights and privileges, including access to the Single Market. 

That may be true. But what is certain is that by its veto Britain has effectively decided to stay out of any deals to fix the euro. That is a significant loss of influence for Britain and it is doubtful that Britain has gained any benefit from Cameron's veto because the City remains vulnerable to the imposition of European regulations and now lacks an advocate as well. For their part, France and Germany can claim that Britain is putting local interests above the common good and that getting 26 out of 27 is European unanimity in all but name.

Basically, Cameron's decision to try and blackmail France and Germany into letting the City off the hook was never going to work. Germany and France don't actually need Britain's participation to strike a rescue deal so the threat of veto was relatively empty and they knew it. The only question was whether the fig-leaf of British participation was worth the price of concessions to the City. Clearly it wasn't, and that fact should have been relatively obvious to the British team. 

Cameron himself will probably also lose out from this failed blackmail. His coalition partners, the Liberal Democrats, are strongly pro-European and their commitment to the coalition must now be in question. And the conservative euro skeptics are likely to use this perceived victory as an opportunity to increase pressure for a referendum on EU membership, further polarizing British politics on this divisive issue. In the end, the decision may cost Cameron his job and trigger an early UK election. Frankly, Cameron would have been much better advised to go in prepared to accept the deal and spend capital on selling it domestically rather than pin his colors to an illusory national interest.

Of course, none of this discussion changes the fact that the deal that France and Germany have struck is not good, because it seems to doom Europe to a decade or more of no growth, unless the ECB starts acting like a real central bank, which it doesn't feel able to as yet. Nor does it change the fundamental problems underlying the euro, which are that it isn't really a viable currency union to begin with, given the very different economies it yokes together, and the fact that a United States of Europe really isn't a politically feasible goal. 

Note: This article is specially contributed by David Champion who is a Senior Editor with Harvard Business Review.