UK Politics

James Landale: The euro dilemma facing David Cameron

Germany's Angela Merkel and France's Nicolas Sarkozy have said the EU needs a new treaty to deal with the eurozone debt crisis - a position set to add to pressure on David Cameron from those in his party wanting a referendum.

David Cameron faces a dilemma. The survival of his government arguably depends on the survival of the euro. But to protect the euro, he could end up accepting a deal that angers his party and divides his coalition.

Let me explain. If the eurozone collapsed, much of what the Chancellor George Osborne announced in his autumn statement last week would count for little. Banks would fail, interest rates would rise, foreign trade would plummet.

The government would probably become very unpopular.

So the prime minister wants the euro to survive. But to help it live on, he is likely to have to accept some kind of greater fiscal integration within the eurozone.

The precise - and important - detail is still being worked on but the basic principles are established.

Any deal would involve eurozone countries giving up some sovereignty over their tax and spending policies. A new disciplinary procedure would be set up to ensure that eurozone countries follow the rules and do not build up the kind of debts that created the latest financial crisis.

Minor tweak

With luck the European Central Bank would then feel confident enough to turn on the taps and start printing euros to help support countries with those big debts.

Now, in an ideal world, Mr Cameron would like this new fiscal union to be created with two conditions.

One is that the new system would be set up with a minor tweak of European laws and treaties that do not force him to hold a referendum.

The second is that it does not in any way sideline the European Union and exclude the UK and other non-euro countries from the decision-making process. In the jargon, this is known as caucusing.

But Mr Cameron's world is not ideal. Germany is pressing for substantial treaty changes - not a minor tweak - to ensure that the new rules are tough enough to keep the Club Med southern European eurozone countries in check.

Surrender of power

And many politicians believe that a new euro fiscal union could by definition dominate the EU and potentially damage British interests.

This means that Mr Cameron is under pressure from his own party.

First, there are some Conservative MPs who believe a fiscal union within the euro would automatically suck power from the UK to the centre and would thus force the government to hold a referendum.

The government rejects this. Downing Street insists that, under the European Union Act, a referendum would be forced only if there was a significant surrender of power from the UK to Brussels. They say a fiscal union does not represent that.

But eurosceptic MPs disagree. They warn that a new fiscal union could decide to establish a financial transaction tax or insist that euro-denominated financial instruments are traded within the eurozone and all of that would hugely damage the City of London.

The bottom line is that the government does not want to concede a referendum, and in truth, nor does Germany. A referendum in the UK - and other countries like Ireland - would cast doubt in the minds of the markets over whether or not a deal was possible to save the euro.

And crucially, a referendum would be almost certainly be opposed by many Liberal Democrats and could undermine the coalition. Europe is one of those issues that still has the potential to divide the Conservatives and Lib Dems.

Peripheral

Second, there are other Conservative MPs who would prefer Mr Cameron to use the current crisis to negotiate for the things they - and they think he - want.

They want social and employment laws repatriated, they want greater protections for the City of London, they want to ensure the completion of the single market in financial services so British firms have greater opportunities overseas.

But the problem for Mr Cameron is that the UK is not part of the eurozone and is seen by many in Europe as peripheral to the debate.

How much progress he can make on this front is open to question. And in the balance of priorities, Mr Cameron would prefer a deal to secure to euro over the repatriation of any powers.

So Mr Cameron's task this week is to help the eurozone countries secure the future of the euro while also protecting Britain's interests.

But that is no easy task and, whatever he agrees, is unlikely to satisfy all in his party.

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