UK Politics

PM's EU task: Saving the euro and saving his party

David Cameron at the dispatch box
Image caption David Cameron told MPs it was "absolutely vital" to safeguard Britain's financial services market

If David Cameron is to retain the support of his party over Europe, he is going to have to come back from Brussels this week with some decent Belgian chocolate and not a traditional slab of euro-fudge.

That is the message from Conservative MPs who - in public and in private - make clear that the prime minister must use the negotiations over the euro-crisis to defend Britain's interests.

They appear to accept the idea that the survival of the euro must be Mr Cameron's first priority. But they want payback for the UK in return for accepting a deal.

The question is what? There are some Conservatives - like Boris Johnson - who are reluctant to accept any deal at all that allows the 17-strong eurozone to become a fiscal union.

But most accept that some kind of further integration of the eurozone is a prerequisite for the euro's survival.

The Conservative backbenches are, however, divided over what they want Mr Cameron to achieve.

Repatriating powers

Some insist that any integration of the 17 eurozone countries - however it is achieved, by treaty change or by protocol and so on - will by definition involve a substantial change in Britain's relationship with the EU. As such, it should be subject to a referendum.

Others think a referendum is unrealistic - not least because it would divide the coalition and send the wrong signal to the markets.

They want the prime minister to use the negotiations to begin the process of repatriating powers from Brussels to London.

Image caption MPs believe that changes to the EU treaty could be a grievous blow to the City of London

They believe that this is the moment when the UK has maximum negotiating power to achieve this.

The prime minister, though, appears not to want to go down this route.

Instead, Mr Cameron seems to be addressing the concerns of another, and larger group of MPs, who are fearful that the new eurozone fiscal union - if that is what it is - could threaten the City of London and the UK's wider financial services markets.

This has the advantage of trying to prevent something that could happen, rather than trying to unstitch and repatriate existing laws.

The UK has by far the largest slice of the financial services markets in the EU and so its fate is important to any economic recovery.

"It is absolutely vital that we safeguard it," the prime minister told the House of Commons.

"We do see it under continued regulatory attack from Brussels and I think there is an opportunity, particularly if there is a treaty at 27, to ensure some safeguards, not just for that industry but to give us greater power and control in terms of regulation here in this House of Commons."

The question, though, is what he means by this.

The most obvious threat is a Franco-German desire for a new tax on financial transactions across at least the 17 eurozone countries.

Many MPs fear this could still disadvantage London as a financial centre.

Many eurozone banks and other institutions have such a substantial presence in the capital that they could end up paying the transaction tax even though they were located in the UK.

Now Downing Street plays down the potential threat, claiming that a lower tax London could gain a competitive advantage.

Officials note that a new tax like this still would require unanimity and could therefore be vetoed.

They also suspect that it is something that is being put up by France and Germany to absorb UK negotiating capital rather than as a genuine proposal. But it might be risky to assume that.

There is also a threat to City markets that trade in euro-denominated financial instruments, such as derivatives.


There is an existing proposal, being pushed by the European Central Bank, for the markets for these kind of financial products to relocate their clearing houses to within the eurozone.

Such a move would support the eurozone but potentially damage the single market as a whole. It would certainly damage the City of London.

And there is also a formal proposal on the table to ban the short-selling of sovereign debt.

Some EU countries argue that this process - where traders buy and sell debt without actually owning it - pushes prices down and exacerbates the crisis, a classic example of Anglo-Saxon light regulation that got the euro into trouble in the first place.

MPs, though, believe that this would be yet another grievous blow to the City of London, another example of the existing trend of restricting the financial markets and resisting growth.

Image caption The European Central Bank has proposed some financial products markets relocate their clearing houses from London to within the eurozone

So what could David Cameron negotiate for, to protect the UK from regulatory proposals such as these?

The most obvious one is a change to the European treaties.

If the new eurozone fiscal union requires treaty change for all 27 EU-countries, the UK could insist that the language it wants to protect the UK could be included too.

As the prime minister says, the more the EU asks for, the more the UK can ask for.

These changes would, by definition, have legal status and would be protected by the European Court of Justice.

This could be anything from general protection for the single market in financial services to a formal "emergency break" that would allow the UK to veto a proposal in extremis that it felt was counter to its national interests.

At the moment, most financial regulations are decided by qualified majority votes in which the UK does not have a veto.

But if there is no new treaty, just some kind of new protocol attached existing treaties, then the UK could try to insert its language there.

For example, the sceptical think tank Open Europe has argued for a protocol for the single market where Britain's influence over financial services laws could be safeguarded, particularly against decisions taken by the eurozone that will impact on all 27 EU countries.

As a text contained within a formal protocol, this would have some legal basis.

The very least that the government could demand is some kind of language in the final summit communique that asserts some protection for the UK financial services, a declaration of some kind of direction travel as the negotiations continue.

Squeaky bottom time

But if the prime minister returned to the UK with just this, it is questionable whether many Conservative MPs would be satisfied.

The problem Mr Cameron has is that the UK has few allies on financial services.

For most other countries, apart from France and Germany, it is a very small part of their economies.

So his task is difficult. He has to push as hard as he can to protect UK financial services while not threatening his wider aim of a deal to secure the euro.

If he pushes too hard, the eurozone could agree a treaty by themselves, excluding the UK and the nine other countries outside the euro.

If that is the case, then suddenly, there could be no text protecting the City of London at all.

If so, then it would be squeaky bottom time for Mr Cameron when he reports back to the House of Commons on Monday afternoon.

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