Which Commission post should the UK push for (clue: not energy)?

When it comes to EU top jobs, if you snooze you lose, as
Gordon Brown discovered to his cost in 2009

In a new briefing published this morning we argue that after the row over Jean-Claude Juncker’s appointment, David Cameron can regain the initiative by sending a heavy-hitter - and not simply someone who happens to be available - to Brussels with the view to securing a top job in the new European Commission. But here is the crucial question - what job should the UK push for?

Here are the key points from our briefing:

• Even though conventional political wisdom says that it’s impossible for the UK to bag the internal market portfolio, this is precisely what David Cameron should ask for, not least given that Germany, in particular, may want to give the UK a quick win in order to reduce the risk of Britain leaving the EU.

• To boost the chances of this happening, financial services could be split off from the internal market portfolio. However, in this scenario, the key is for this portfolio to go to a country that actually has a meaningful financial services industry, or the strategy could backfire.

• The second best outcome for the UK would be to secure the competition portfolio. competition is by far the most powerful DG, with the power to impose multi-million euro fines, prevent mergers and restructure banks. The portfolio would allow the UK to ensure a business-friendly environment and ensure fair competition within the single market by preventing discrimination against non-euro member states. It also establishes a political link to eurozone - it’s impossible for eurozone leaders not to engage with the Competition commissioner.

• The Trade portfolio is often mooted as a good one for the UK, and on substance it certainly is. Being able to conclude the EU-US free trade deal (TTIP) would be a great scalp. However, it is important to remember that Commissioners’ ability to impact EU policy is not limited to their own briefs; many policy proposals are debated within the College of Commissioners offering every Commissioner the opportunity of raising any concerns at an early stage. Just as the EU’s High Representative for Foreign Affairs – currently held by Baroness Ashton - the Trade Commissioner is often absent from Brussels, thereby limiting the UK’s overall influence.

• The energy portfolio would be a relative disappointment for the UK. Yes, energy is a hugely important issue for Europe – and liberalised single market could help tremendously in both boosting energy security and keeping cost down. The Energy Commissioner could also play a key role in keeping the EU out of shale gas regulation – a key UK objective. However, the big push needed to change the political culture in Europe for this to happen won’t come from the European Commission and will take a long time to achieve anyway. This battle will first need to be won in national capitals. Taken together though, the Competition Commissioner probably has more sway over the EU energy market by being able to strike down attempts at creating national champions and new forms of intervention – as illustrated by the current stand-off between Germany and the Commission over Berlin’s rebate for energy intensive industries from its domestic renewable surcharges.

• Arguably, the social affairs brief would be better than the energy portfolio given how hugely important the rules on access to benefits for EU migrants are for the wider debate in the UK.

Just as important as the UK’s portfolio is the distribution of other key portfolios among reform-minded countries like the Netherlands and Sweden. Cameron needs to be far cleverer than Gordon Brown was in 2009, when France got internal market and Romania agriculture. This won’t be easy though. Having lost out on one of the three ‘top jobs’, France could push for either the competition or internal market brief. However, if France keeps the internal market, financial services should be split off as well.

Finally, the appointment of the new President of the European Council will also be crucial – in some ways just as significant as that of the Commission President – given that this will be the person in charge of brokering Cameron’s negotiations with other heads of state and government.

It's certainty all to play for.

Divided we stand - EU struggles to find common position for sanctions on Russia

In a new flash analysis out today, we look at where each EU member state stands on expanding sanctions against Russia.

The summary notes:

There is a huge diversity of views within the EU on what to do next with regards to Ukraine and Russia. This is mostly down to divergent interests (economic, political and cultural) for different member states, as well as varying views on the effectiveness and implications of further sanctions. Countries range from Poland and the Baltics, which have very strong economic links with Russia but remain very hawkish, likely due to historical experience, to countries such as Bulgaria and some Mediterranean countries which remain quite dovish. Open Europe has attempted to quantify this on a Dove/Hawk scale from -5 to +5. The average ranking for EU members is 0.4 suggesting that the bloc as a whole remains someway off from finding the unanimity needed to push further sanctions.

In terms of trade links to Russia, Lithuania has the largest trade turnover at almost 32% of its GDP, while the Netherlands, Slovakia and Estonia also have high levels at 11%, 11% and 14% of GDP respectively. There is however, no strong link between deeper trading links and a more dovish approach to sanctions on Russia, suggesting the discussions are informed by a number of complex factors.  

The key graph is below (click to enlarge).  Clearly there is a huge level of divergence, based off a number of factors (not just total trade turnover, which is shown on the vertical axis).

Despite all this, further sanctions remain on the table. In the analysis we examine what form further sanctions could take. It would likely be sanctions on: specific firms, sectors or broader financial sanctions. The fallout of all of these has the potential to be serious, possibly explaining some of the divergence across the EU.

Attention now turns to tomorrow’s meeting between the West and Russia. The focus remains on a ‘diplomatic solution’ but with Russia warning of civil war (not least because it fits its narrative of instability), and calling for the UN to condemn Ukraine’s actions to remove pro-Russian forces in Eastern Ukraine, this remains very uncertain.

Fact-checking the Clegg v Farage EU debate

The first EU debate between Nick Clegg and Nigel Farage on LBC was for the most part restrained with a surprising amount of detail and substance. Most of the key fault lines in the UK-EU relationship were touched on.

However, given that the two men represent the polarising ends of the debate, there were also a number of claims that struggled in the accuracy department. Here is our quick 'fact-check' of the key debating points:

Claim - Clegg: I supported a referendum on Lisbon

Verdict: Technically true but highly misleading

On the referendum question, Clegg said that when it came to new EU Treaties transferring new powers to Brussels,

"I've never wavered in that position, that's why the last time the rules changed, something called the Lisbon Treaty, I said there should be a referendum."

It is true that the Liberal Democrats called for referendum on Lisbon but crucially it was an in/out referendum which was not on the agenda at the time - the issue wasn't even put to put to a vote. There was however a vote on whether to have a referendum on the Lisbon Treaty itself on which the party abstained, despite the fact that together Tory MPs, Lib Dem MPs and Labour rebels could have passed it. Clegg is being highly disingenuous by blurring the distinction between an in/out referendum and a treaty specific one. Farage's quip that there was no point waiting for a new Treaty as powers were being transferred to the EU every week via directives and ECJ rulings was quite effective in this context.

Claim - Farage: Under EU rules we have a completely open door to 485 million Europeans 

Verdict - Partially true but unclear on the numbers

It is true that the free movement of labour is a fundamental principle of the EU and the UK cannot limit the numbers of EU migrants coming over. However, Clegg was right to point out that the right to free movement is not completely unqualified - under the free movement directive migrants have to be able to support themselves financially or have 'reasonable' prospects of finding a job.

In terms of Farage's 485 million figure though we have to say we are a bit confused as to where exactly this comes from - the population of the EU28 is around 506 million, which minus the UK's approximately 63 million leaves 443 million.

Claim - Clegg: 3 million jobs would be at risk if UK left the EU

Verdict - Highly unlikely - would depend on a range of other factors

Clegg cited the well-worn '3 million jobs linked to the EU figure' despite established doubts over its veracity. Recently those tending to cite this number have replaced "depend on" with "linked to" but it's still dubious. As we've argued in the past, this claim is one of the most conspicuous examples of a rogue statistic without any credible counter-factual attached to it. The assumptions behind the 3 million jobs figure is that there would be no trade at all trade with Europe if the UK left the EU, which of course is nonsense -  a similarly heroic assumption to that which Better Off Outers make when calculating the cost of EU membership based on all regulatory cost magically disappearing on Day 2 post-Brexit.

Claim - Farage: UK would hold the whip hand in negotiations over a new trade deal with the EU

Verdict - Very uncertain 

Farage argued that in the event of an exit, the UK would "hold the whip hand" in trade negotiations with the EU due to the EU's trade deficit with the UK. We've looked at this in detail - the key point is that while this is true in the area of goods, when it comes to services - a crucial and thriving area of the UK economy - this is not the case. So with that logic, EU countries would have incentive to strike a deal with the UK in goods but not services including financial services. Secondly, the process for leaving the EU - the so-called Article 50 - actually involves less control for the UK than is often assumed, including a Qualified Majority Vote on the final deal in which the UK will not take part.

Claim - Farage: 75% of UK laws come from the EU. Clegg: no it's 7%

Verdict - Both are wrong

The contentious topic of how exactly how many UK laws are derived from the EU also came up, with Farage gleefully citing Viviane Reding's absurd claim that 75% of UK laws are decided in Brussels (as we've argued many times, Reding must secretly be on the UKIP payroll). Clegg went with the House of Commons' Library's briefing which estimated this to be around 7%. Regular readers will know we've analysed this in painful detail and the truth is it is simply not possible to say exactly - what's clear is that it's neither 7% (this only counts primary legislation which isn't meaningful at all) nor 75%. (But basically too many).

Claim - Farage: We give the EU £55 million per day

Verdict - True if counting gross cost, untrue and misleading if counting net cost

Farage is correct that the UK's contribution to the EU works out as around £55 million per day. However, that it is a gross figure which does not include the UK rebate (cold, hard cash the UK gets back from Brussels every year) and nor the UK's receipts from the EU budget (even if this is only UK taxpayers' cash being re-routed via Brussels).

Claim - Clegg: Without the EAW we'd struggle to extradite criminals and terrorists

Verdict - The EAW makes the process faster but it is not indispensable

The European Arrest Warrant (EAW) is used by EU states to speed up extradition procedures. It is true that the EAW has been used by the UK to recover suspected terrorists and other criminals from other EU states who have subsequently been found guilty and locked up. It is however untrue to claim that suspects such Hussain Osman and Jeremy Forrest could not have been recovered without it. Also before the EAW was agreed, there were agreement on extradition and the UK managed to successfully extradite plenty of criminals from EU countries through bilateral procedures. These were considerably slower but it is highly unlikely that with or without the EAW Italy would have wanted to hang on to Hussain Osman or France to Jeremy Forrest.

EU immigration: Why Ukip should pay close attention to what happens next in Switzerland

Our Director Mats Persson writes on his Telegraph blog:

In a referendum yesterday, the Swiss voted by a narrow margin in favour of restricting immigration from the EU. Switzerland is not an EU member but via around 100 agreements, Switzerland is partly integrated into the EU, including in the contentious area of free movement of workers.

Ukip’s Nigel Farage has been quick to stick the boot in, calling the vote "wonderful news for national sovereignty and freedom lovers throughout Europe." Equally predictable, Vivanne Reding – Vice President of the EU Commission – said that while "we respect the democratic vote of the Swiss people… The single market is not a Swiss cheese. You cannot have a single market with holes in it."

Which is a silly statement. One of the basic flaws with the Swiss trading relationship with the EU is precisely that it suffers from holes, including patchy market access in areas such as services, making it a sub-optimal model for the UK to follow. But Reding’s comments still highlight what an important test case this will be of the feasibility of the pick and mix relationship with the EU from outside, which the UK might have to adopt should it leave the EU.

Here it gets tricky. The Swiss-EU agreement on free movement was part of a bundle of agreements known as Bilaterals I, which also covered six other areas including market access for various Swiss exporters and firms, from trade in agricultural products to civil aviation. Crucially, it contains a "guillotine clause: which says that that the contents – including the market access – can only take effect together: if one of the agreements is terminated, the others would also cease to have effect. This sets Bern up for very difficult talks with Brussels. If the EU wants to play hardball, it could scrap the entire agreement.

There are a huge number of issues captured in the Swiss vote: support for immigration in Europe, the risk for an open economy in erecting new barriers to the world (think labour costs), how the EU responds to referendum results and much more. However, for the UK the implications are clear. If this escalates into other areas of Swiss-EU trade, including restricted market access, many in the UK will argue that a “pick and mix” deal with the EU will be hard to pull off. If, on the other hand, Switzerland was able to renegotiate its relationship to impose some form of restrictions on EU migration, however minor, those who favour UK exit would no doubt see it as a politically palatable precedent.

The Swiss referendum question doesn't specify what shape the immigration quotas would take, but only instructs the Swiss Parliament to draft legislation addressing the issue within the next three years. Much can still happen. However, no matter what, the EU will most certainly negotiate any revised deal with one eye firmly fixed on London, worrying about giving the Brits ideas. And for anyone with even the slightest interest in Britain’s future place in Europe, this is a key one to watch.

Hey Berlin, this is what an EU without Britain would look like

Open Europe's Director Mats Persson writes on his Telegraph blog,

One of the biggest questions in today’s European politics is what price Germany is willing to pay to keep the UK in the EU. One school of thought – which strangely sees an over-representation of retired Europhiles and hardcore Eurosceptics – claims virtually no price at all. Berlin will choose Paris – and Warsaw – any day of the week. David Cameron might as well throw in the towel now.

Well, the past week may have given Berlin a taste of what an EU without Britain could look like. And it ain’t pretty.

The looming EU-China trade war has again pitted Europe’s north against its south, with Beijing pursuing its patented ‘divide and conquer’ strategy. The dispute was triggered by Brussels’ decision to impose anti-dumping tariffs on heavily subsidised solar panels from China. Beijing’s retaliation was swift: you Europeans spend an awful lot of cash subsidising wine. Is that really legal under World Trade Organisation rules?

It hasn’t been lost on anyone that the biggest wine producers in Europe also are the strongest proponents of the solar panel tariffs: France, Italy and Spain. Given the symbolic importance of wine in these countries, this is no longer only business: it’s personal.

A trade war with China would hurt everyone but, wine exports notwithstanding, it would be particularly bad for Germany. With demand in the eurozone drying up, the boost in German exports is largely due to a rise in its share of the Chinese market. A disruption in these export flows now, when the European recovery is balancing on a knife’s edge, would be a disaster for Germany.

It’s therefore not surprising that Berlin has gone to town over the anti-dumping tariffs, and it has been backed by the UK and other liberal countries.

However, since the EU has so-called “exclusive” competence in trade policy, the European Commission negotiates on behalf of all EU member states and Germany is hostage to majority decisions amongst EU ministers.

The way EU trade policy is decided is complex. A final decision on whether to keep the tariffs in place will be taken at some point towards the end of the year, though it could well be solved before then. But clearly, without the additional pressure and weight of the UK, Germany would struggle to get its way on this one. Any short-team decision to remove the tariffs requires a so-called Qualified Majority. Germany would find it extremely difficult to reach the necessary voting share absent the UK (and may even struggle with it, though the final decision is taken by a simple majority).

And this is where Brexit meets the German economy. At the moment, under a Qualified Majority Vote the Northern, liberal bloc has a “blocking minority” in the EU’s Council of Ministers, which means it can stop the many attempted protectionist measures originating in the Mediterranean. The southern group, too, has a blocking minority – meaning the two blocs balance each other. However, should the UK leave, the Mediterranean block would substantially strengthen its collective voting weight, whilst the German-led North would lose its blocking minority altogether. The field would be wide open for a barrage of anti-dumping tariffs and tit-for-tat trade wars (think “Buy European”) with China and other crucial destinations for German products.

There are several other reasons why Berlin fears a UK exit more than it lets on – prospect of paying even more to the EU, extra costs to UK-bound exports, losing a financial gateway to global markets, geopolitics and more. But as Germany increasingly goes global, it’s the fear that a more protectionist EU could prevent it from doing business across the world which really hits home.

Going global: Germany is slowly shifting its trade away from the EU (or why German growth alone cannot save the eurozone periphery)

On top of the release of UK trade data, Germany has also put out its latest trade statistics. As this is Germany we're talking about, the figures are interesting on all kinds of levels.

As the graph above shows German trade has recovered since the start of the year, although exports and imports remain well below their March 2012 levels. Exports have recovered slightly quicker allowing for Germany’s significant trade surplus to widen further.

But where is this new demand coming from? The eurozone remains mired in recession, so there is little chance that the turnaround in trade is being driven within the single currency bloc. Looking at the graph below may provide some clue.

As we can see, of Germany’s top trading partners only five on the import side and four on the export side are from within the eurozone. These are from the end of last year, but with growth in the US picking up and Asia still doing relatively well, it’s likely that much of the upswing in German trade was with these countries rather than the eurozone. This is confirmed to some extent by the table below which shows that trade with non-euro EU countries and third countries was either positive or less negative relative to a year ago.

What’s the significance of all this?

• Firstly, it raises interesting questions about Germany’s role in the eurozone and the crisis. Trade with eurozone countries, especially those in the periphery, is becoming less important for Germany on both the export and import side. The knock on conclusion of this is that even if Germany were to boost domestic demand or import more (as many southern European leaders have called for) it’s not clear it would actually have a huge benefit for the struggling country.

• A report by Deutsche Bank in February found that an additional 1% growth in German GDP would only provide a 0.1% boost to the current account of struggling economies. Far from enough to have any material impact on overcoming the crisis.

• The second interesting point, in terms of the UK-EU debate, is that Germany is proving incredibly successful in cultivating trade with countries outside the EU, despite at times a stifling European regulatory environment (including meddlesome EU rules) and the eurozone crisis. This is likely due to its focus on manufacturing and its strong ‘Mittelstand’ (the undervalued euro also helps). In turn, this suggests the choice presented by some - either you trade with the EU or you trade with the rest of the world - is clearly false. Warts and all, you can cultivate trade with the rest of the world from within the EU - what you need is economic assets which appeal to these fast developing economies. And of course, a more, liberal, outward-looking EU would certainly help as well. 

New figures show that 51.4% of UK goods exports are sent outside the EU and we run an EU trade deficit – does that tell us anything?

New trade figures out today show the UK exports more goods to countries outside the EU than to countries inside EU. But what is the relevance of this or the fact that the UK continues to run a trade deficit with the EU?

Key facts:

UK goods exports to EU in July 2012 £12.5 bn (48.6%)

UK goods exports to non EU in July 2012 £13.2 bn (51.4%)

As the graph below shows, the UK has for most of recent history sent far more than 50% of its total goods exports to the EU. The UK's services trade is more diversified but it is a traditional argument that the EU's customs union is vital to the UK's goods exports. The recent figures for July 2012 seem to buck the trend due to weak EU export and better non-EU export figures. As an aside, the proportion of UK goods exports going to eurozone countries fell to 43.6%, the lowest share since records began in 1988.
 

So is 50% significant?

The simple answer is no. 50% is a rather arbitrary figure;** it would make little difference if the UK only exported 40% to the EU - it would still be vital to ensure it continued, although it could be argued that the less the UK relies on the EU for its exports the stronger its hand politcally.

But the more important question for now is whether the UK’s membership of the EU is the best way to promote trade and if so whether this benefit is offset by the other costs of membership (budget, regulation, CAP, etc).
 

Is the UK’s trade deficit with the EU a strong card to play if we left the EU?

The second potentially significant trade figure out today shows a UK trade deficit with the EU in goods of £4.3bn - bigger than that for non-EU goods.

However, the UK's record in goods also needs to be considered along with its more healthy balance in services trade, but even when services are included the UK still posts a total trade deficit with the EU.
 

So is it a strong card?

If the UK left the EU would it be able to strike a deal that preserves the UK’s trading relations with the rump EU without the costs? One argument goes that its deficit is a ‘trump card’ that will force the remaining EU to conclude a favourable Free Trade Agreement (FTA).

Yes the UK has a deficit but what is more important is total volume of trade. For the UK total EU trade is now less than 50% of its exports. Less than it was, but for the EU (ex UK) the UK would amount to only 22% of its total exports (E306bn out of E1,348bn) – who has the upper hand? Clearly for the EU 22% of its total exports is a lesser consideration than the UK's 50%. Striking a trade deal should be mutually beneficial, but things are seldom that clear and, given recent hostility to UK financial services exports, the comparitively weaker UK position could be significant.

Does the UK’s membership of the EU discourage its trade outside the EU?
 

Mostly no, although the future is less certain. The UK’s non EU trade is governed by the EU’s Common Commercial policy which includes the EU's network of free trade agreements and its seat at the WTO. In outsourcing its foreign trade policy to the EU, the UK is trading off its specific negotiating requirements against the weight of a common negotiating position, backed by the incentive of the Single Market. The EU has a reasonably good record in pursuing liberal trade deals, where its combined weight helps, however sometimes UK priorities (services) get subsumed to others' priorities. One area where being in the EU does not help UK trade is the protectionism surrounding agriculture, where the UK on its own would probably chose to import cheaper products from outside the EU than currently allowed.

What is the best way to increase UK trade?

In our recent paper “Trading Places” we looked at the operation of the EU from the perspective of UK trade and concluded that it was currently working. Not at as well as one might like, but still working. However the outlook may change; the benefits of the Single Market may not be increased due to problems implementing further liberalisation in services and the EU may lapse into protectionism in its external policy leading to less favourable trade deals for the UK that stop it benefiting from growth markets for its services.

But, of course, UK membership of the EU includes other membership costs (EU Budget, CAP, regulation etc.) so in order to ensure that EU membership remains beneficial for the UK, the Government needs to reduce these costs as well as increasing the benefits where possible.

Given that the UK, with mixed success and too different degrees, has been pursuing a liberal trade agenda in the EU for some time and the caveats noted above, this is no longer enough to ensure the benefits will continue to outwiegh the costs over the long term. The Government therefore needs to do far more to reduce the cost side of the equation, which requires the renegotiation of the UK's terms of membership.

** We accept that the UK’s trade to the EU is inflated by both the ‘Rotterdam Effect’ and import displacement particularly as a result of the CAP.

Britain should not ape Norway - but new EU membership terms are fully possible

In today's Telegraph, we argue,

During Prohibition in America, the bootleggers and Baptists found themselves in an unholy alliance. One liked Prohibition for commercial reasons, the other backed it due to religious conviction. The alliance proved short-lived. A similar union has now grown up between certain Europhiles and Eurosceptics. Both say that renegotiating new EU membership terms for Britain is impossible: one group because it thinks the status quo in Europe should prevail, the other because it thinks the UK should leave the EU altogether. Both positions miss the point.



From Open Europe "Trading Places" report.

The argument the Eurosceptics make is that Britain should “become like Norway”, i.e. leave the EU and join its more detached cousin, the European Economic Area. But this would actually be a much worse deal than the existing relationship. First, Norway is almost as much of an EU member as Britain is, implementing roughly 75 per cent of all EU laws, from labour market rules (such as the working time directive) to crime and policing measures.

Second, despite being forced to accept all these laws, Oslo has no representation in the EU’s institutions and virtually no way of influencing the decision-making process to reflect its national interests. Should Britain “become like Norway”, it would be home to 36 per cent of Europe’s retail finance market, but with no say over huge swathes of regulation governing that market. And it would have to accept EU employment law – currently costing UK employers £8.6 billion a year – but with no way of influencing it. The net effect would be less opportunity to hold Brussels to account, not more.

Finally, Norwegian companies face extra costs when selling manufactured goods to Europe, stemming from the EU’s arcane “Rules of Origin”, which impose a tariff on any imports that contain components from outside the EU, and lots of extra paperwork. This has been acceptable to Norway, since 62 per cent of its goods exports come in the form of fish or natural resources, which are not affected by these rules. Applied to the UK – its car manufacturing or pharmaceuticals industries – it would bring sudden additional costs and a competitive disadvantage.

In return for its deal, Norway gets control over its farming and fishing industries. This has economic benefits and helps the country manage and maintain its heritage. But fishing and farming only account for 0.7 per cent of UK GDP. As maddening as the EU’s policies covering these two areas are, would the trade-off really be in the UK’s interests? Pursuing a “Swiss model” – based on a cobweb of bilateral agreements – might be a slightly better fit, but it would present similar problems, for example limited access to the Single Market for the UK’s large services sector.

Europhiles are equally wrong in thinking that the status quo is an option. Whether the eurozone integrates further or breaks up, the rules of the game will change. It is clear that the British public will never accept being dragged deeper into a centralised EU.

As the newly launched Fresh Start group of Tory MPs argued yesterday, Britain should set out a new vision for its place in the EU. This should allow countries to integrate with each other to different degrees. To avoid the pitfalls of the Norwegian model, Britain must not only maintain access to the internal market for goods and services, but also a vote on making the rules, and therefore remain an EU member. But it could take a pick and mix approach in other areas, including retaining its opt-in arrangement on EU policing laws, while participating in a better-targeted EU budget and some environmental measures.

As Europe goes through profound political changes in the wake of the crisis, Britain will have plenty of opportunities to advance this position, including in budget talks and future treaty negotiations, over which it will have vetoes. Once new terms have been agreed, they could confidently be put to the electorate in a referendum.

But to show he can be trusted on Europe – and to avoid a stinging defeat at the 2014 European elections at the hands of Ukip – David Cameron must get to work right away. First, in the ongoing talks over the EU’s long-term budget, he should use his veto to insist on UK economic support being limited to the poorer member states, ending the irrational redistribution of money among richer countries. This would save taxpayers billions. Second, under a loophole in EU law, he could instantly bring more than 100 crime and policing laws back under the control of MPs. Last, as the eurozone presses ahead with a “banking union”, he is right to explore safeguards against its 17 members writing rules for all 27 EU states.

Contrary to what reform-sceptics on both sides say, Britain has leverage in Europe. If the choice is between the UK leaving or getting some powers back, liberal, northern EU countries in particular may – after a lot of posturing and negotiation – go for the latter. The alternative would be losing a key ally in upholding a rules-based system of liberal trade as Europe goes through a highly defensive phase. Germany fears a Mediterranean-dominated EU as much as anyone.

Britain is one of the world’s largest economies, and therefore a major market for other member states, a huge contributor to the EU budget, a powerful military force and a global leader in finance. It lends clout and reach to the EU in world affairs. If it makes the effort, it will most certainly achieve a better deal for both itself and for Europe as a whole.

EU Referenda games: staying in, leaving or renegotiation - it's all complicated

With Europe as fluid as ever, talk of some sort of EU referendum is heating up in the UK (well at least in the Westminster bubble).

The always excellent James Forsyth of the Spectator argued in the magazine yesterday that London Mayor Boris Johnson’s support for a referendum and UKIP’s rise taken together “make it highly likely that Britain will have its first vote on Europe since 1975 within the next five years."

He also notes that,

"The popularity of Cameron’s EU veto made his circle realise how much of a political asset Euroscepticism could be, if used in the right way. There is also concern in No. 10 that if the Tories don’t offer the public a vote, Labour will."

He goes on to say that,

"One source intimately involved in Tory electoral strategy told me recently that a referendum in the next manifesto was ‘basically a certainty’...My understanding is that, at the moment, the favoured option is to propose renegotiation, followed by a referendum on the new arrangements within 18 months. During the campaign, the Tories would argue for staying in if new terms could be agreed but leaving if the rest of Europe refused to play ball." 

The equally excellent Paul Goodman over on Conservative Home today echoes Forsyth, listing a range of reasons why a referendum draws nearer.

And Forsyth's colleague Alex Massie also picks up on this on the Speccie's Coffee House blog, looking at all the complications involved in trying to square an EU renegotiation with a referendum (the "on what?" question always looms large). We've looked at the various options for a referendum in detail before, so this is all familiar (if you're interested in the different options, we strongly recommend reading this piece).  Massie makes a good point though. An EU referendum is too often seen in Tory leadership ranks as being about "a matter of party morale, discipline and tactical positioning", not getting something that actually works for the UK.

We agree. The thing is, this is far too complicated an issue to make a matter of mere party management. It will be part of the equation, of course, but making it subject to pure party politics will reduce the discussion to the usual Westminster back-and-forth on vague concepts such as "influence", "isolation" or "sovereignty" - it will be Mandelson land.

But where Massie - and a whole range of other commentators and politicians - get it wrong is when they say that in contrast to the renegotiation option, "an in/out plebiscite at least offers a choice between easily-grasped options."

No it doesn't. Staying in raises a whole range of complicated questions - what does the UK do if the eurozone takes that quantum leap towards further integration? What happens if the EU merely becomes a political extension of the eurozone (which Britain can't join)? In other words, if we want things to stay as they are, things will have to change.

And the "out" option? It sounds easy at a superficial glance, but in a serious discussion, it would raise far more questions than answers. In fact, there's virtually no "out" option (save perhaps one) - all options to withdraw from the EU treaties (which is what 'out' must mean, though it is rarely defined), involves joining something else. Doing a "Norway" would be suicide for UK, i.e. accepting 2/3 of EU laws but with no say over them; a Switzerland would be slightly better but still immensely complicated. A different type of Free Trade Agreement altogether involving business paying hefty fees or facing new admin burdens on exports to the EU, which contain some imported components? A customs union a la Turkey meaning being stuffed on market access on services? Simply falling back on the WTO's Most Favoured Nation (MFN) rules, with a range of costly barriers to trade and movement?

Answers anyone? The truth is that most of the complications that apply to renegotiation, also apply to the "out" option, including the need for some sort of "approval" from other countries for whatever alternative arrangement the UK enters into (apart from the WTO option) possibly. The truth is that all three options: staying in on current terms, renegotiation or withdrawal from the EU treaties are massively complicated. To whet your appetite, we're about to publish a comprehensive report looking at the different options for the UK was it to vote to decide to leave. And trust us, it's complicated.

What we do know is that both Britain and the eurozone will simply have to move. It's therefore right that No 10 is now considering different options.

But again, it should be for the right reasons.