Everything you need to know about the eurozone deal in five minutes
What is the eurozone deal, what does it mean for British politics and will it solve the crisis?
By Ian Dunt
What is the deal?
Cameron's veto of the European initiative was not really a veto. As critics have pointed out, vetoes stop the process in question. In Cameron's case, the process simply took a new form, shrugged its shoulders and carried on anyway. The form is that of an intergovernmental treaty. While there is still a lot of uncertainty around it, it is likely to impose rules on all 26 EU members – not just the 17 countries which use the euro.
The treaty will hold members to strict new budgetary rules, including a cap of 0.5% of GDP on their annual structural deficits, a requirement for them to keep public deficits under three per cent of GDP and a rule that insists they must submit their budgets for European approval.
While it originally appeared that just the eurozone countries would be affected by the rules, it is now likely they will be imposed on all the EU countries. Most of the non-eurozone members have plans to join the euro eventually and they want to maintain their influence over its future direction in the run-up. Countries such as Poland are especially nervous about being left on the sidelines. The real wild card is how their national parliaments will react when they are asked. Countries such as Sweden, with enviable natural resources and a reliable tax base, have little to gain by deeper involvement, with all the loss of sovereignty that entails. Ireland may even need to hold a referendum.
The fact that the treaty is taking part at an intergovernmental level, rather than an EU one, significantly weakens the European Commission, which the UK had traditionally relied on as a counterweight to Franco-German influence. The fact the treaty will take place outside the EU has other ramifications as well, not least a dispute over whether the other 26 members can use the EU's institutions, especially for monitoring and enforcement. This British complaint has prompted EU lawyers to start digging around the ancient precedents they might use to prove their case. Britain is also seeking legal advice, but it will be wary of being painted as the international bad guy by further holding up the process or spooking the markets.
Will it work?
The fact the treaty will be intergovernmental, rather than institutional, was a major source of disappointment for Angela Merkel, who wanted fiscal discipline to be enshrined in EU law to placate the markets. The fact she failed was reflected in the lukewarm response of investors, who were not moved to confidence by the events of last week. European leaders are hoping the initiative will be enough to encourage Mario Draghi, chair of the European Central Bank (ECB) to open the money taps, introduce monetary easing and buy government bonds – the real moment the markets are waiting for.
European leaders also agreed to channel another 200 billion euros through the IMF, with an eye to boosting contributions from countries like Brazil and China. The European Stability Mechanism will have 500 billion euros at its disposal once it’s up and running next year.
A German demand that bondholders lose some of their investment during any future national bail out was another victim of negotiations. These bondholders are mostly large European banks, who lost 50% of their investments in recent moves to save Greece. The new arrangements protect the banks extensively from future losses, while embedding fiscal solutions – basically austerity – into European law. For this reason it is opposed by many centre-left parties in Europe. One of the great ironies of Cameron's veto is that he is opposing a plan created by predominantly centre-right European governments which wholeheartedly accept his economic remedies.
Indeed, in one key area, Cameron was actually to the left of the European consensus. One of the concessions he lobbied for was for the UK to be able to apply tougher capital rules on its own banks than those proposed by the European Commission, in line with the Vickers report.
This protective attitude towards the banks has led many left-wing economists to doubt whether the deal will work, because it protects the very industry widely blamed for creating the financial crisis in the first place. Furthermore, many economists doubt whether austerity-driven economic policies can save Europe. All the evidence so far suggests they act as a brake on demand, thereby creating a death spiral as states fail to raise enough revenue to pay back their budget deficit.
On the right, economists are wary of the European plan, because it does nothing to address the unwieldy operations of a transnational currency. This has prevented countries such as Greece from devaluing their currency and attracting investment that way, because they are tied into the euro. Scepticism of the plan comes from every political persuasion.
Has Cameron even saved the City?
Cameron's main aim was to protect the City of London from a financial transactions tax – often referred to as Robin Hood tax or a Tobin tax, although these are two slightly different schemes. Many question whether this really was Cameron's aim, or whether he simply did the most sensible thing for himself politically and protected himself from the ire of eurosceptics in his own party. Assuming it was his real objective, it appears his tactics have failed.
EU financial regulation will likely be decided by majority vote, and the majority vote is likely to back a transaction tax. Britain will probably be powerless to stop it. Even a eurozone-only tax could be applied in a way that encompasses transactions in London. If it doesn't, it's not worth the paper it's printed on anyway.
If some of the more dire pronouncements turn out to be true, and Britain does find itself on the outskirts of European decision-making, many financial services providers are likely to want to move base to Frankfurt anyway. Furthermore, Britain's manufacturing industry is already complaining that firms such as Tata, of India, and Celsa, of Spain will be encouraged to head to the continent. So even if the financial sector holds firm in London, manufacturing might go elsewhere. Of course, all of that assumes the European gamble will work out.
Will Britain really be weaker?
Certainly, Britain will not be going to the monthly meetings where countries appraise current progress and will, in all likelihood, be excluded from key economic decision-making meetings. These groupings will meet before EU summits, meaning British prime ministers of the future will appear with most major decisions already wrapped up. Most single-market decisions are based on majority voting, so Britain will be unable to wield its veto as a last resort.
Culturally, there is also a distinct anti-British sentiment on the continent, with many feeling Britain has demanded exceptions and a seat at the high table for far too long. One did not need a doctorate in body language to see how alienated Cameron was during the summit last week. Combined with Britain's robust euroscepticism, the natural weight of political gravity is pulling Britain and mainland Europe apart.
Some – particularly senior Liberal Democrats – argue this will significantly weaken Britain's influence on America, which values the UK for its role in Europe, not as a country in its own right. This is probably overstated. The Anglo-American relationship is based, in large part, on British military and intelligence contributions. The former cannot be replicated by other European countries except, to a lesser extent, France, which anyway takes a more critical view of American adventurism. The latter will be unaffected. Britain's support for most American military operations also allows the US to 'internationalise' approval of their missions, a factor which will be important regardless of Britain's relationship with the EU.
The real setback to British influence on America is if Britain is seen as a roadblock to solving the eurocrisis, causing minor international pariah status. This is especially concerning given that Barack Obama seems considerably less close to the UK than the presidents which preceded him, seeing the world more in north-south terms than east-west.
Can the coalition survive?
Of all the differences between the Liberal Democrats and the Conservatives, the Europe issue is probably the most substantial. With 2010's Tory intake even more eurosceptic thanits predecessors, their positions could not be further apart. Nick Clegg's confusing response to the veto – initial support followed by outspoken criticism two days later – typified the panic in Lib Dem ranks. On top of the tuition fees U-turn, senior strategists clearly believe the party could not survive support for such a historically eurosceptic foreign policy.
This will have been a disappointment to Clegg, who initially boasted of his role as a control on his coalition partner's attitude to Europe. Now, observers will be watching for whether his attacks on Cameron signal the green light for similar comments from his MPs, or whether that initial salvo will have been designed only as a PR stunt to placate Lib Dems' anger.
As ever, the main factor in the coalition's survival is fear of the alternative. While the Lib Dems could legally leave the coalition and team-up with Labour and a coalition of other parties to form a government, such a move would not be accepted by the country or the press. The fall of the coalition would therefore entail a general election, leaving the Lib Dems in the electoral wilderness if their current opinion poll results are anything to go by.
How will the veto affect British politics?
While the idea that the veto was Cameron's 'Falkland's moment' is over-enthusiastic, it has boosted his poll ratings among Britain's resolutely eurosceptic electorate. The Tory leader spent two hours preparing to face the press on that fateful night in Brussels, but he probably didn't need to be so nervous. While European and international news agencies widely reported that he was out-negotiated and generally out-manoeuvred, his domestic audience was considerably more sympathetic. One poll over the weekend even suggested the veto had wiped out Labour's poll lead.
Politicians are acutely aware of the British publics' view. For instance, Britons believe the UK loses 19% of its gross national contribution each year to the EU, when in fact the number stands at 0.12%. This has framed the Labour response, which has been confusing at best.
Shadow foreign secretary Douglas Alexander has adopted a more eurosceptic tone over the last few weeks and even admitted Labour would also have vetoed the initiative, but he has attacked Cameron for his tactics and negotiating style. Central to the Labour attack is Cameron's isolation in Europe, particularly his decision to pull out the main centre-right grouping into a new party block when he was in opposition. They say this approach has reduced all his political capital on the continent and left him friendless and isolated as decisions are taken which affect the UK.
While it is being ignored now, that message could prove more potent later, especially if the European initiative works. In that scenario, Britain will spend years trying to get into the club it has just walked away from.
The political results, just like everything else, rely on the outcome of the economics. And the economics are as deeply unpredictable as everything else.
