Cameron’s push for EU reconciliation

The British Prime Minister is working to mend economic fences with the European Union, but fundamental policy differences remain in place.

As the year turns towards conclusion and a new beginning, British Prime Minister David Cameron’s relationship with the European Union is gearing into a shift of expression.

This (political) season, the 'you’re not my boss' slanging matches with former European Commission chief Jose Manuel Barroso are absent. The stinging backhanders to new chief Jean-Claude Junker -- whom Cameron once said represented 'a big step backwards' -- have been toned down. At the same time, Cameron’s reformed immigration policy is taking shape, distancing itself from the largely unqualified free labour movement that defines the current EU, and readying to canvass support from the other EU members who would need to approve it.

For the past seven months, immigration has rated as the issue most concerning British voters as they eye the May 2015 national election. Mid-December, voters placed more importance on immigration than they had in over six years, according to respected pollster IPSOS. And UKIP -- the right-wing, anti-immigration, anti-EU United Kingdom Independence Party which advertises billboards of escalators up the white cliffs of Dover, and British construction workers begging on the streets -- continues to make inroads on the Tories’ voting base. The November accomplishment of its first MPs, in twin by-elections triggered by the defection of two former Tories, showed a party which once staked its strength on protesting EU election votes taking the battle firmly to the local streets.

Meanwhile, British economic optimism is still lagging pre-GFC highs. Official national statistics released this week show unemployment at 6.2 per cent in the October quarter, down from 8.2 per cent two years earlier, but 2.8 job-searchers are still fighting for each job vacancy. And the recovery’s 'big surprise', BoE Monetary Policy Committee head Sir John Cunliffe said in November, has been the extent to which employment has been able to grow without generating more inflationary pressure through higher pay increases. “Despite the biggest squeeze on real incomes for nearly a century, there appears to be little evidence that workers are demanding a catch-up in pay.”

This week’s figures showed wage growth rising above inflation for the second month after a five-year hiatus, while a separate data set released alongside (covering April earnings) showed average full-time weekly earnings at £518, up just £1 from a year earlier, the smallest annual increase since 1997.

Against this backdrop, Cameron’s strategy is aimed squarely at stamping out EU benefit tourism and, more controversially, cutting the overall number of immigrants to Britain from within the EU. Describing the UK as “the jobs factory for Europe”, it advocates a ban on tax credits, social or council housing and child benefits before an EU member has lived and worked in the UK for four years. If an EU jobseeker has not found work within six months, it proposes he or she be required to leave. Cameron hopes this will be enough to keep him in power after May, after which the challenge would begin in earnest to win over other EU members in time to deliver some version of his reforms ahead of his promised EU membership referendum in 2017.

Within the UK, business is supportive but less than completely enamoured of Cameron’s policy. The Confederation of British Industry responded by saying that while Britain must ensure “rewards to those who work”, the freedom of movement to work is essential to businesses getting access to the best talent. “Immigration has helped keep the wheels of this recovery turning by plugging skills shortages and allowing UK firms to grow,” it said. The comments are supported by a long-term University College London study, which found European immigrants who arrived in the UK from 2000 contributed over £20 billion in net terms to UK public finances between 2001 and 2011, and brought productive human capital worth £6.8bn of UK education spending.

But there are other areas of the EU relationship that have garnered far more vocal dissatisfaction from business. Not for nothing did Barosso’s speech to Chatham House in the last days of his post attempt to reassure on red tape with a quasi-humorous “we have scrapped legislation on bendy cucumbers”.

More serious in the city, however, are concerns about banking regulation more sympathetic to those in the eurozone than without, and less responsive to growing markets around the world. At the same time many city banks paid “allowances” rather than “bonuses” this year, in order to get around EU rules which deemed bonuses over 100 per cent of a salary unlawful.

Indeed, EU red tape is deemed to have such significant impact on business in London -- the ninth-largest economy in western Europe -- that an August report commissioned by Lord Mayor Boris Johnson found it would be better off under a UK exit, were no reforms taken, than under the status quo. In two decades, London was forecast to grow to £615bn (from £350bn currently) under an EU exit and reforms, compared to £495bn under a ‘business as usual’ scenario.

But critically, the best scenario for London is from the report by Gerard Lyons, one of the UK’s most lauded forecasters, in which the UK would have membership in a reforming, adaptive EU. That would grow London’s economy to £640bn. Soberingly, this scenario pivoted largely on the ability for the UK to engage more with the EU and play a leadership role in reforms. In that sense, Cameron’s efforts will be an early litmus test of the UK’s ability to engage co-operatively with the rest of the EU. And it will also test the EU’s ability to accept that flexibility.