How Cameron's budget bluster will help Europe

In the end it doesn't matter whether those on the fringes of the EU linger or leave. But David Cameron's insistence on a budget freeze should help the body sharpen its priorities.

One of the curious things about the EU is a predictable inverse relationship between the amount of money at stake and the time spent on negotiations. Nothing illustrates this better than the appalling spectacle of the EU's budget negotiations.

Do not be fooled by the headline number of €1 trillion. This sum is to be spread over seven years, during which the forecast gross domestic product of the EU will be about €100 trillion. The dispute is not about the budget itself but about 3 per cent of the budget. Measured in terms of EU gross domestic product, the disputed volumes translate to about 0.03 per cent. It would be an act of arithmetic foolhardiness to attach any macroeconomic significance to it.

By contrast, sorting out the eurozone crisis will end up costing real money and will have real economic significance. This is what the leaders of the EU should be focusing on, not the EU’s budget.

The singular importance of the budget negotiations, and of British prime minister David Cameron’s insistence on an EU budget freeze, lies in what they reveal about the future of the EU itself. A frozen budget means that the EU is stuck with what it does. Forget the Agenda 2020, or any other pretence at growth-enhancing policies. The EU’s prime project remains a crippled single market. The single market has been an overhyped, but mostly disappointing program, with no measurable impact on GDP. It does not extend to most services, the largest part of the economy. Governments have rolled back the single market in finance during the crisis. Member states also treat energy as largely domestic. Defence procurement was never part of it anyway. I always found that the single market’s most useful function was that you can pay tribute to it in after-dinner speeches.

What the fraught budget negotiations tell us is that the process of European integration – at the level of the EU – is largely completed. In that sense it matters little whether the UK, for example, stays inside or not. In formally leaving the EU, there would be no need for the UK to give up on any existing rights, including the right to take up work and residence in the EU and, of course access to the single market – whatever that is worth. The terms of a withdrawal from the EU are freely negotiable. Even now, it does not feel that different, apart from the temperature, whether you are in Britain inside the EU, or in Norway outside the EU.

Today’s EU has two important functions left. Some readers may find my list shockingly short. The first is that it provides the institutions and legal framework for the eurozone to muddle through to a solution of its crisis. I am not saying that the eurozone will necessarily achieve that goal. There is a non-trivial probability that it will not.

But if it does, it will end up usurping the single market, and possibly turn it into something useful. The banking union could be a first step towards a single market for finance at eurozone level. Ultimately, I would also expect a single market for labour and for services, all at eurozone level. If there is a fiscal union, its budget will end up not only bigger than the EU’s, but also different in composition – to fulfil the purpose of macroeconomic stabilisation.

The EU’s second important function is to serve as a waiting room for member states who are not yet in the eurozone, but are willing to enter it at some point in the future. The real dividing line in the EU is not between the 17 eurozone members and the 10 non-members, but between the group of the "ins” and the "pre-ins” and the group of the "outs”. Britain is clearly in the latter category and so is the Czech Republic. Denmark and Sweden are also in there, but are a little closer to the fence.

In the end, it does not matter whether the outs leave the EU formally, linger compliantly on the fringes or whether the eurozone leaves them. A messy divorce of some sort will take place, at some point, possibly still quite a few years away. It could take numerous forms. A formal separation is only one of several possibilities. But it is not sustainable for a group of permanent outsiders to enjoy permanent co-decision rights, even though the EU is endlessly patient when it comes to accepting transitional arrangements. The reality is that there is no sustainable biosphere that is outside the eurozone, but inside the EU.

The marginalisation of the EU at the expense of the eurozone also has implications for other policies, such as the foreign and security policy, and also for EU enlargement.

By insisting on an EU budget freeze, Cameron is ultimately doing the eurozone a favour. By undermining the EU, he provides further incentives for the eurozone to grasp its collective interest. I support him.

Copyright The Financial Times Limited 2012.

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