Britain's Osborne and Cameron Walk a Tightrope on EU Reform

LONDON (TheDeal) -- Dear Mr. Osborne,

Congratulations on your Conservative Party's recent win in the U.K. general election. Frankly, you "Tories" were probably many people's second choice; but in Britain's first-past-the-post electoral system there was undoubtedly a lot of tactical voting, aimed at keeping others out rather than putting you in.

Many will also have voted for you because their own preferred candidate didn't have a prayer, so your mandate to implement the policies you campaigned on might not be as clear as you would like us to believe. However, you did have a personal part in organizing the election campaign. One should recognize the hard work and co-ordination that went into it.

The Prime minister, David Cameron, seems to have rewarded you already. Not only has he kept you on in the powerful role of Chancellor of the Exchequer, the medieval title we use to describe our finance minister, but he has designated you chief negotiator on European Union reform.

It's up to you, and your diplomatic skills, to find an agreement with your European peers that will permit Cameron to fulfill his pledge to the electorate. He has promised to put a simple question to the country in a referendum in two years -- maybe less.

The question will be: Have we and our partners in Europe reached sufficient agreement on necessary changes to the way Europe works to make it possible and desirable for the U.K. to stay in this club of 28 nations, or do we want to leave?

Footloose hedge-fund managers might disagree, but the country's biggest businesses have made it clear where they stand on the fundamental issue of a British exit, or Brexit. Leaving Europe would be mad, economically and politically, condemning Britain to a life on the sidelines of world affairs and to long-term economic decline. Continued access to our biggest markets would be rendered vulnerable to the whims of our former partners.

Our so-called special relationship with the U.S. would not help us, if we no longer have the firepower to join America's battles either literally or metaphorically and if we cannot even act as a bridgehead into Europe for American banks or companies. But the point is not now whether the Eurosceptics are right or wrong. The point is whether the anti-Europe bandwagon that you and Cameron have been riding, however reluctantly, can be kept under control and directed to Britain's maximum advantage, or whether you crash it ignominiously into a ditch as deep and wide as the English Channel.

An accidental exit would be the worst of all worlds, leaving Britain with neither the advantages of membership of a reformed EU nor the benefits of a friendly disengagement on mutually acceptable terms.

Because, so far, you and Cameron have shown a lamentable lack of diplomatic skill in your dealings with Europe. Too often, you have simply assumed that you have natural allies in Northern Europe who will come to your defense, secretly agree with you on the need to reform and will help you push through the things you want.

But the Swedes, for instance, failed to support you over regulation of hedge funds and private equity and the Poles warned Cameron more vehemently not to expect their support in wrecking or paralyzing the EU. The Germans, by far the most important player in any negotiation, have already rebuffed you on immigration and made you look arrogant and petulant in the public row over the choice of the president of the European Commission. They made it clear that your ideas for reform of the Eurozone -- of which you are not even a member -- are unwelcome. German finance minister Wolfgang Schäuble recently attacked your "silly" and "unnecessary" interventions during the Eurozone crisis, reportedly suggesting that many Europeans believe London deliberately tried to undermine European monetary union.

So your first task is to be clear what it is you and the prime minister want from European reform. Even as you ask for reductions in the bureaucracy and red tape you believe to be holding British business back, it is worth remembering that many of the regulations -- the common accounting standards for instance, the competition and takeover regulation, much of the structure of the internal market -- were introduced at Britain's behest. They were designed to be as much like British regulation as possible.

London was already the dominant financial market; others were pressed to follow, often against their will. It was Britain's rejection of euro membership that changed the balance of power. The fewer policies we are part of, the less power we will have to shape them in future.

Demand restrictions on social welfare and medical provision for migrants, if you must, but remember that British people living and working abroad also benefit from the free movement of people and from the social infrastructure that allows it to happen. Britons who worked in Germany on building sites in the 1970s and 1980s, when there was no work in the U.K., cannot complain about Polish and Romanian construction workers flooding into Britain today.

Germans and French people, let alone the people of Eastern Europe, are not always as friendly toward migrant workers as their mainstream political leaders like to make out; but their governments are still committed to the fundamental right that permits them to be there. Do we really want to opt out of a policy that has worked to our benefit in the past and could help us again in the future?

Your second task is to put your ear to the ground in Brussels and all the European capitals to work out exactly what your counterparts will be able to accept. It's no good assuming that because you are always right (as a politician that's a given), that others will not have better arguments and equally touchy domestic audiences to play to. Above all, they may have a genuine belief in the European project, in European values of solidarity between member states and their peoples and a desire for social cohesion and harmonious labor relations that Britons are all too ready to scorn.

As you go into battle over the coming months, keep the picture in mind of Greek finance minister Yanis Varoufakis. He went to Europe, threatening a "Grexit" and assuming that the louder he shouted about German bullying and the injustice of his treatment at the hands of his creditors, the sooner he would win. His country is on the brink of disaster, and the Germans haven't blinked. Britain has some reasonable arguments, but lecturing and hectoring while you seek reforms in a matter of months rather than years may make agreements harder to reach.

And third, -- assuming you have not already succumbed to the siren call of Euroscepticism yourselves and would not secretly be relieved if the British people voted to pull us out of the E.U. -- you must work out very carefully how you plan to carry your party with you during the negotiations. Because so often you have not had a strategy for dealing with Parliament or public opinion. (Think of the Prime Minister's disastrous failure to network and persuade fellow lawmakers in advance over support for punishing Syria over its chemical weapons. He lost that vote, weakened President Barack Obama's resolve and undermined his negotiating position with the Russians -- and earned the derision and distrust of the American establishment.)

It is not enough to have a plan for Europe that will please the few remaining Conservative Europhiles. You will never persuade those ideologues on the right of the party for whom Brussels is the capital city of the Evil Empire. They may pretend to support you now, but they will reject whatever victories you bring back from Berlin, Paris or Brussels as too little too late. They -- and there are more of them in Parliament since the election earlier this month -- will always demand an immediate British exit. Identify them now and sideline them as best you can. Instead, you have to bring alongside those thinking members of your party, who are still open to argument and to whom you will have to offer enough meat to satisfy their appetite for reform.

More important, you will have to get them to remain at your side in the battle to persuade the British people, over the clamor of the sensationalist right-wing media, that you have got what you went to Brussels to fight for. You will have to believe it yourself, too, and present your case with passion, and without the usual political ducking and weaving. Otherwise, nobody will be persuaded.

That said, Mr. Chancellor, one can only wish you the best of luck. Maybe what your friend Cameron handed you was not a reward but a poison chalice. But you'll have to drink it to find out.

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