Both Britain and Europe could benefit from David Cameron’s use of the veto in the EU treaty negotiations. The creation of a new structure will be easier without the UK sniping from the sidelines

Though David Cameron is the first Prime Minister to have exercised the British veto in Europe, the United Kingdom’s relationship with the European Union (EU) has always been a deeply troubled and contradictory one.

The essential problem is that, where Europe is concerned, Britain’s governing elite seems always to have put its own agenda before the broader interests of the public, By exercising the veto, Cameron, as well as acting with consistency and integrity, may have begun a process which will decide once and for all whether Britain either leaves the EU altogether or becomes a fully committed participant in the European project. Either would be better than the indecision that has characterised the Anglo-European relationship since the 1970s.

Of course, there have been issues where the UK has got it right, most notably over successive governments’ determination not to join the single currency. Shadowing the deutschemark through the ERM was bad enough, leading to economic calamity in the autumn of 1992, but at least the UK recognised that the combination of a single currency with a multiplicity of budgetary processes simply could not work.

To function effectively, a single currency requires a single budgetary authority. Within a common currency, American states have local tax and spending powers, but the overall budget process is controlled by Washington. Similarly. Scotland, Wales and Northern Ireland enjoy limited fiscal autonomy within the UK, but Westminster makes all of the key decisions and sets the fiscal framework.

The absence of an overarching fiscal process has been the central contradiction within the single currency that has led inexorably to the current crisis. The creation of the euro gave countries like Greece the ability to borrow at interest rates that hitherto had been the preserve only of the most fiscally responsible. Unsurprisingly, they took full advantage of it to rack up debts which far exceeded their economic capability. At the same time, wage costs rose across southern Europe, a process which necessarily undermined economic competitiveness.

A single budgetary process could alone overcome these contradictions, providing a consistent underpinning for the euro, setting a clear mandate for the central bank, and using the fiscal system to transfer funds from stronger to weaker components of the whole in a manner anomalous to regional support within individual countries.

The deal agreed by the eurozone 17 (and likely to be supported by most of the other EU 10, with the exception of Britain) is a step in the right direction, but it may prove to be yet another case of ‘too little, too late’. The firepower of the stability fund still looks far too small to buttress the debts of countries like Italy, while the role of the European Central Bank (ECB) remains ill-defined. Few doubt that, ultimately, the ECB will have to print money to bail out weaker EU members, even if Germany is undoubtedly right to fear the inflationary implications of any such policy.

But will the ECB be allowed to ride to the rescue in time? The implications of money-printing will undoubtedly include inflation, but inflation may prove to be the least bad option after more than a decade of the reckless accumulation of debt. When debt is allowed to become excessive, both creditors and the consumer end up paying for it, the only argument being whether inflation is better or worse than default.

Where does this situation leave Britain? Cameron has broken with a long and discreditable tradition by acting on principle, and by putting British interests first. Of course, there are many potential drawbacks, including potential exclusion from decisions that necessarily will affect the British economy. But the reality is that the UK has always been a semi-detached member of the EU, and the prime minister deserves credit for making this explicit.

The honesty over Europe shown by Cameron is long overdue from a British leader. The essential problem with Britain’s membership of the EU has been that the UK’s leaders have always tried to pick and choose, and to have a foot in both camps. Right from the start, the British governing elite has almost always spun Europe its own way. Though the objective of ‘ever closer union’ was always explicit on the continent, when, in a 1975 referendum, the British electorate was consulted about joining the European project, the public were told that nothing more was at stake than a ‘common market’.

The public duly voted in favour by 67% to 33%, which seemed to make perfect sense. After all, a fully-functioning single market should have enormous advantages for the British consumer.

Simply by going on-line, he or she should be able to purchase goods and services on the most advantageous terms. For instance, a single market should make it possible for the motorist to purchase petrol over the internet, paying the local price (including duty) in, say, Greece before collecting the fuel at a local filling station.

The same single market rights would enable British road hauliers to compete on a level playing field with European rivals. Likewise, the British consumer should be able to order his alcohol from France, or his tobacco from Spain. Overall, a single market would offer great advantages to the consumer.

Oddly enough, it has never quite worked out that way, and the British consumer has been denied many of the undoubted benefits of the single market. Britain may have vacillated over many European issues, but has always been determined to continue to reap lucrative tariff revenues by denying its citizens full participation in the common market.

This inconsistency has been all of a piece with the way in which British politicians have tended to behave over Europe, putting their own interests above those of the general public.

Thus, whilst the British establishment has been less than committed over giving its citizens the benefits of the single market, it has been thoroughly onside over Europe’s plethora of rules and regulations. Almost every European rule that restricts individuals’ freedom of action has been embraced and enforced to the limit, in contrast to the reportedly lax enforcement procedures prevalent in many continental countries.

Where interference in the daily lives of individuals is concerned, Europe has proved a marvelous scapegoat for the curtailment of choice, and British citizens have tended to swallow the line that ‘it’s a European law’ without ever wondering why any penalty for transgression is meted out by a British functionary, and not by an Italian or a Spaniard. Odd, that.

Much the same selective approach has been applied over institutional and political issues. Britain has almost always pushed for broadening the Union as an alternative to deepening it, wanting to be involved but at the same time wanting to prevent its own privileges from being subsumed into European power structures.

For the Labour government, being ‘at the heart of Europe’ was no obstacle to involvement in the American intervention in Iraq despite strong opposition from Germany, France and many other EU member countries.

Seen this way, both Britain and Europe may benefit from David Cameron’s action. The creation of the necessary centralised budgetary process may be easier without the UK sniping from the sidelines (though Europe’s sclerotic decision-making processes may still prove unequal to the task).

For Britain, an eventual resolution of the ‘in-out’ debate has come nearer, even if there is no immediate prospect of a referendum. At least, when the public is asked for a decision, the question is likely to be a clear-cut one about membership rather than a technical debate over degrees of sovereignty.

In or out, however, Britain needs to back up its position by internal reform. Amid all the debate over eurozone sovereign credibility, it tends to be forgotten that the UK’s aggregate indebtedness (corporate, individual and government) is, at close to 500% of GDP, much worse than the eurozone average. A decade of excessive borrowing has aligned the UK economy against growth, while government continues to spend more than the country can afford.

Whether Britain does or does not remain within the EU, the UK can no longer continue to kick such cans down the road.

Dr Tim Morgan is global head of research at Tullett Prebon. This is an edited version of a Tullett Prebon Strategy Note