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Cameron's EU veto strains governing coalition

A news story about British Prime Minister David Cameron is broadcast on a TV screen at the stock market in Frankfurt, Germany, Monday, Dec. 12, 2011, when the German stock index DAX went down more than 2 per cent.

Michael Probst/Michael Probst/AP

Britain's most valuable industry – financial services – is threatened with fringe status because Prime Minister David Cameron fogged in the island state with his resounding "No" to Europe.

That is the view of Mr. Cameron's critics, one he outright rejected in the House of Commons on Monday, three days after his decision to veto a European Union pact aimed at saving the euro.

His desire, he said, was "to stay out of arrangements where they do not protect our interests."

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The argument did not fly with some of the top pro-Europe politicians inside and outside of Mr. Cameron's Conservative-Liberal Democrat coalition government. They said the rejection of the EU pact will have grave repercussions on the broader economy in general and financial services, in particular – its main employment and income generator.

"There is now a real danger that the United Kingdom will be isolated and marginalized within the European Union," said Deputy Prime Minister Nick Clegg of the Liberal Democrats. "I don't think that's good for jobs in the City or elsewhere, I don't think it's good for growth, I don't think its good for families up and down the country." (The City is the name for London's financial district.)

Labour's Ed Miliband, the Opposition Leader, said that Mr. Cameron's European brush-off was a "diplomatic disaster" and that "far from protecting our interests, he has left us without a voice."

The confrontation over Mr. Cameron's veto marked the biggest rift within the governing coalition since its election in the spring of 2010. The strain was highlighted Monday when Mr. Clegg refused to sit alongside Mr. Cameron in the House of Commons. While some political commentators predicted the beginning of the end for the coalition, the LibDems are seeing their popularity plummeting and have made it clear they are in no mood for an election.

The trouble began when Mr. Cameron vetoed a proposed EU treaty change that would have put the 27-country EU on the road to fiscal union. It would set strict limits on budget deficits and national debt loads, use sanctions to punish transgressors and demand oversight of national budgets to ensure that they are sustainable. Its goal was to prevent a repeat of the financial collapses of Greece, Ireland and Portugal, each of which required bailouts and led to the euro zone's existential crisis.

Mr. Cameron had offered to sign the EU pact, which was endorsed by 26 of the 27 EU members (17 of which use the euro), if Britain's financial-services industry received certain safeguards – essentially a demand for protection from any European regulations that might harm Britain's biggest industry.

Mr. Cameron wanted Britain to have the ability to determine capital levels for its own banks and did not want the industry to be hit with a financial-services transaction tax.The proposed tax, championed by French President Nicolas Sarkozy, who has been crusading against "unbridled capitalism" since the 2008 financial crisis, has been fiercely resisted by Mr. Cameron's government.

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In the House of Commons on Monday, Mr. Cameron insisted he acted in "good faith," presented demands that he thought were "modest, reasonable and relevant," and used the veto power for the national interest.

In the absence of Britain's endorsement of the EU treaty changes that would be required to enforce the new fiscal pact, the 26 EU countries are forging ahead with an intergovernmental agreement of their own. This led to widespread accusations that Mr. Cameron had stepped outside of the European tent, relinquishing a seat at negotiating sessions that could influence Britain's economic future.

Still, Mr. Cameron's move attracted more praise than criticism outside Westminster. "To say that Britain is isolated is like saying the one sane man in the asylum is isolated," said Andrew Smithers, financial commentator and founder of London investment firm Smithers & Co.

James Michael, a professor of EU law in London, said Mr. Cameron's move was a gesture of support for British financial services, which, according to the industry trade group, TheCityUK, has 1.6-million employees and generates a hefty 10 per cent of gross domestic product. That makes the industry twice as big as France's. "What Cameron did was a little like setting Britain up as a regulatory haven, with light-touch regulation," Mr. Michael said.

Many City executives endorsed Mr. Cameron's veto, even if they said years may pass before its effects on the industry will be known. "I think it does protect UK financial services," said Terry Smith, CEO of Tullett Prebon, the London money brokerage. "It's our biggest taxpayer, employer and exporter." He added that he doubts the Prime Minister's veto will jeopardize London's position as the world's financial services hub.

Other executives think Mr. Cameron certainly took a risk, though one that is hard to judge. One executive, who did not want to be named, noted that Britain is still part of the EU, and therefore subject to any financial and market regulations passed by the EU. "Therefore, he really doesn't have an opt-out," he said. "This could be a Pyrrhic victory for Britain."

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Gary Jenkins, head of fixed-income research at London's Evolution Securities, said "we have no idea what the impact" of Mr. Cameron's decision will be, but noted that Britain killed a treaty change that the euro-zone countries, notably Germany, had wanted. "It's doubtful he will get much sympathy from his European peers any more," he said.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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