Did David Cameron Do “Bad Deal” on Europe?

The Conservative leader should unite countries outside the European currency union.

Britain’s deputy prime minister Nick Clegg said that he was “bitterly disappointed” about David Cameron’s veto to European treaty changes last week.

The Liberal Democrat leader told the BBC that any further withdrawal from Europe risks making Britain “a pygmy in the world.” He blamed the “intransigence” of France and Germany for Britain’s isolation. Both countries pushed for a fiscal compact of European nations. Britain was the only member state to oppose fiscal union.

Clegg also criticized Euroskeptics within the ruling Conservative Party who, he alleged, had pressed the prime minister to show “bulldog spirit” in negotiations.

There’s nothing bulldog about Britain hovering somewhere in the mid-Atlantic, not standing tall in Europe and not being taken seriously in Washington.

The liberals, who are far more enthusiastic about European integration than their conservative coalition partners usually are, have reason to be concerned. As Cameron pointed out on Friday, more than half of British trade is conducted with others countries in the European single market. Being a member of the European Union is very much in Britain’s interest.

His wariness of surrendering sovereignty to Brussels stems from those very interests however. Britain stood little to gain from becoming part of a European fiscal union and much to lose — the fortunes of London’s financial district for one thing but also, eventually, the freedom of maintaining a competitive tax regime. France and Germany favor harmonization of tax rates across Europe, something Britain and Ireland have objected to.

The other Europeans should not be blamed for blocking a British exemption from regulatory and tax harmonization. Smaller countries like Estonia, the Czech Republic and the Netherlands also stand to lose business if they have to rein in their financial sectors and raise corporate tax rates so why should they tolerate a special status for Britain?

Indeed, none of these countries should have to undermine their competitiveness in the name of boosting competitiveness across the continent and Britain should be leading the fight for a two tier Europe with a eurozone core that embraces fiscal integration and a periphery that’s economically too divergent to belong to a monetary union but quite prepared to be part of the common market.

Cameron’s “bulldog” backbenchers and their call for a referendum about British membership of the EU are an asset in this regard. The threat of a British exit should compel eurozone leaders to reconsider their insistence that the entire Union adopt their plans for fiscal consolidation and financial reform.

As for Clegg, his party is mired in single digits in opinion polls. He won’t split the coalition and risk a snap election now.