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David Davis MP writes on Europe in the Financial Times

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Time for shadow boxing in Europe is over

Today, David Cameron will return to a (rightly) warm welcome in the House of Commons. The government will successfully spin the EU budget negotiations as a success. It was not a victory, it was not even a draw, but it was not a defeat. And it is, of course, simply half-time.

To be fair, the UK prime minister played a difficult hand with intelligence and dexterity. He had lucky breaks, and the underlying forces were inevitably going to lead to an impasse. At least eight nations threatened to use the veto, and the domestic politics of a number of them gave little room for manoeuvre. The distance between member states – northern v southern and eastern in particular – was enormous.

The attempt by president of the European Council Herman Van Rompuy to come up with a new proposal was laughable. It actually involved increases in the Cohesion Fund and Common Agricultural Policy. Presumably it was designed to corral recipient nations’ support, and morally blackmail the paymaster nations. Unsurprisingly it was rejected by Germany, Holland, the Nordics and of course Britain. It also managed to drive a wedge between old allies France and Germany.

Mr Cameron focused on the EU gravy train, which is unpopular with voters, and on a line-by-line critique that left Eurocrats uncomfortable. An organisation like the EU that has been unable to publish unqualified accounts for well over a decade is bound to wither in the face of detailed scrutiny.
The question is: where now?

One problem is that there are too many irrational beneficiaries of the current system. Take Poland. It is the world’s 20th biggest economy, and pretty much the only one to weather the post-crash recession without any downturn, yet it is the largest net beneficiary of the budget. If you hear whining from Polish ministers about the UK stance, now you know why. They are terrified of losing their unjustified handouts.

The second problem is the decision-making mechanism. A rational system would default to a freeze in the event of an impasse, creating an incentive for recipient nations to agree a solution. Instead it defaults to an annual system of qualified majority voting. This is an incentive to the beneficiaries to veto sensible economies. From Britain’s point of view, if we win, we lose; and if we lose, we lose.

Third, there is the fundamental problem at the heart of the eurozone. Europe’s leading actors will not countenance a partial break-up, which would release struggling eurozone members to devalue and become more competitive. So there will be pressure for large increases in financial transfers to Greece, Portugal and possibly the other stressed economies. Because it would take spending of 10 times the current European budget to properly mitigate the euro’s problems, those pressures will last well beyond the EU budget’s seven-year horizon.

The block on all this pressure will be German politics. With a general election in the second half of next year, Chancellor Angela Merkel cannot be seen to be profligate with taxpayers’ money. The Germans are near the limit of financial tolerance.

And everybody needs Germany. Which is why Ms Merkel was the real conductor of the negotiations – and why delay is almost certainly what she wanted. It leaves her with levers over almost everybody. Indeed, the conventional wisdom in much of continental Europe seems to be that she will look to the UK for concessions and support on a banking union as a corollary to the final deal on the budget.

I have long thought the UK will either achieve a significant change in its relationship with Europe in the next decade or it will end up leaving. It looks as though the budget process, following the agonising indecision of the euro crisis, is beginning to persuade Downing Street of the same. I believe we need to reinforce our negotiating leverage with an early “mandate” referendum, backed up by a “decision” referendum to persuade Brussels that the threat of departure is real. This weekend Grant Shapps, co-chairman of Mr Cameron’s Conservative party, admitted that the government was considering just that.

So last week’s inconclusive skirmishing may represent the opening shots in a grander, decisive action, a battle that decides Britain’s future, inside or outside the EU. I hope that process is more rational than the past few days has been.