Wanted: a vision to trump Cameron’s offer of bleak isolation in Europe

The problem is that if the euro sinks, the UK will be dragged down with it.

British politics is still hung. As 2011 draws to a close, no party has broken the deadlock that produced an indecisive result in the last general election. Opinion polls have told pretty much the same story all year. The Labour Party is liked much more than it was when led by Gordon Brown, but Ed Miliband is not deemed to be as plausible a national leader as David Cameron. The Prime Minister is much more popular than his party, which still retains a toxic whiff of moneyed complacency.

The Liberal Democrats are reviled or ignored. Nick Clegg's alliance with the Tories has alienated many of his party's old supporters without recruiting new ones. The Deputy Prime Minister had hoped to fight the next election claiming credit as an equal partner in a joint venture to rescue the economy from the disastrous legacy bequeathed by Labour. The strategy was to make the Lib Dems the party of "competence and compassion".

The former would be expressed in the tough decisions taken to tackle a ruinous budget deficit; the latter in policies to mitigate the harsh effects of spending restraint. Neither is being achieved. The economy is stagnant and we might well see in the new year in recession. The deficit will still need cutting after the next election. What little palliative social intervention the Lib Dems claim to have secured will be scant compensation for falling real incomes and lost public services.

Tory foot-stamping

The Lib Dems do have substantial voting rights on the coalition board but Tory backbenchers hold a golden share. That much was proved by the veto that was wielded at the emergency Brussels summit to save the European single currency on 8-9 December. To be clear, I am referring to the prohibition imposed by the Conservative Party on the Prime Minister pursuing a policy of constructive engagement with other continental leaders. The "veto" that Cameron claims to have deployed at the negotiating table doesn't prevent eurozone countries from pursuing an agenda of closer integration. It merely guarantees that they will do so in consultation with every non-eurozone member state apart from Britain. Obstinate foot-stamping has cleared the room of people minded to accommodate UK interests, especially when it comes to protecting the City of London from European regulation, which was the advertised motive for Cameron's intransigence.

That outcome caused dismay in Clegg's team, verging on despair. The words "disaster", "awful" and "miscalculation" have all been freely used in the Deputy Prime Minister's office to describe Cameron's handling of the negotiations. In public, Clegg limits himself to expressions of pained regret and martyred determination to continue fighting for pet causes in government - his signature tune.

Lib Dem torment over Europe was prefigured earlier in the year in the referendum campaign on switching to the Alternative Vote (AV) electoral system. Then, too, Clegg thought his intimacy with Cameron was a safeguard against indulgence of Conservative reactionary impulse. Cameron would support the "no" camp, Clegg would call for a "yes" vote, but there was a "gentleman's agreement" not to let it get personal. Then Tory backbenchers, furious at their leader's apparent preference for coalition cosiness over party policy, persuaded Cameron to sanction a campaign that mercilessly punched Clegg's bruises. AV was denounced as a stitch-up to promote perpetual hung parliaments of benefit only to a Lib Dem leader considered to have swapped principle for power.

Cameron takes no pleasure in disrupting coalition harmony but he also knows that, when the alternative is rebellion in his own ranks, trampling the Lib Dems is the safer path. Clegg's miserable poll ratings preclude flouncing out of the coalition. Besides, the Lib Dems have aligned themselves irrevocably with Conservative economic policy, which overshadows all other considerations. George Osborne, Cameron's election strategist as well as his Chancellor, had a plan to subject Britain to a short, sharp dose of austerity and then, as growth returned towards the end of the parliament, compensate voters with pre-polling-day tax cuts. That timetable has been sabotaged by economic reality. The government is now heavily reliant on voters' continuing to blame Labour for the nation's economic problems and remaining unconvinced of Miliband's credentials as a potential prime minister. Cameron will present himself as the only serious candidate, determined to finish a job that Labour only reluctantly acknowledge needs doing at all. The Lib Dems, having backed Osborne's plan, are obliged to second that attack.

Clegg has argued that partnership with the Tories was essential for the pursuit of the national economic interest. Yet he believes Cameron's sulky isolation in Europe is "dangerous" and "bad" for Britain. It is also a luminous signpost announcing the limitations of Lib Dem influence and the strength of those Conservative MPs for whom enmity with Brussels is an old vendetta. That in turn supports the Labour claim that Cameron's project to "modernise" his party in opposition was spurious - a line of attack Clegg has discreetly abetted in the hope that voters would see him as a moderating influence, diluting or blocking the ambitions of Tory zealots. Clegg is left staring at a blank sheet of paper where he needs an explanation for why his party should remain in coalition, other than tackling the deficit and postponing electoral annihilation.

Atlantis myth

Labour, meanwhile, needs prescriptions for the economy and Britain's future in Europe that can't be caricatured as variations on "we wouldn't start from here". Miliband complains that Cameron's path of maximum austerity at home and mean diplomacy abroad makes it harder to boost growth and create jobs. The Tories are confident that the public sees no alternative. More significantly, having captured UK foreign policy, the hard-line Eurosceptics believe they have an alluring destination for the country. Over time, further detachment from the EU is inevitable. The nation will be liberated from the bureaucratic meddling that is supposed to have held back the economy. With entrepreneurial dynamism thus restored, we will flourish as a global trading hub while other European nations look on enviously, trussed in red tape, stranded on the capsized hull of their single currency. That is the underlying rationale for Euroscepticism - creating an island utopia where commerce is unencumbered by footling matters such as geography or regional diplomacy; Atlantis.

The problem is that if the euro sinks, the UK economy will be dragged down with it and if it is rescued the ill will generated by Britain's position guarantees unfavourable terms of trade in the future. Companies that are based here because it is a useful avenue into Europe's single market, the world's largest unified trading space, will relocate if it becomes clear that British influence is waning. Atlantis is a myth.

But the mundane imperative of our dependence on good EU relations is obscured by exaltation in a two-fingered gesture of defiance. Opinion polls show clear support for the Prime Minister's actions in Brussels. Cameron has proved adept at cutting through complex issues with a glib, parochial account of Britain's interests. Last year he and Osborne outmanoeuvred Labour by presenting the country's woes as the result of Gordon Brown blowing the national budget on public services. With no sign of recovery in sight, the Tories find in Brussels a new scapegoat - and one against which most of the press has spent years whipping up hostility.

Anyone looking to Labour for a more uplifting vision for the future will find only a sketch on Miliband's drawing board. In his party conference speech in September, the Labour leader expounded his thesis that the British model of capitalism is broken, rewarding delinquent "predatory" behaviour and failing to honour "productive" activity. The financial crisis, he argued, signalled the end of the era in which a tiny minority would be allowed to monopolise wealth and power, while for the rest living standards fall and insecurity rises. It is unclear how Miliband intends to reverse that trend. It is still less clear whether his new model of capitalism envisages Britain more or less integrated with the rest of Europe.

The view in Downing Street is that voters will see Miliband's moralising calls for fairer capitalism as hand-wringing, well-meaning perhaps, but impotent. "It isn't as if anyone is out there calling for unfair capitalism," observes one Cameron aide.

But when politics is hung, the deadlock can only be broken by something more compelling than the promise of well-managed stagnation. Labour want to present the Tories as relentlessly pessimistic, offering only grim resignation to long-haul austerity. That attack only works alongside an optimistic counter-offer. The Holy Grail in Westminster is a convincing account of how Britain can make its way in a world made scary by economic crisis, on the periphery of a continent resisting decline. Miliband doesn't yet have such a story. Nor does Nick Clegg. The most developed project around, and the one with the most momentum, is the populist island tale peddled by the Eurosceptics. The question for David Cameron is whether he wants to lead a real European nation or follow the men from Atlantis.