The eurozone that emerges from the crisis will be unrecognisable from its present configuration. Whether or not Greece, Spain and Portugal relinquish their membership of the single currency, the likelihood is that it will survive, accompanied by a fiscal union of euro countries. In the form of the German-scripted “fiscal compact”, which would impose stringent limits on Keynesian deficit spending by member states, the process is already under way. As Angela Merkel, the German chancellor, told her party earlier this year, “Step by step, European politics is merging with domestic politics.” Eurosceptics, too, acknowledge that “ever-closer union” is Europe’s destiny. David Cameron and George Osborne are fond of referring to the “remorseless logic” of monetary union leading to fiscal union. On that, they are correct.
The implications for British politics are profound. The UK has long had a semi-detached relationship with the EU by virtue of its non-membership of the single currency and the Schengen Area. The risk now is that British influence will be diluted as the core members use the pan-European institutions to alter the terms of the single market, something Mr Cameron is powerless to prevent. Should this happen, the arguments in favour of withdrawal from the European Union would gather force.
In a column in this week's New Statesman , David Owen, the former Labour foreign secretary and leader of the Social Democratic Party, says that a referendum on Britain’s relationship with the EU is “inevitable”. The Conservatives, mindful of the poll bounce they enjoyed following Mr Cameron’s “veto” of the revised Lisbon Treaty last December in Brussels, are expected to commit to one in their 2015 manifesto. Tory strategists are keen to neutralise the increasing electoral threat from the populist UK Independence Party (Ukip), which cost the party as many as 21 seats at the last general election (there were 21 constituencies in which the Ukip vote exceeded the Labour majority). Should a second-term Conservative-led government fail to extract sufficient concessions from Brussels, it is no longer inconceivable that it could stage a Yes/No referendum on EU membership. The Liberal Democrats have previously pledged to hold such a vote “the next time the British government signs up for a fundamental change in the relationship between the UK and the EU”.
Yet, as Lord Owen writes, there is another option to “federalism or bust” – “restructuring” Europe. If the argument in favour of pragmatic reform is to prevail, it is vital for the Labour Party to make its intentions clear now. The alternative, Lord Owen writes, is that it will trail “behind public opinion close to the 2015 general election and will be forced to make a desperate bid to halt the Conservative Party”. Jon Cruddas, who is now leading Labour’s policy review, has argued for a referendum on full withdrawal from the EU. “At certain stages, the political classes should invite the people into the discussion that affects their everyday lives,” he said.
Yet it is probable that such a vote would be lost, with disastrous consequences for Britain’s international standing. In spite of its present woes, the EU has been largely a force for good. It has brought peace to a continent once ravaged by war, transformed eastern Europe and the former Mediterranean dictatorships, and vastly expanded trade and prosperity.
The onus is, therefore, on Ed Miliband to identify a compromise acceptable to both his party and the British electorate. The greatest danger is that the debate remains polarised between federalists and hard sceptics, with the sceptics emerging triumphant each time. There is a patriotic and hard-headed case to be made for sustained British engagement with Europe. It is time for Labour to make it.