Opinion

David Cameron's EU Gamble is Bad News for Business

David Bach — January 2012

UK Prime Minister David Cameron promised that, if reelected, he will hold a referendum on whether the country should stay in the European Union. Yale SOM's David Bach argues that this move is likely to produce just what a struggling economy doesn't need—more uncertainty.

British Prime Minister David Cameron's frustration is understandable. Britain's longstanding advocacy for market-oriented reforms, competition, and a light regulatory touch has taken on new urgency as efforts to tackle Europe's sovereign debt crisis have run up against a hard reality: the lack of international competitiveness of a large and growing number of EU economies. While Angela Merkel and her allies in Finland, the Netherlands, and elsewhere have imposed strict austerity policies on Europe's periphery stretching from Greece to Ireland, Cameron is right that competiveness cannot be restored via falling wages and shrinking welfare states alone. His repeated calls for a renewed commitment to liberalization, the completion of the Single Market in services, a reform of Europe's arcane agricultural policy, and more competition across the board have largely fallen on deaf ears. Instead, continental leaders have pressed forward with plans for "greater integration," which in British English means "more centralization of power in an unaccountable and inefficient bureaucracy in Brussels." It is true that most economists agree the Eurozone needs greater fiscal coordination and that the proposed banking union will strengthen the Euro. But that does not change the fact that Europe's crisis response has largely ignored British proposals, and that the overall direction taken flies in the face of Britain's view regarding what the EU ought to be. Add to this the fact that public EU skepticism in Britain is giving way to outright hostility and the prime minister's decision to hold an in-or-out referendum if he is reelected in 2015 is both understandable and a shrewd political move. Unfortunately, it's the last thing business needed. 

There is some irony in this situation. I suspect most CEOs, not just in the U.S. but also across Europe, largely agree with Cameron's policy proposals. And his strategy to essentially raise the specter of walking away in order to put pressure on his counterparts is one that pretty much every CEO has pursued to turn bargaining dynamics in his or her favor. The problem, however, is that with this decision, Cameron is likely to achieve the opposite. He has essentially taken Britain out of the discussion over the EU's future. What is more, since a referendum would at the earliest take place in 2016 or 2017, the prime minister has created tremendous uncertainty for business. The EU is Britain's largest trading partner. And even though Cameron and many EU skeptics believe that London is one of the world's foremost financial centers because it eschewed the Euro, the fact that it is inside the Single Market where capital flows freely and rules are fairly homogenous has been equally important. Business will always prefer business-friendly rules. But what business detests even more than suboptimal rules is uncertainty. Yet prolonged uncertainty is precisely what the prime minister has created. Many investors will think twice about investing in Britain for as long as such a fundamental question is not resolved. Moreover, the move will likely undermine business confidence in the rest of Europe: not only does the EU risk "losing" its main pro-market member and third-largest economy, but more importantly British political capital will henceforth be spent on renegotiating Britain's status within the EU rather than shaping the future of the European project. It's bad news indeed all around. 

David Bach is senior associate dean for executive MBA and global programs and senior lecturer in global business and politics. His research and teaching focuses on business-government relations, nonmarket strategy, and market regulation in a globalizing world economy, with particular emphasis on the regulation of financial markets.