Brussels - It was billed as a summit to save the euro. It
may be remembered as the day Europe lost patience with Britain, as most of the
continent threw in its lot with EU founding members France and Germany and
committed to binding their economies ever more tightly.
There was plenty of talk of history in the making in the
week before the December 8-9 gathering of European Union leaders - the eighth
this year. But it was all about the currency and whether it would survive the
strains of a debt crisis that over the past two years has engulfed Greece,
spread to Ireland, Portugal, Spain and Italy and now threatens France and even
mighty Germany.
As the summit began, there was no hint of the drama that was
to come in the early hours of Friday, the moment when Europe split, 26 against
one, after about 10 hours of talks.
Britain has always had an uneasy relationship with its EU
partners, choosing not to join the single currency or sign the open borders
Schengen treaty and often kicking against what it sees as Brussels "interference".
But this was a low point, the first time in 39 years that a
British prime minister had used a veto to block an EU agreement.
David Cameron
cast it as a bold and necessary decision to protect British interests. Most of
the rest of Europe appeared to regard it as reckless and went a different way.
Hours later, when the leaders briefly reconvened to finish
their discussions, Cameron cut a lonely figure. French President Nicolas
Sarkozy appeared to avoid an extended hand as Cameron walked to his seat.
The buildup to this last summit of the year had been much
like the previous seven. The language had been recognisable too, even if market
pressures had added an unprecedented degree of urgency to glacial EU decision
making. Overnight borrowing from the European Central Bank (ECB) hit its
highest level since March at the start of December, showing the degree of
tension among banks.
Profound concern
US Treasury Secretary Timothy Geithner had spent several
days in Europe before the summit. The United States, like all of Europe's trade
partners, had been watching the accelerating debt crisis with profound concern,
worried for their own economies and banks.
In meetings with ECB head Mario Draghi and eurozone finance
ministers, the conversation was all about the two-year-old debt crisis and how
to resolve it.
The issues: the role of the ECB, how far should or would it
stand behind countries to buy them breathing space, the scale of the eurozone's
rescue fund, the part to be played by the IMF, and should the EU let private
bondholders off the hook.
Geithner spent time in Frankfurt, Berlin, Paris, Marseille
and Milan. London didn't figure on his itinerary. During the same week, German
Chancellor Angela Merkel and Sarkozy spoke frequently and met in person. There
were contacts with Spain's incoming Prime Minister Mariano Rajoy. Draghi was
closely involved in discussions at all stages, insiders say. Once more, Cameron
was peripheral.
Immediately before the summit, the US assessment of Europe's
progress was, in broad terms, they know what they need to do but they need to
work out how they're going to do it.
As one US official put it, fixing the flaws of the
13-year-old single currency - a monetary union without coordinated budget
policy - could not happen overnight. But the Europeans were moving closer to
addressing the problem at its root.
That assessment captured well the mood in the hours heading
into the latest in a long line of "crunch" summits.
Germany - Europe's biggest economy - was intent on changing
the EU's treaty to enshrine stricter budget discipline and penalties for
countries that failed to adhere to them, to ensure there could be no repeat of
the current crisis.
From the German perspective, only by reforming economies,
cutting social benefits and working longer would the indebted members of the
eurozone and the single currency emerge from the turmoil. Printing money would
buy only a temporary respite and would remove the incentive to reform.
France was ready to back Germany in a push for full-blown
treaty change, but really favoured the idea of an intergovernmental treaty -
akin to a sideline agreement - among the 17 eurozone members, anchoring the
single currency and its members at the heart of a new Europe.
Nativity play
Britain's prime minister, under pressure from a sizeable
anti-EU element in his own party, set off for the Brussels meeting straight
from his son's school nativity play, having promised during a particularly
raucous session of parliament the previous day that he would defend Britain's
interests at the summit.
With hindsight, the choreography on the evening of Thursday,
December 8, probably should have been clear to Cameron and everyone else.
Speaking a few hours before the summit began, European
Commission president Jose Manuel Barroso issued this challenge to Europe's
leaders: "What I expect from all heads of governments is that they don't
come saying what they cannot do but what they will do for Europe."
Luxembourg Prime Minister Jean-Claude Juncker, who chairs
eurozone finance ministers' meetings, was the first to arrive at the Brussels
venue. Juncker said he preferred to see unanimity on treaty change among the
27, but if that wasn't possible, the 17 members of the eurozone would have to
go it alone.
"Their relationship is more intimate than between the
27."
When Cameron arrived in Brussels on Thursday, it was after 6
pm. His first meeting was with Italy's new Prime Minister Mario Monti, an
unelected "technocrat" charged
with getting Italy's finances in order. Europe's fourth-biggest economy has a
debt to gross domestic product ratio of 120% after years of stagnation under
Silvio Berlusconi.
The meeting was brief and was followed by 45 minutes of
talks with Merkel and Sarkozy. Cameron was accompanied at that meeting by
Foreign Secretary William Hague and Jon Cunliffe, the prime minister's most
senior EU adviser, the architect of the rules that helped keep Britain out of
the euro and Britain's next ambassador to the EU. One official who saw the
three leaders emerge said they were "visibly tense".
Britain's isolation
Then came dinner and the start of the meeting that was to
end in Britain's isolation. Sources involved described how events unfolded. The
intention was to get the 27 leaders to agree on what they wanted for a stronger
eurozone first, and then work out how to achieve it, officials said. It was
disagreement over the means, not the objective, that led to the breakdown.
An official present at the negotiations said Cameron had
begun by saying that he understood there was a desire for treaty change, and
that he wanted it too, but if Britain were to give its backing, it needed
something in return. "His reasoning appeared to be: 'You want treaty change,
I want treaty change', 'I need something because you are asking for
something'," the official said, describing it as logic that wasn't going
to fly.
At that point, the British prime minister set out two
concessions he wanted in exchange for Britain's support on treaty change.
"One was a safeguard on the internal market... but that was not the
problem," the official said. "Then he launched the idea on financial
services."
Financial services account for about 10% of Britain's
economy and the government has been at pains to shield the sector from
regulation emanating in Brussels. Britain had shared the outlines of its
thinking with some of its partners, officials said, but it hadn't circulated
anything approaching a document sufficiently detailed to form the basis of
discussion.
For that reason, the demands were news to many of the people
around the table. But it wasn't just the way Cameron went about it, it was the
substance of the demands. He was effectively asking for a softening of
regulation on Britain's financial sector at a time when many voters and
politicians believe banks are largely to blame for the crisis Europe is
suffering and want tighter regulation on the sector.
Dead from the start
"Politically speaking, when the banks are considered
the enemy and the root of all the problems we have today, Cameron's arguments
were the wrong arguments at the wrong time for the wrong people," the
official said. "Politically, he was dead from the start."
At that point old enmities came into play, rooted in a widely-held French view that Britain never really belonged in the European Union in the first place.
"The French were
using all this as a really perfect alibi to get rid of the British. Sarkozy
used the proposals of the British to justify an intergovernmental treaty,"
the official said, explaining that intentionally or otherwise, Cameron had
played straight into Sarkozy's hands.
It may have appeared things couldn't get worse for the
British prime minister, a relative novice on the EU stage.
"It took 10 or 20 minutes to see that most of the
participants were not pleased at all with the idea of Britain getting an opt
out or exceptional treatment for their financial services and it didn't fly at
all. There was no understanding for it. David Cameron obtained nothing. Just
nothing."
"We understand his domestic political situation. He is
a prisoner of domestic constraints."
Another official present at the talks recalled the moment,
in the early hours of Friday, when European Union president Herman Van Rompuy,
who chaired the meeting, proposed moving forward with an intergovernmental
agreement of the 17 eurozone nations, with an open invitation for other
countries to join.
"France said yes, immediately followed by Germany and
then one by one, in a matter of seconds the member states of the eurozone
backed the Franco-German call. Within a few minutes, the non-eurozone member
states decided they wanted to be in and left Cameron completely isolated.
The swing was very, very quick. Everybody was on board in a
matter of minutes. I think it was obvious inside the room that Cameron was
shocked by the swiftness with which his allies left him alone.
"Cameron made a serious miscalculation. He genuinely
thought he could get something back in return and underestimated the
willingness of the eurozone to move on. That's our view. This deal has probably
saved the euro, but all this will now have serious repercussions on the
relationship between Britain and the EU."