NEWS ANALYSIS

Germany takes key step to keeping Britain in EU

Merkel supports Cameron's call for City of London to be protected from future EU rules

Germany has signalled its support for a British demand that the City of London, Europe's biggest financial centre and the world's largest foreign exchange market, should be protected from the effects of future European Union regulation despite Britain's continued refusal to adopt the euro as its currency.

In a speech to an industrial conference in the German capital, which was also attended by British finance minister George Osborne, German Chancellor Angela Merkel noted that although she "does not agree with Britain on everything", she accepts the British argument that the "Europe of today is no longer a Europe of one speed" and that individual nations don't have to follow all the regulations applied to other EU member-states.

Dr Merkel's statement on Tuesday represents a major boost for the British government which plans to hold a referendum on the country's continued membership in the EU.

If the German promise is translated into a new EU binding agreement protecting London's financial centre, it will bolster British Prime Minister David Cameron's claim that Britain can remain in the EU and still safeguard its sovereign interests, including the all-important financial services that account for 15 per cent of the British economy.

Acknowledging that not all EU countries will be happy with a deal that singles out London for special protection, (British finance minister George) Osborne couched his demand as part of a broader compromise under which Europeans who desire tighter financial regulations will be allowed to do so, provided Britain is allowed to go along a slower lane.

Britain and Denmark are the only EU member-states to have negotiated a permanent opt-out from the euro; all other nations which don't currently operate Europe's single currency are obliged to adopt it sooner or later, and no nation is now allowed to negotiate a British-style opt-out.

That special arrangement worked well until the financial crisis struck Europe, prompting demands for tighter regulations over Europe's single currency and clearer EU supervision powers over banks and other financial institutions.

The avalanche of EU regulations which followed culminated in an order issued by the European Central Bank in 2011, requiring all financial houses handling euro-denominated trading activities to be physically located inside the 19-state euro zone bloc, a move which threatened the very existence of London's money centre.

Britain fought a fierce legal battle against the decree, and scored a rare legal victory in March, when the EU General Court ruled that the European Central Bank has no power to impose such conditions.

Still, the experience highlighted a fundamental contradiction which continues to haunt British-EU relations: that, while London benefits hugely from its position as Europe's financial gateway, it sometimes does so by avoiding regulations that apply to its European competitors. In effect, the British want to have their cake and eat it too: they portray London as an offshore and a continental European financial centre at the same time.

Mr Osborne, who is considered Mr Cameron's most likely successor as prime minister later this decade, has taken it upon himself to ensure London's protection from further regulation. And he has chosen Germany as his first port of call partly because German support is crucial to any deal and also because Germany and Britain are Europe's biggest single trading partners.

Acknowledging that not all EU countries will be happy with a deal that singles out London for special protection, Mr Osborne couched his demand as part of a broader compromise under which Europeans who desire tighter financial regulations will be allowed to do so, provided Britain is allowed to go along a slower lane.

"You get a euro zone that works better, we get a guarantee that the euro zone's decisions and costs are not imposed on us," he told German businessmen and politicians in Berlin.

The proposition struck a chord with Germany's industrial bosses, who are increasingly worried that, if Britain is not given the necessary concessions, its people may be tempted to vote to leave the EU, thereby depriving Germany of its most important ally on free trade and open markets. "Germany needs the UK," said Mr Ulrich Grillo, the boss of BDI, the national association of top German industrialists.

The question is whether other EU member-states will follow the German concession, and whether it could be enshrined in a binding document. The British government needs that document in order to tout it during the referendum campaign as a serious achievement for Britain. But other European countries are weary of negotiating new treaties, because such exercises always raise unexpected problems.

Still, Mr Osborne left Berlin buoyed not only by the fact that he seems to have secured German support, but also by his heightened international profile.

It's now up to Mr Cameron to negotiate other concessions that Britain wants, including the much more difficult question of the free movement of people across Europe, from which Britain is also seeking exemptions.

A version of this article appeared in the print edition of The Straits Times on November 06, 2015, with the headline 'Germany takes key step to keeping Britain in EU'. Print Edition | Subscribe