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Angela Merkel to David Cameron: support us or we leave UK behind



German chancellor told prime minister that eurozone countries are prepared to draw up their own treaty without Britain
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Angela Merkel, pictured with David Cameron at the G20 summit, told the prime minister last month that eurozone countries are prepared to draw up their own treaty. Photograph: Getty Images


All roads may lead to Rome but in the shaping of today's Europe they went via Sicily.

The allies began their slow campaign to win control of continental Europe in the second world war when Operation Husky, the invasion of Sicily, was launched in July 1943. A decade later, the key step towards the creation of the EEC was taken in Sicily at the Messina Conference in June 1955. Two years later the EEC was formally established in the Treaty of Rome signed in March 1957.

Italy's role in shaping modern Europe serves as a reality check for those who have been speculating that Italy could drop out of the euro if it is overwhelmed by a sovereign debt crisis. Sources in Brussels tell me that eurozone leaders are absolutely determined that Italy should remain at the top table. There is one reason above all that explains this thinking: Italy is one of the six founding members of the EEC. In the eyes of eurozone leaders, hell will freeze over before Italy leaves the euro.

For the moment eurozone leaders want Greece to remain in the euro, though they do not feel such a strong attachment to a relative newcomer. Greece only joined the EEC in 1981.

If Italy is to remain within the eurozone, drastic measures will have to be taken. It is one thing to stand by a relatively small economy like Greece, as a senior Whitehall figure told me recently. It is quite another to stand by the third largest economy in the eurozone which also has the third largest bond market in the world. It would take around €1tn to bail out Italy, dwarfing the eurozone's European Financial Stability Facility (EFSF).

If Italy is to remain in the euro then two big steps will probably have to be taken, assuming that Italy's new prime minister takes the initial step of introducing austerity measures to reassure the markets. The steps are:

• The European Central Bank, which has been buying limited quantities of Italian debt, acts as a lender of last resort. Germany is adamantly opposed to this because it believes this would jeopardise the ECB's independence and could lead to the historically dreaded inflation. David Cameron made clear on Thursday that Britain believes that the time is fast approaching for the ECB to step in. I blogged last week on Anglo-German tensions.

• The EU's Lisbon Treaty is revised to place a new framework for fiscal co-ordination, or even fiscal union, among the 17 members of the eurozone on a legal footing.

The three largest members of the EU – Germany, Britain and France – have been involved in something of a tussle, though they are taking different sides on each of the two steps.

On the ECB, Britain is siding with France which would like the bank to guarantee the EFSF. For all the talk of the new Frankfurt Group – France, Germany, the ECB and the European Commission – dominating Europe, Germany is still resisting the French idea on the ECB. Angela Merkel vetoed it at the meeting in Frankfurt last month which gave rise to the name of the new group.

On the treaty negotiation, Britain and France take opposite views, with Germany in the middle. Britain has reluctantly accepted that a narrow treaty change will probably have to be agreed by all 27 members of the EU, though it will want assurances that the City of London will not be threatened. France would like a treaty change to be agreed by the 17 members of the eurozone. Nicolas Sarkozy outlined this thinking in a speech in Strasbourg on Tuesday when he revived the French dream of creating a two speed Europe with an inner core of the eurozone members and an outer core of the ten countries outside the eurozone.

Germany would like a treaty to be agreed by all 27 members of the EU so that the new fiscal arrangements would be anchored in the institutions of the EU. But I understand that Merkel became so frustrated with Cameron's approach that she warned him in Brussels on 23 October, at the first of the emergency European Councils, that she would have to go along reluctantly with Sarkozy's idea for a eurozone-only treaty if Britain did not moderate its views.

One source familiar with the European Council told me:



Angela Merkel said to David Cameron: either you allow us to go ahead with treaty change at 27 or others [Nicolas Sarkozy] will want a separate treaty with separate institutions for the 17. She said she did not want that but others did.

Relations between Cameron and Merkel have improved since then after the prime minister indicated that Britain accepts the need for treaty change and will table relatively modest demands. The repatriation of social and employment laws will be for a later treaty negotiation.

It is amid this background that José Manuel Barroso, the president of the European Commission, entered the fray on Wednesday with a major speech in Berlin. One line caused some irritation in London when Barroso had a pop at Britain:



The speed of the European Union, and a fortiori of the euro area, cannot be the speed of its slowest member or its most reluctant member.

But the general thrust of the speech by Barroso, who is legally obliged after all to act as the guardian of the EU treaties, was supportive of the British position: that treaty change must be agreed by the 27. The Anglophile former Portuguese prime minister, whose favourite English publication is the Spectator, said "a split union will not work".

Barroso believes that Britain should hug him and Merkel close because a view is developing in Brussels that France is attempting to unravel two key British achievements over the last 20 years:

• The enlargement of the EU from 15 members in 2004 to 27 today. France was always wary of enlargement because it believed that widening the EU would make it more difficult to deepen the EU and create an "ever closer union". The key piece of evidence to support the view in Brussels that France is trying to use the eurozone crisis to re-shape the enlarged EU is an article in the FT on 3 November by Jean-Claude Piris, the French former legal counsel of the European Council.

Senior figures in Brussels say the Piris article reflects the views of the Elysée Palace which was not thought to be surprised by its publication. Suspicions about the tactics in Paris were heightened by this passage:


It is time to admit that the enlargement of the EU from 15 to 27 members was too rapid.

Piris then spelt out the idea of a "two speed Europe":


...there is the politically tricky issue of how to maintain democratic control of decision-making within the present institutional framework. Far better would be to consider a two-speed EU, which would include an avant-garde group, probably based on the current 17 members of the euro area.

Sources in Brussels say that France would like to press for a eurozone-only treaty to create new rules and institutions that would be less favourable to the Anglo-Saxon model of open trade. As I blogged recently, Germany likes Britain to be present for such negotiations because it shares some, if not all, of Britain's views on liberal trade. Britain would of course be excluded from a eurozone-only negotiation.

France cannot reverse the enlargement of the EU and the eurozone will, by law, eventually have to include every EU member state bar Britain and Denmark which have opt-outs. But France could ensure that future euro members, such as Poland, would join a body shaped without British influence. This leads to the second area where Barroso has concerns for Britain:

• The single market. Barroso says that it is only the institutions of the EU as a whole that can protect what he called the "integrity of the single market". Translation: Britain may feel uncomfortable with the power wielded by the European Commission and the European Court of Justice. But they offer the only protection against French protectionism.

Crunch negotiations on the EU are always portrayed as historic moments. But the EU is genuinely experiencing a decisive period that will determine its future direction. Vital national interests are at stake but, as ever, opinions are divided across the EU.

The old British tactic of divide and rule, used so ruthlessly during the days of empire, will once again have to be deployed by Britain's EU diplomats. The dry and ferociously clever Jon Cunliffe, who will soon replace the amiable and smooth Kim Darroch as Britain's "perm rep" in Brussels, will have to use all his cunning learnt in his days as a taxi driver to outwit the opposition.

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