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$%&'()* +'' ,%-. /)&0123 124 5'6 $2'%7. 8&96192:
Cn May 10, Angela Merkel hosLed her lrench counLerparL, lranols Polland, ln Lhe Cerman coasLal
clLy of SLralsund. 1he evenL was planned as a show of unlLy, wlLh [olnL sLaLemenLs on Lhe fuLure of
Lhe Luro and Lhe unlon's response Lo Lhe ongolng crlsls ln ukralne. And afLer 20 hours of dlscusslons,
Lhe Lwo dld lndeed hammer ouL some common poslLlons Lhey could sell Lo Lhe press and Lhelr
publlcs as a demonsLraLlon LhaL all was well
1
. 8uL ln facL, Lhe mood beLween Lhe Lwo moLors of
Lurope" was beLLer reflecLed by Lhe lron grey skles over Lhe 8alLlc porL.

1here are a number of reasons for pesslmlsm ln Lhe parLnershlp. lrance conLlnues Lo face economlc
and flscal challenges desplLe lndlcaLlons of growLh ln Lurope as a whole. And Lhe worse ls far from
over: Lhere ls a serlous rlsk of deflaLlon across Lhe conLlnenL, wlLh some naLlons llke Spaln already
experlenclng lL ln core prlces
2
. ueflaLlon wlll lncrease Lhe debL burden on Lhe perlphery economles
LhaL are already sufferlng from debL-Lo-Cu raLlos well above 100, regardless of Lhe subsLanLlal
drop ln soverelgn bond raLes Lhese counLrles have recenLly beneflLed from. 8erlln and arls remaln
aL loggerheads over Lhe value of Lhe Luro: lrance wanLs Lo weaken Lhe exchange raLe Lo beneflL her
exporLs, whlle Cermany ls comforLable wlLh Lhe currenL level, knowlng LhaL Lhe slngle currency ls
undervalued agalnsL an lndependenL ueuLsch Mark. LC8 resldenL Marlo uraghl has promlsed
aggresslve acLlon agalnsL deflaLlonary rlsk should Lhe slLuaLlon conLlnue lnLo !une, buL so far hls
organlzaLlon has followed Lhe Cermany poslLlon of leavlng lnLeresL raLes where Lhey are.
3

$%&'()12 %29'2 '& ;'<<=)&)92:
AL Lhe hearL of Lhls acerblc debaLe ls Lhe markedly dlfferenLlal performance of Lhe 27 member sLaLes
slnce Lhe crlsls. Whlle Cu growLh has reLurned Lo mosL markeLs, ln many lL can only be descrlbed as
anemlc. 1he margln beLween growLh and recesslon ls narrow enough ln Lhese markeLs Lo be
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aLLrlbuLable Lo addlLlonal governmenL deflclL spendlng, as ls Lhe case ln Spaln, or one off correcLlons,
as ls Lhe case ln Creece. MosL counLrles ln Lurope have noL yeL recovered Lhelr pre-crlsls (2008) Cu
levels, and some are sLlll below Lhelr 2003 Cu levels.
4


? '@ $A('&6B 6' /)&0123 ? '@ C0('&6B @&'0 /)&0123
,966)<)%&'(1
Czech 8epubllc
1
31.80 29.30
AusLrla
1
31.40 42.10
neLherlands 26.30 13.90
oland
1
26.00 27.30
Pungary
1
23.60 23.10
Slovakla 22.40 18.30
SwlLzerland 19.80 29.70
8omanla 18.90 17.30
D1&7) 124 E9=)&B9@9)4
8elglum 18.00 14.2
2

lrance 16.70 19.30
uenmark 13.90 20.80
lLaly 12.80 13.70
F%6B94) /)&012 F&G96
norway 12.6
2
12.4
2

orLugal 11.8
2
11.2
2

unlLed klngdom 11.30 12.30
Spaln 10.8
2
11.80
Sweden 10.3
2
17.40
llnland 9.4
3
13.9
3

Creece 6.2
3
9.2
2

1
Cerman Lrade volume ls 2x or more nexL largesL Lrade parLner
2
Cermany ls second largesL Lrade parLner
3
Cermany ls Lhlrd largesL Lrade parLner

CuLslde Lhe Cerman orblL", Lhlngs have gone less well. unless you were a ma[or oll and gas
exporLer, llke norway, or kepL conLrol of your currency, llke Sweden and Lhe unlLed klngdom - or
boLh - Lhen you were ln Lrouble. 1he MedlLerranean and 8alkans counLrles have suffered Lerrlbly,
and conLlnue Lo suffer. CrowLh Lhere remalns fraglle and dlsproporLlonaLely Lled Lo large flscal
budgeL deflclLs, exporLs and wage deflaLlon. lrance sLraddles Lhe llne: lL ls a large, dlverslfled
economy wlLh world-class companles, buL unemploymenL remalns sLubbornly hlgh, growLh slugglsh
and flscal deflclLs large.
!usL looklng aL Cu palnLs a rosler plcLure Lhan whaL acLually exlsLs on Lhe sLreeL. Cross uomesLlc
roducL ls noL a parLlcularly good measure of whaL ls golng on ln an economy, as Amerlcans have
dlscovered, and you can have growLh wlLhouL [obs. CrowLh of corporaLe proflLs, LhaL ls. ln Lurope,
Lhls ls very much whaL we are seelng. CLher Lhan Lhe Cerman mlddle class (and LhaL of a few oLher
small economles) mosL of Lhe growLh ln Lurope has yeL Lo beneflL workers and unemploymenL levels
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remaln lnLolerably hlgh
3
:

MlLLeleuropa" sLands ouL even more sLarkly as Lhe only reglon LhaL has managed, as a bloc, Lo
reduce unemploymenL raLes below pre-crlsls levels (2003 Lo 2008). Slovakla, Pungary and 8omanla
are noL yeL Lhere, buL Lhelr unemploymenL ls Lrendlng downwards. 1he nordlc markeLs and uk have
also responded relaLlvely well, Lhanks Lo Lhelr conLrol over moneLary pollcy, buL unemploymenL ls
shocklngly hlgh across Lhe MedlLerranean 8asln and Lhe 8alkans. ln lrance, lLaly, orLugal and
lreland [ob creaLlon ls barely occurrlng, whlle ln Spaln and Creece, caLasLrophe" ls noL Loo sLrong a
descrlpLlon and unemploymenL levels are falllng only because people are leavlng Lhe [ob markeL
fasLer Lhan [obs are belng desLroyed.
1hese resulLs are beyond worrylng. 1he dlslocaLlon beLween Lop-llne Cu growLh and sLreeL-level
sLagnaLlon ls leadlng Lo a masslve dlsllluslonmenL ln Luropean leaders and Lhe Luropean pro[ecL by
voLers. Across Lhe conLlnenL, polls flnd LrusL ln Luropean leadershlp ellLes plummeLlng
6
. Lven ln a
relaLlvely prosperous Cermany, 70 of voLers lndlcaLed LhaL Lhey dldn'L LrusL malnsLream pollLlclans,
Lhough Ms. Merkel en[oys hlgher supporL. 1hls dlsconLenL has lefL Lhe door wlde open Lo far rlghL
parLles ln Lhe upcomlng Luropean elecLlons. 1he Swlss have already voLed Lhls year on a referendum
Lo llmlL lmmlgraLlon Lo Lhelr counLry even from wlLhln Lhe Lu. 1here are also exLremlsL parLles ln
AusLrla, 8elglum, 8ulgarla, Cyprus, uenmark, Creece, Pungary, lLaly, LaLvla, Sweden, and Slovakla
LhaL sLand Lo beneflL. And Lhey are beglnnlng Lo organlze beLween Lhemselves, [olned by a common
dlsllke of non-Luropean forelgners (l.e. Musllms) and Lhe Lu lLself. PlsLorlcally, each naLlon's far-
rlghL has been focused on domesLlc pollLlcs and fragmenLed, buL laLe lasL year Marlne Le en's
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naLlonal lronL and CeerL Wllders lreedom arLy agreed Lo coordlnaLe sLraLegy across Lhe conLlnenL.
5'6 $2'%7. 8&96192
1he challenge posed by Lhe wasplsh ML nlgel larage and hls openly LuroscepLlc ukl ls a growlng
one. 8ecenL polllng daLa makes grlm readlng for conservaLlves. 1he 1orles have Lralled Labour ln Lhe
polls slnce laLe 2010
7
- ever slnce Mr. Csborne unvelled Lhe budgeL wlLh Lhe largesL spendlng cuLs ln
decades.
8
Powever, Lhe ukl has recenLly experlenced a surge LhaL has noL only solldlfled Lhelr lead
over Lhelr malnsLream conservaLlve rlvals, buL also has ecllpsed Labour for Lhe flrsL Llme slnce May
2013. AlLhough sLlll a far cry from belng a LhreaL ln Lhe naLlonal elecLlons, Lhe ukl looks seL Lo wln a
comforLably ma[orlLy ln Lhe Luropean elecLlons.

Mr. Cameron has soughL Lo aggresslvely Lo counLer hls dlsadvanLage aL hls weakesL polnL: Lurope. 8y
flnally promlslng hls parLy Lhelr long soughL afLer referendum on remalnlng ln Lhe Lu, he has become
Lhe hero of Lhe hour for 1ory M's as well as conservaLlve voLers, Lhough he hopes Lhe effecLs of hls
speech wlll lasL longer Lhan LhaL. Lven Lhe mosL anLl-Lurope M ls unllkely Lo buck Lhe M now. 1he
ukl conLlnues Lo bang on Lhe drum of Lu exlL, buL aL leasL Lhey are noL as llkely Lo sLeal 1ory voLers
anymore. WlLh an eye beyond Lhe Luropean voLe, Mr. Cameron has also been poslLlonlng hlmself as
Lhe CnL? man who could dellver a referendum Lo Lhe 8rlLlsh publlc: Lhe ukl would never wln a
naLlonal elecLlon, and Labour would never dellver on Lhe pleblsclLe promlse
9
.
1here ls no quesLlon LhaL Mr. Cameron ls aware of Lhe poLenLlal cosLs of an exlL from Lhe common
markeL and he has been very clear LhaL he personally does noL wanL 8rlLaln Lo leave Lurope. 8y
leavlng Lhe referendum ln Lhe dlsLanL fuLure, and predlcaLlng lL on a 1ory vlcLory ln 2013, Mr.
Cameron ls hoplng Lo reap Lhe shorL-Lerm domesLlc beneflLs wlLhouL concedlng much ln Lhe long-
Lerm. 1here ls evldence LhaL seems Lo supporL Lhls vlew.
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Whlle 8rlLons' vlsceral re[ecLlon of all Lhlngs from 8russels ls almosL proverblal, much lf noL all of Lhe
dlsllke ls focused on soclal lssues and lmmlgraLlon, raLher Lhan economlc complalnLs. Whlle buslness
leaders grouse abouL excesslve regulaLlon" from Lu bodles, Lhe reallLy ls LhaL mosL people concede
LhaL 8rlLlsh flrms and Lhe 8rlLlsh economy have beneflLed mlghLlly from Lhe Common MarkeL. Mr.
Cameron clearly feels LhaL ln Lhe long run-up Lo an acLual referendum, pragmaLlsm would wln ouL.
as long as he can secure an accepLable deal from hls Luropean parLners. 8uL Lhe LhreaL remalns a
real one: voLlng lnLenLlon on an Lu referendum flucLuaLe around 40 ln favor and 40 agalnsL
sLaylng ln Lhe unlon, wlLh a dlsconcerLlngly large 16 Lo 20 undeclded. Mlsreadlng Lhe senLlmenL
of Lhe voLers could have enormous consequences for Lhe fuLure of Lhe unlLed klngdom and Lhe
Luropean unlon.

+'' ,%-. /)&0123
Some Luropean leaders are beLLlng LhaL Lhe referendum wlll never happen. AfLer all, for 8rlLaln Lo
leave Lhe Common MarkeL would be economlc sulclde, Lhey argue. Lurope accounLs for half of all
8rlLlsh Lrade
10
and Lhe uk ls a ma[or Lradlng parLner for all of Lurope's largesL economles. Powever,
CreaL 8rlLaln ls only a small parL of Lhe exporLs of any Luropean markeL ln parLlcular. WlLh Lhe
excepLlon of norway, exporLs Lo Lhe uk represenL only 6 Lo 7 of LoLal exporLs for mosL Luropean
sLaLes. And Lhe Luropean share of 8rlLaln's LoLal Lrade has been on Lhe decllne for over a decade.
1haL places Mr. Cameron ln a somewhaL awkward poslLlon: Lhe uk sLands Lo lose up Lo t269 bllllon
ln Lrade - on aggregaLe - from deparLlng Lhe Common MarkeL, buL none of her Lradlng parLners wlll
lndlvldually lose more Lhan t70 bllllon, even lf Lhe Lu would lose more Lhe 8rlLaln - on aggregaLe.
1hls could lead Lo Lhe perverse dynamlc of lndlvldual sLaLes wlLh llLLle Lo lose ln 8rlLlsh Lrade blocklng
any revlslons Lo Lhe currenL relaLlonshlp even sLaLes wlLh more Lo lose mlghL be wllllng Lo make
concesslons.
erverse or noL, t300 bllllon ls sLlll a very greaL deal of money Lo lose, and Luropean economles are
noL ln a poslLlon Lo be leavlng any money on Lhe Lable. 1he economlc damage Lo 8rlLaln's parLners
goes beyond a slmple calculaLlon of exporL volume: 8rlLlsh lndusLrles are heavlly lnvolved ln Alrbus
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and Lhe parenL company, LAuS. Luropean pharmaceuLlcals have a crlLlcal research and
manufacLurlng presence ln Lhe unlLed klngdom, Lhe auLomoLlve secLor ln Lhe uk ls also pan-
Luropean. CreaL 8rlLaln ls a ma[or exporLer of peLroleum and lLs derlvaLlves Lo Lurope. 1he ClLy of
London provldes vlLal flnanclal servlces Lo many Luropean companles and ls Lhe only global flnanclal
cenLer ln Lurope.
Mr. Cameron ls also aware of hls economy's decllnlng sLake ln Lurope. 8rlLlsh flrms have made a
susLalned efforL slnce Lhe mlddle of Lhe lasL decade Lo beLLer poslLlon Lhemselves ln emerglng
markeLs. 1hls sLraLegy has borne frulL, wlLh exporLs Lo Lhe Lu sLeadlly decllnlng as a percenLage of
LoLal exporLs. 1here ls an apocryphal sLory of a debaLe beLween pro- and anLl-Lurope 8rlLlsh
pollLlclans. Where Lhe pro-Lu pollLlclan sLaLed smugly LhaL 8rlLlsh Lrade wlLh Lhe neLherlands was
greaLer Lhan LhaL wlLh Chlna, Lhe anLl-Lu pollLlclan replled, 1haL ls preclsely Lhe problem."

1here ls anoLher, pollLlcal reason, why Luropeans, parLlcularly Cermany, should wanL 8rlLaln Lo sLay
and may be wllllng Lo glve Mr. Cameron some face-savlng concesslons Lo Lake Lo Lhe voLers. 1oday,
Lhe Luropean unlon ls relaLlvely well-balanced, wlLh four greaL economles domlnaLlng: Cermany,
lrance, unlLed klngdom and lLaly
11
. no economy domlnaLes, Lhough Cermany ls clearly Lhe mosL
lmporLanL and lnfluenLlal member of Lhe club. 1ake away Lhe unlLed klngdom, however, and Lhe
Common MarkeL sLarLs Lo look an awful loL llke a conLlnenLal verslon of Lhe russlan !"##$%&%'( of Lhe
laLe 19
Lh
CenLury.
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1he Luropean unlon desperaLely needs Lhe sLablllLy provlded by a seml-lndependenL" uk,
prevenLlng Lhe formaLlon of a Loo domlnanL Cermany. 1he only posslble alLernaLlve would be a
coallLlon of MedlLerranean sLaLes, led by lrance, Lo counLerbalance Lhe 1euLonlc glanL. 1here have
already been some serlous proposals made ln Lhls dlrecLlon, lncludlng Lhe poLenLlally dlsasLrous ldea
of a Lwo-speed Luro". Such a shlfL ln Lhe lnLernal dynamlcs of Lhe unlon could have profound and
hlghly negaLlve lmpacLs on Lhe fuLure of Lhe lnsLlLuLlon. Cerman power ls already belng revlled ln
markeLs where Cermanlc" ausLerlLy has blLLen Lhe hardesL.
Cermany ls well-aware of Lhls negaLlve percepLlon and has been acLlvely aLLempLlng Lo mlLlgaLe lL.
1he Cermans wanL Lo be Lhe good Luropeans, and Lo an admlrable exLenL, Lhey have succeeded. lL ls
probable LhaL 8erlln would be exLremely senslLlve Lo enhanclng percepLlons of domlnaLlng Lurope",
and Lhey do noL wanL Lhe formaLlon of a permanenL Club Med" worklng agalnsL Lhelr lnLeresLs.
Cermans value Lhe 8rlLlsh commlLmenL Lo free and open markeLs, Lo Lrade llberallzaLlon and Lo Lhe
avoldance of undue regulaLlons.
MosL commenLaLors have asked, Can 8rlLaln survlve wlLhouL Lurope?" erhaps Lhe opposlLe
quesLlon ls more perLlnenL. lL seems clear LhaL boLh 8rlLaln and Lurope sLand Lo lose a very greaL
deal from a dlvorce, no maLLer how accommodaLlng lL ls. 1he 8rlLlsh economy would weaLher Lhe
sLorm evenLually, Lhough Lhe cosL mlghL be more Lhan Lhe 8rlLlsh publlc ls wllllng Lo bear. lL ls, afLer
all, a naLlon sLaLe. 1he Luropean unlon ls noL a naLlon sLaLe and lLs lnsLlLuLlons remaln fraglle - lL ls
less clear Lo me LhaL lL could survlve a 8rlLlsh deparLure. 1he economlc cosLs, Lhough slgnlflcanL, are
affordable: whaL ls dlfflculL Lo reconclle ls Lhe fundamenLal reallgnmenL of power wlLhln a Lurope
llmlLed Lo Lhe conLlnenL, a Lurope even more obvlous domlnaLed by Cermany.
Cn one polnL, Mr. Cameron should glve no ground. 1he referendum should go forward. 1he Lu has
changed dramaLlcally slnce Lhe lasL Llme Lhe 8rlLlsh publlc voLed on membershlp and Lhey have Lhe
rlghL Lo expecL Lhelr volces Lo be heard. lor an lnsLlLuLlon LhaL osLenslbly supporLs democracy, Lhe
Luropean unlon has proven Lo be remarkably allerglc Lo Lhe democraLlc process. 1he facL LhaL Lhe
unlLed klngdom ls seLLlng Lhls example ls very necessary Lo Lhe long-Lerm healLh of Lurope. AfLer all,
lf Lurope cannoL convlnce lLs clLlzens LhaL Lhe beneflLs far ouLwelgh Lhe cosLs of membershlp, whaL
fuLure does lL really have?
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N'%&-)B 124 5'6)B

1
noah 8arkln, lranco-Cerman show of unlLy masks pollcy dlvlde," 8euLers, 12 May 2014
2
MllLon LzraLl, 8e Afrald: 1he Lu's nexL Lconomlc Crlsls ls Loomlng," 1he naLlonal lnLeresL, 09 May 2014
3
Clalre !ones, Luropean CenLral 8ank slgnals moneLary loosenlng ln !une," llnanclal 1lmes, 08 May 2014
4
LurosLaL
3
lbld
6
AnLonla Malloy, uklp seL Lo wln ln Luropean elecLlons, poll suggesLs," 1he lndependenL, 12 May 2014
7
Com8es oll, lpsos-Morl oll, oll of olls, opulus oll - 88C news oll 1racker
8
Spendlng 8evlew 2010: Ceorge Csborne wlelds Lhe axe," 88C news, 20 CcLober 2010
9
Cnly 1orles Can uellver Lu 8eferendum, Says M," Skynews, 02 May 2014
10
See noLe 11.
11
Spaln could be lncluded as a courLesy, buL lL ls only 66 of lLallan Cu