David Prosser: Osborne has to pick and choose his battles with Europe

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The Independent Online

Outlook It has not taken long for Britain's new government to run into trouble with the European Union. Barely a month has passed since the election and George Osborne has been in situ at Number 11 for an even shorter time. Yet the new Chancellor already finds himself at odds with his counterparts in the EU over how to respond to the latest stage in the financial crisis.

Those clashes will continue. On Monday night, Britain stood alone in refusing to sign up to an EU-wide agreement to subject its Budget plans to peer review. Then, yesterday, France and Germany called for a crackdown on naked short selling, as well as new curbs on the credit default swap market. Since London is a centre for both types of trading, it will not be long before Mr Osborne feels obliged to object (as he also did, within days of taking office, to the directive aimed at hedge funds).

The problem for the Chancellor, as so many of his predecessors have discovered, is that standing alone on too many issues in Europe simply marginalises you. If Mr Osborne rejects every Commission proposal out of hand, he will have no hope of influencing the decision-making process.

The alternative is to pick your battles. So which cudgels should the Chancellor choose to take up?

Well, at first sight, the answer is straightforward. The suggestion that Britain should allow other EU member states to pick over our Budget plans even before they have been scrutinised by Parliament looks to be a blatant attack on our sovereignty. A row over how to regulate relatively obscure financial instruments seems trivial by comparison.

Appearances can be deceptive, however. In fact, Mr Osborne should concentrate his fire on yesterday's Franco-German proposals – at best they are red herrings, at worst they will have the opposite effect to what is intended. By contrast, while many people in Britain will feel uncomfortable with the idea of other EU countries passing judgement on our Budget proposals, this is a necessary step.

The point about these two ideas is that only one of them actually deals with the crisis that Europe – and not just the eurozone – is currently facing. The focus on short selling is an attempt by Europe's governments to blame those nasty speculators for their woes – and will be seen as such, which is why it may actually lead to even more bets being placed against the weaker economies. It's very similar, by the way, to the Commission proposal for a new European rating agency, which also just addresses the symptoms of the condition rather than the disease itself.

That disease is fiscal irresponsibility. For as long as the EU's member states continue to live beyond their means, there will be investors who want to gamble on the failures of the most egregious examples. And this is why peer reviews of Budgets are a good idea: each member state needs to be prepared to expose the failings of other countries – and to have its own failings exposed – if EU nations are not to go on getting away with borrowing too much.

One can see why a Conservative Chancellor, aware that a virulent strain of euro-scepticism is ever present not far below the surface of his party, would feel so threatened by the idea of submitting his budget to Brussels for approval (not that the Commission would have a power of veto). But Mr Osborne should have nothing to fear. He has, after all, already set up an Office for Budget Responsibility, whose duties will include independent scrutiny of the Chancellor's plans.

There is no reason to think the European Union will be any more demanding than his new watchdog. And if Britain passes the EU's budgetary tests with flying colours, Mr Osborne will have all the more authority when he calls for a rethink on fig-leaf proposals such as the ones that came out of Paris and Berlin yesterday.

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