Adrian Hamilton: 'New politics' also applies to Europe

Europe was supposed to be the great dividing issue of the new government coalition here. And on every logical basis it should be. The two parties couldn't be further apart than in their approaches. The Lib Dems believe in it, the Tories, and David Cameron personally, feeling nothing but distaste for Brussels and all it stands for.

And yet, like so much else, events are overtaking all. Compared to our little local difficulties with expenditure cuts, what is happening to the euro is of a different order of magnitude altogether. Having launched the trillion-dollar rescue package earlier this month – arguably the biggest international rescue scheme ever – the members of the eurozone now find themselves with their currency still falling, the markets continuing to mark down sovereign debt and the traders now fixated by rumours of troubles with the German and other European banks. No wonder that the German authorities have stepped in (somewhat vainly) to stop short-selling of debt. No wonder, too, that the press there is full of stories about the politicians and officials pondering radical plans to overhaul Europe's economic systems.

The rescue package may have worked to stem the total panic that seized the markets over Greek debt but it has clearly not worked to stop the rot of investor doubts about Europe's economic state. Commentators, and politicians, are now openly questioning whether the euro will survive even the next year, and certainly not the next decade. And, for the first time, the world outside Europe is beginning to wonder whether the EU itself will not fall apart under these strains.

Personally, I don't think it will happen. Whatever the differences and the indecision amongst leaders, the EU has too many benefits to throw them all wilfully away. Pressed up against the wall, Europe's politicians – and their constituents – would prefer to develop together than apart. Nor should one underestimate the resources and the effectiveness of political action when it comes to facing down markets. Traders in this case are not continuing to mark down the euro and sovereign debt because they underrate the package but because they doubt the political resolve behind it, and particularly the German willingness to stump up the kind of transfers that will keep it going over the long term. Markets follow a herd instinct. If they perceive a clear direction, they will follow it, up as well as down.

Which brings in the UK and its response. So far we have been able to ignore what is going on in the European markets basically because we've been too absorbed in our own election and post-election affairs, but also on the grounds that it was really a matter for the eurozone members and not for us. How much longer we will be able to keep up this observer status is debatable.

At its most basic, with over half our exports going to our EU partners and a monetary policy designed to keep the value of sterling low for competitive reasons, the fall in the euro and the constraint on economic growth on the Continent must affect us greatly, while the turmoil in the European debt markets is bound to have (and is already having) an impact on the cost of our own debt.

In the broader sense, however, the fact that the crisis is now affecting sentiment about the whole EU project brings us in, whether we like it or not. In one way, of course, it must add grist to the mill of those eurosceptics in the Conservative Party, and in the country at large, who would really like us out of the political union. If their dream is – as it is – of a European project restricted to being a free trade area, the thought of the break-up of the euro can only be a source of cheer.

Yet, in a perverse way, it may have just the opposite effect on the Conservatives in government. The visceral Tory dislike of Europe is very much directed towards Brussels and its encroachment on what is seen as British sovereignty. But this crisis is essentially a political one and, while the Commission President, Jose Manuel Barroso, would love to extend his rule, it is essentially up to the heads of state to sort it out.

Prime ministers are easily seduced by the world stage when in office. And in this case justifiably so. In coming to power both David Cameron and his Foreign Secretary, William Hague, have been at pains to declare their European credentials. The Chancellor, George Osborne, has started his first European visit by going along with new regulations on hedge funds – which the City bitterly opposes.

As it was a matter of majority voting, he had little choice. But it was also a reflection of the Government's desire not to start off with a quarrel and its political sense that the City has now few friends amongst the domestic electorate, never mind abroad.

Only events will show whether Cameron has the makings of a statesman in Europe, but events are pushing him in that direction if he wishes to take it. There's all to play for in Europe and, if Germany is anything to go by, a British voice concerned at sovereignty will find plenty of fellow feeling there.

Nuclear playground

So the US has responded to Iran's play in reaching an enriched uranium settlement with Turkey and Brazil by dismissing it and pressing ahead with sanctions approved this time by China and Russia. Round one to Washington? Perhaps.

We're in the playground politics of big boys pushing out the newcomers. Sanctions have become a means for America to display its continued power in the world and to put Iran in its place. But one wonders whether they aren't a face to the past. The old way of doing things was by agreement between the major nuclear powers. America, with Britain's support, would keep it that way. But maybe a more diverse pattern is now under way and we should be welcoming the interventions of Brazil and Turkey, not brushing them aside.

a.hamilton@independent.co.uk

For further reading

Cameron's Europe: Can Conservatives achieve their EU objectives? by Charles Grant (Centre of European Reform)

Tomorrow: Nature Studies by Michael McCarthy