John Rentoul: In? Out? Where's the third way when you need it?

David Cameron's European policy is so contradictory he doesn't even agree with himself. But logic and Europe have often failed to converge

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The Independent Online

It has taken two years, but David Cameron's European policy is now clear. Unfortunately, that does not mean that it is a good policy. Nor does it mean that it no longer contradicts what the Prime Minister privately believes. It does, but it is clearer now what he is up to and why he disagrees with himself.

The puzzle of the Government's policy is that its leading members, Cameron, George Osborne and William Hague, do not believe that the euro can work. They have a belief, founded in economics, forged in Thatcherism and fortified by their humiliation by Britain's ejection from the European exchange rate mechanism in 1992, that "there is no way in which one can buck the market". The ERM failed because its constituent economies had not converged enough, and movement of labour, which makes the giant US currency union work, was not sufficiently free.

For them, the creation of the euro was a doubling on that original error. It removed the immediate threat of speculative attack on a currency, but failed to deal with the structural imbalances, thus ensuring that the eurozone would have to break up at some point. I suspect that they are right, and that the alternative view – that the single currency would itself force economies to converge enough to make it work – is mistaken.

Why, then, did Cameron go to another summit in Brussels last week to support the fiscal union, the banking union and, in principle, the political union of the 17 members of the eurozone, but to trumpet Britain's exclusion from it all? The answer is that Britain's influence in Europe is weak, and the commitment of the 17 to the euro is strong. Really strong. And it is not as if the other nine members of the EU outside the eurozone are sure that the currency is a bad idea. Cameron is outnumbered and has to calculate how to deal with that.

He is also hemmed in at home, just as the last Conservative Prime Minister was. John Major had to balance sceptics and pro-Europeans in his party. Although the Tory party has moved since then, leaving only Kenneth Clarke as a Cabinet pro-European, the Liberal Democrats make up the difference. Hence the policy of "European political union for the others but not for us". This is a transparent device to hold together the two wings. Everyone seems to agree that the euro can work only if there is political union. For the sceptics, this is their argument against it. For the pro-Europeans, this is a goal for which they strive. Or an option, at least, which they want to keep open for Britain.

Actually, the policy does not fully cover the sceptics' position. Even a fully-fledged United States of the Eurozone does not guarantee that the single currency would work, because it does not make the economies converge, and it does not instantly make the movement of labour freer. The sceptics really believe that the main European economies need their own currencies, which could find their own value against each other.

That is not likely to happen soon, however, and in the meantime a political union would allow German taxpayers to support the weaker economies of the eurozone for some years.

The importance of last week's summit was that it edged a little – but only a little – in that direction. It means that German taxpayers will continue to sustain the unsustainable for a bit longer, as Hamish McRae argues on page XX.

This was particularly significant because Angela Merkel had repeated her warning that "not even Germany's strength is unlimited" just before the summit, and yet she agreed to a compromise which seemed to pledge more of that strength to stand behind Spanish and Italian banks. Merkel's warning stands, however: that, if the rest of the eurozone demands too much of Germany, "then everything we are planning, agreeing, implementing would ultimately be worthless".

That seems all too likely, to put it crudely, but Cameron cannot say it. He would gain nothing by telling our European partners that they ought to dismantle the euro and start again. Thus he tries to make a virtue of a contradiction, which is that we are part of something we do not really like but over which we have no influence.  

The trouble with being a "practical Eurosceptic", which is what the Prime Minister declared he was in Brussels last week, is that it means that Britain should be semi-detached for ever. And it means an unstable balancing act at home. At his post-summit news conference in Brussels, Cameron said that he did not agree with an in-out referendum on Britain's membership of the EU because it would offer "only those two options".

He prefers the third way, of being neither in nor out. That was a halfway house that Tony Blair could sustain, because he thought Britain's "destiny" was to be "in". But "neither in nor out" does not look like leadership, or even a policy. It looks like indecision.  

Maybe that accurately reflects what this country wants, or what we have to settle for, but it doesn't provide much of an idea of what we want from Europe in future, and it guarantees the permanent distrust of our European partners.;