John Bruton

Opinions & Ideas

Category: Future Scenarios

HOW TO REDUCE UNCERTAINTY AND INCREASE INVESTMENT

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Interest rates are low, so it should be attractive for companies to borrow to invest in new products and markets.

But United States companies are not doing so to the hoped for extent. Instead they are spending about $500 billion every year buying back their own shares.

Share buy backs keep up the value of their shares, which is good for their shareholders.  But they are not all that beneficial to the economy, in so far as they reward holders of financial assets, without creating new job opportunities through investment. They also may increase inequality in US society, because shareholders tend to be better off than the average citizen.

 But do the Companies have a real choice here?

Companies should only invest if the risk/ reward ratio of the proposed investment is good. Investment is inherently riskier than share buy backs, so the prospective rate of return on the investment must be above a hurdle that is set in advance. A lot depends on prospective demand in the market place.  If society is ageing, there may be fewer, and most cautious, potential customers, and that raises the hurdle which a proposed investment must surmount.

A related uncertainty, discouraging investment decisions, is the long run growth potential of mature developed economies.

Is it 3% a year, as in the past 60 years, or just 1%, as it was in previous centuries?  Economists differ on this. Some technologies add measurably to growth and GDP, other just make life easier without adding to the same extent to GDP.

If the political future is uncertain, and there are threats of protectionism, that also increases the risk of any investment that depends on exports.  Brexit is a good example of this, and so is the volatility and seeming irrationality of voter behaviour in other countries, including the US.

Against this uncertain background, Central Banks are trying to stimulate the economy by cutting interest rates.  This is supposed to encourage investment by reducing its cost, but that is happening very slowly, if at all. It also means that governments can borrow very cheaply, which may tempt them into mistakes.

A persistent low interest rate policy undermines the financial models of insurance companies and pension funds, which have to pay insurance claims and pensions out of interest they get on investments. If the interest rates stay very low, the money may not be there to meet the pension and insurance obligations. This is a further economic uncertainty.

We now have a big mismatch between savings and investments. We have a surfeit of savings, chasing very few convincing investment opportunities

So the policy of low interest rates cannot continue forever.

If low interest rates are not stimulating the economy sufficiently, what can, or should, be done?

If companies are not investing, perhaps governments should step in to stimulate the economy by investing on their own account.  This is what was done during the Depression of the 1930’s in some countries, like Germany and the US.

Whereas privately owned companies have to be satisfied that an investment will yield a return to their own bottom line, a government can take a longer and broader view of the return on the investment it makes.

An investment by government is financially justifiable if the eventual return, in extra taxes paid at some stage in the future, as a result of the extra economic activity generated by the investment, exceeds the cost of servicing and repaying the extra debt undertaken.

It can also take non financial benefits into account if it is satisfied it will have no problem servicing its extra debts from other sources.

But because the factors to be taken into account in assessing a government investment are so much wider, the calculations to be made are much more subjective and uncertain.

For example, how does one compare the return on an investment in additional places in a university sociology faculty, with the return on an investment in improving a lightly trafficked road?

It all depends on future trends and needs, and a multiplicity of other factors which are matters of pure judgement.

There is, however, another limitation on government investment that must be considered…the impact of ageing on the solvency of governments, thirty or more years from now.

A government’s   debt/GDP ratio may be 90% or less today, and, on that basis, it may be able to justify borrowing more to invest more.

But some important future liabilities of governments are left out of these official Debt/GDP calculations.

Predictable future increases in public pension liabilities and age related expenditures generally are not included in the Debt/GDP ratio.

Apparently an average 64 year old consumes six times as much healthcare as an average 21 year old.

When, over the next 20 years, the number retired increases relative to the number at work, and the number of 64 year olds increases relative to the number of 21 year olds, the resultant increase in government spending, relative to its receipts, will worsen dramatically, unless policies are changed in the meantime.

The numbers aged 65 or over in Ireland will increase by 97% by 2060, as against an average increase of 60% in the EU as a whole. By then, on present policies, age related spending by government would absorb 8.7 percentage points more of GDP than it does  today, which is twice the average EU increase.

Most EU countries could see their debt to GDP ratios increase to 400% of GDP by 2050, if pension and age related policies are not changed.

Uncertainty about how this might be done is a factor holding back countries, like Germany, which seemingly can afford to invest more, from doing so, because Germany is ageing rapidly on the basis of  its historic low birth rate.

All this uncertainty is leading to stagnation.

I believe the best way to avoid stagnation induced by uncertainty would be for governments in developed countries to produce a comprehensive, demographically based, scenarios for the economy for the next 30 years.

These scenarios should set out the menu of decisions that  may need to be taken and the consequences of taking, or of not taking them.  Obviously the EU could coordinate some of this work and the assumptions used, but the choices to be set out would be for national politicians.

These scenarios would be extremely controversial and subject to vigorous questioning from all sides.  But they would orientate  politics towards the things we can actually change, and away from the localism, emotionalism, and xenophobia we are seeing at the moment in some countries.

 

PULLING OUT THE 40 YEAR OLD THREADS THAT BIND THE UK AND THE EU TOGETHER

8268467475_fc8fb937e8_zDisengaging the UK from the EU will be like undoing all the stitching of a patchwork quilt, and then re stitching some parts of the quilt together, while making a new quilt of the rest. The UK is, at the moment, stitched into thousands of regulations and international treaties, which it made as a member of the EU over the last 43 years. Each piece of stitching will have to be reviewed both on its own merits and  for  the effect rearranging it might have on other parts of the quilt.

This is, first and foremost, a problem for the UK itself.

UK GOALS YET TO BE DETERMINED

We all think we know what UK voters voted against on 23 June. But nobody, even in the Conservative government itself, has a clear idea what UK voters voted FOR.  People voted to leave the EU for contradictory reasons.

Many voted  to leave because they wanted more protection from global competition. On the other hand, many of the Leave campaign leaders wanted to get out of the EU, so they could deregulate their economy, dispense with EU social rights, and promote more global competition and lower costs ( wages) in the UK economy.

The UK government must first decide which of these economic policies it wants and, only when it has done that, can it decide what sort of relationship it wants with the EU.

MUST THE UK BE OUT OF THE EU BEFORE IT MAKES A DEAL?

The 27 EU heads of government, on 29 June, told the UK that any trade agreement with it will be concluded with it “as a third country”.

This could be interpreted as meaning that the UK must first become a “third country”, by withdrawing from the EU, before it can have a trade agreement with the EU. This could mean that the UK would have to be out of the EU, before it knew what terms it might get on trade. This would be a very hard line EU position.

If that is what the 27 leaders meant , it is  probably contrary to Article 50 of the Lisbon Treaty, which says a Withdrawal Treaty must take account of the “ framework” of the withdrawing country’s  ”future relationship” with the EU.

……..OR MUST THERE BE TWO SIMULTANEOUS NEGOTIATIONS?

 I believe Article 50 means that there will be two negotiations,

 one on “Withdrawal” and

 one on the” Framework” of the future relationship.

I believe the two treaties must be negotiated, simultaneously and in parallel, and that the Framework  agreement cannot wait until the UK is already a “third country”, as  seemed to be implied by the 27 leaders on 29 June .

Ireland cannot afford to wait ,until the UK is already a “third country”, before border, travel, and residency issues between Ireland and UK are sorted out. We need these issues sorted out before the UK leaves.

IT WILL BE LIKE A DIVORCE NEGOTIATION

As with a divorce, the Withdrawal Treaty will be about dividing up the property. It may be easy enough to negotiate.

The Framework Treaty will be about the future, and like marital disputes about access to and care for children, will prove to be much more fraught and complex.

The question of whether there is  a “hard border” or not,  will flow from  what the UK  looks for, and what it  gets, in its Framework negotiations.

Nobody knows yet what the UK will look for, so this question is impossible to answer. The 27 EU leaders rightly insisted that the four freedoms – freedom of movement of people, goods, capital  and services- go together. Nobody has any idea yet how the UK will propose to get around that.

UK CANNOT MAKE DEALS WITH OTHERS WHILE IT IS STILL AN EU MEMBER

If the UK were to heed the call of Liam Fox MP, the UK’s new Minister for International Trade, that the UK   leave the EU Customs Union, so it could negotiate trade agreements with countries outside the EU, this would mean an immediate  hard border in Ireland. The Taoiseach’s diplomacy in recent days has probably helped head that threat off. Implementing Minister Fox’s proposal would have breached a UK Treaty obligation, a very serious matter for a country that relies on 30000 international Treaties.

The sort of border we have in Ireland will depend on the shape of the final UK/EU Framework agreement on all the four freedoms. Ireland can do no side deal with the UK.

 And if Ireland is to influence the EU positions in its favour, it has to present its case as  beneficial to Europe as a whole. It cannot be, or be seen to be, on both sides of the table at the same time, in what will prove to be a highly contentious negotiation.

Until it leaves, the UK is still a member of the EU, and is bound by all EU rules. It will fully participate in all key EU decisions, except those concerning  it’s own exit terms.

This means that the UK cannot do trade deals with other countries, while still in the EU.

Indeed it would appear it cannot even enter into commitments about future deals, particularly ones that might undercut EU negotiating positions.

 This is because, as long as it is still an EU member, the UK must, under Article 4 of the Treaty, act in “sincere cooperation” with its EU partners. The meaning of “sincere cooperation” was elaborated by the European Court  in judgements it made on  cases the Commission took against Germany and Greece  ,to overturn separate understandings each had forged  with other countries, on matters that were EU responsibilities without EU involvement .

So, to ensure that he stays within the law, Liam Fox may have to take a Commission official with him on all his trade travels around the globe, at least until the UK has finally left the EU!

THE UK SHOULD NOT BE RUSHED INTO TRIGGERING ARTICLE 50

Indeed the more closely the UK government looks at its options, the longer it may take to decide when to trigger Article 50.

The leaders of the EU 27 should not rush the UK on this.  Short term uncertainty is a very small price to pay for avoiding a botched and ill prepared exit negotiation.  Everyone would lose from that.

The UK civil service did not, after all, expect to find itself in this position. Indeed UK civil service studies, done long before the Referendum, concluded that the UK’s then existing relationship with the EU was just about right. Furthermore, once Article 50 is triggered, the UK cannot, easily or legally, change its mind and revert to the status quo, EVEN after a General Election.

A MAJOR DISTRACTION FROM OTHER  VITAL WORK

Meanwhile, Europe, with so much other work to do, has to turn inwards and devote itself to unravelling 43 years of interweaving between Britain and Europe. All this highly demanding technical work has to be done, at a time when Europe should be looking outwards towards the opportunities and threats of a rapidly changing and unstable world.

WHAT WOULD HAPPEN IF THE EU BROKE UP?

I have attended a number of conferences in the past few weeks where the future of the European Union has been discussed. Where previously the EU’s continuance was complacently taken for granted, now there is much more uncertainty, but also much more interest.
The European Union has been a remarkably successful institution building project. It is the first ever voluntary coming together of sovereign states, pooling some of their sovereignty, so that they could do more together, than they could separately.
Almost every other political unification or state building in history has involved the use of force, including the creation of the UK and the maintenance of the USA. The EU came together peacefully and voluntarily.
Some might argue that the EU was necessary only in order to cement a post war reconciliation of Germany and France and that, now that that is achieved, it has done its job and needs no further development.
This is wrong for two reasons.
WHY THE EU IS STILL AN ASSET
1 . AN ASSURANCE OF MUTUAL SECURITY,
 Firstly, the fact that there is a queue of states still lining up to join the EU shows that the EU still provides a necessary political and economic umbrella under which reconciliation and mutual security between states can be  assured in the twenty first century.
This was why the Baltic states, Poland and other central European states joined, and it is the reason several Balkan states, and even Georgia and Ukraine might like to do so. It is also the reason why Greece, much to the surprise of many, has favoured Turkish membership. While the United States of America is remarkably successful in many ways, there is no queue of other American states lining up to join. Even Puerto Rico has not done so after more than 100 years of Washington rule
2. A WAY TO MANAGE GLOBALISATION DEMOCRATICALLY
Secondly, the EU is the most advanced effort in the world providing a measure of democratic supervision into globalisation. Unlike other efforts to supervise globalisation, like the United Nations and the World Trade Organisation, the EU has a directly elected Parliament which co legislates for the EU alongside the 27 Governments, who often decide issues by majority. Other international organisations operate on a purely intergovernmental basis, which means that there has to be unanimity to get a decision, and democratic involvement only arises when a deal already negotiated in private, has to be ratified in national parliament  without possibility of further negotiation or amendment.
As a result, other organisations, like and the WTO and the UN, can do much less, and have to  do much more of what they do behind closed doors, than is the case with the EU.
My view is that the EU provides a unique model for democratic rule making, at supra national level, something which will become more, not less, necessary as we proceed into the 21st century.
  Indeed the failure of the world to deal with climate change is a good example of the weaknesses of present intergovernmental models of global governance. If the different regions of the world had Unions, like the EU, which could negotiate seriously, and with genuine political legitimacy, as the EU can, the failures of Copenhagen and other climate change summits would not have happened.
If the EU were to break up, either because of the collapse of the euro or because a major country like the UK feels it has to exercise its right to leave the EU, and either event were to set off a breakdown of the trust that keeps the EU itself together, we would have lost a unique instrument for security building in Europe, and for problem solving in the wider world.
I would now like to analyse those two potentially existential threats to the EU, the euro crisis, and the UKs possible desire to leave.
Of these, a  break up  the euro is undoubtedly  by far the  more serious existential threat to the EU, because the scale of the economic losses is potentially much greater, and the  means of controlling  those losses, are much less.
THE EURO CRISIS IS NOT SOLVED
The euro crisis has become slightly less acute in recent weeks. The announcement of a new bond buying policy by the European Central Bank has calmed the markets. But there is no doubt that the markets will test the ECB’s will power at some stage.
Meanwhile the link between the solvency of European banks and the solvency of European states has not been removed.
 A default by any EU state would wreck the banks of that state, because each state’s banks tend to be big  purchasers of the bonds of that state.
Similarly a potential collapse of a bank in a state would force that state to inject capital into banks, if it did not want a run on banks generally to take place, and contagion to other countries. The  confidence loss caused by a major bank getting into difficulty could lead to a dramatic collapse in state revenues, leaving it with a much increased budget deficit, at the very time it was also having to find the money to recapitalize the bank.
FOUR THINGS THAT MUST BE DONE TO SOLVE IT
If these problems are to be resolved, four things will have to happen, more or less at the same time.
1. Greek Government debt will have to be forgiven.
2. The ESM will have to be seen to be big enough to stand behind Spain and other countries that might get into difficulty, on a contingency basis,
3. The new mechanisms to supervise, and if necessary rationalize, Europe’s banks will have to be put in place.
4. The already agreed reforms to reduce deficits, and to promote growth by opening up the job and service markets to competition will have to be demonstrated to be being fully implemented, in letter and spirit, to show creditors that, if one forgives debt or creates enlarged the ESM, one is not throwing good money after bad.
At the moment, the Greek debt issue is not being tackled, and seems to have been postponed until after the German election in September. The delay may not be the worst thing in the world, if it allows time for Greek reforms to begin to establish credibility. It also allows time to educate public opinion in creditor countries like Germany, and in countries sitting complacently on the sidelines, of the true consequences for themselves of a euro break up. Greece also need immediate help to finance itself to the end of 2013, and that bridging finance cannot await elections in Germany or anywhere else.
The EU has already enacted a raft of legislation, including the Fiscal Compact Treaty, to ensure that countries reduce their deficits, and liberalise their labour and service markets. . One of the reasons growth potential has been low in Greece, Italy, and Spain is lack of competition or flexibility in key sectors
But Germany is not yet satisfied. It wants to have an EU Commissioner with the power to veto state budgets, and enforceable contracts on reforms between states and the EU.  But not enough attention is being paid to the fact that Germany, France and other core countries could also be doing a lot more themselves, to open up their own digital, financial, energy, retail and professional service markets. While Germany has set a good example in labour market and pension reform,  there are other reforms it could initiate, that would help other EU countries to sell more goods and services into the German market, and thereby trade their way out of their problems.
There is understandable political resistance in Germany to any further debt forgiveness for Greece. But debt forgiveness within the euro is one thing. Greek exit from the euro is an entirely different matter. It would be far more dangerous, and that needs to be explained to German public opinion.
WHAT WOULD HAPPEN IF THE EURO ZONE BROKE UP?
Even a disorderly default by a country within the euro, no matter how severe its consequences for its own people and for its creditors, would have far less severe consequences for the euro, and for the EU itself, than an exit of a country from the euro would have.
I have heard a view from some Northern Europeans that an orderly exit of Greece from the euro could be contemplated, if it was accompanied by building up a huge fund, much bigger than the existing ESM, to stand behind all the other euro area states, so as to prevent a Greek exit leading to a loss of confidence in the financial position of the rest of the euro zone.
I believe this view, that Greek exit from the euro can be managed, is profoundly mistaken.
The whole edifice of the EU rests on law. The EU has no police force to enforce its will. It relies on member states freely respecting the interpretation of EU law by the European Court of Justice, and implementing the Court’s decision, however unpleasant that may be. The exit of a country from the euro is, quite simply, a breach of their Treaty obligations, and treaty obligations have the force of law.
The euro was established on the basis that it was irreversible. A Greek exit, particularly if it was condoned or encouraged by other members, would say loudly that the euro is not irreversible.
That would lead to constant speculation in the markets as to who would be next. And as speculation increased, so too would the size of the funds or guarantees needed to check it, increase. That in turn would then lead heightened risk that some of creditor countries, who would have to provide these funds and guarantees, might decide that they themselves should exit the euro, and re-establish their own currencies. That would be the end of the euro.
Breakups of currency unions have happened before, in Austro Hungary after the First World War, and in Eastern Europe in the 1990s when the rouble zone broke up. As described in a recent article by Anders Aslund of the Peterson Institute of International Economics, the consequences of this were disastrous.
A  SCENARIO THAT MIGHT LEAD TO THE END OF THE EU ITSELF
New currencies would have to be established. The relative value of these currencies would be unknown and unknowable. Some would lose value very quickly and others would shoot up in value.
Exports would become dramatically uncompetitive in some cases, and in others they would become  so cheap that there would be  accusations of dumping, currency manipulation, and calls for  immediate reintroduction of  import duties to level the playing field. Such duties, if imposed, would  end the Single Market.  And that would be tantamount to the break up of the European Union itself. Open markets, the assumption on which Ireland built it entire economy over the last 50 years, would be gone.
In some countries the banking system would break down, and people would have no access to credit for even the most basic transactions.
In others, people would cease to trust the value of their own money, and money, after all, is based on a promise and if people can no longer trust the states standing behind the promise that underlies their money, the basis for money itself is gone.
This is not fiction. It is what happened when the rouble zone broke up in the 1990s and explains why incomes fell by 50% in the former rouble zone countries. And the exporter nations within the rouble zone, like the Russian Federation, suffered just as much hardship as the importer nations, like Latvia and Estonia.
The political stresses that this scenario for the 500 million people of the EU, and their Governments, would be such that trust between European nations would easily break down completely.
We see signs of that happening already, but it is being held in check by the hope that problems can still be resolved on a collective basis. A break up of the euro would show that that was impossible to resolve matters on a collective basis, and it would then be a case of every nation for itself, with particularly severe consequences for smaller countries, like Ireland.
…………AND MEANWHILE IN THE UNITED KINGDOM
As if Europe did not have enough problems, one important EU country, the United Kingdom of Great Britain and Northern Ireland, is preparing to renegotiate the terms of its own membership of the EU, and hold a referendum on the outcome, which would potentially decide whether the UK would stay in the EU or leave.
The first thing to say is that the UK is entirely free to do this. Unlike other Unions, like the United States or the United Kingdom itself, the European Union is a Union which states are free to leave, so long as they fulfil their normal obligations under international law, which arise when any country withdraws from any international treaty.
The UK has been an uneasy member of the EU from the outset. While Churchill envisaged a United States of Europe, he did not envisage the UK, which still had a global Empire at the time, being part of it. The UK did not attend the 1955 conference in Messina which led to the Treaty of Rome. When it eventually joined the Common Market, a decision endorsed by a referendum, the idea was sold to the electorate as an economic arrangement, whereas even the most cursory reading of the Treaty of Rome would have shown it to be much more than that.
A THREAT TO VETO THE EU BUDGET
The United Kingdom is now threatening to veto the entire EU budget,  something it is legally entitled to do, unless there is an absolute freeze on the size of the budget. The difficulty with this stance is not legal, it is political.
 The EU Single market, which guarantees free movement of people, goods and services, was created as a political deal.
 Weaker economies opened up their markets to stronger ones, and removed protection from local businesses, on the basis of a promise that they would qualify for structural funds to modernise their economies. These funds are what the EU budget provides. (Some of the EU budget also goes on agriculture, but that has fallen from almost 80% of the total originally, to only 30% today.)
The political difficulty with the UK stance is that of fairness.
In the past, when countries like Ireland, Spain, Greece, Portugal, and even the UK itself, joined the EU, we all qualified for very substantial EU structural funds, in the form of aid for agricultural modernisation, general infrastructure, training, communications etc.
Now, when the EU has taken in 12 central European countries who are almost all relatively far poorer by comparison with the rest of the EU,  than we were when we  joined, these 12 are to be told, if the freeze the UK  wants is to go into effect, that they are not to get even a fraction of the help Ireland, Spain, regions of the UK and others qualified for as of right after we joined. This is causing resentment.
I heard an Estonian Minister complain recently that, under the existing EU budget which is already an unfair compromise, his farmers have to compete in the same EU market with west European farmers who are getting three times the subsidies. Unless there are to be drastic cuts, this sort of anomaly can only be put right by an increase in the EU budget.
The problem is that the UK Government has made the size of the budget a red line issue without getting into any informed debate about what the money is actually spent on, or about what sort of EU budget is necessary to ensure that the  EU Single Market, to which the UK itself is very much attached, works fairly and is preserved.
The UK wants access to the single market, but is not prepared to pay any entry fee.
AND A DEMAND TO RENEGOTIATE THE ENTIRE BASIS OF UK MEMBERSHIP OF THE EU
The same problem arises in the renegotiation of the terms of UK membership for which the current  UK Government wants. In preparation for this renegotiation, the UK Government is now doing a comprehensive audit of all EU laws, to identify areas of activity that could be taken back from the EU to be administered exclusively under UK law instead. There may be some good ideas emerging from this, on which all other members could agree, but there may also be a lot of problems.
The difficulty is that the UK wants to take back, yet to be specified, powers, but also to retain full and unfettered access for all its goods and service exports to the EU Single market. 50% of UK exports go to the euro zone, whereas only 15% if euro zone exports go to the UK, so this is important to the UK.
The difficulty is that the EU Single Market, like any market, is a product of common rules, regulations and conventions. A market is a political construct. Without common rules or understandings nobody could rely on what they were buying.
That is why, for example, there have to be common EU quality standards to construct a common EU market. Otherwise one country could impose peculiar quality standards, designed to exclude competitors from its market and to enable its own producers to make monopoly profits at the expense of its consumers. Any rulemaking power that could be abused in this way, cannot be handed back to national level without endangering the Single Market. That is the problem that the proposed UK renegotiation of  its EU membership terms will encounter.
And the competition in any market also has to be fair, and someone has to regulate that. If competitors have different environmental, or product liability standards, or if some firms are operating monopolies or cartels, the competition will not be fair. These matters cannot be handed back to be decided by national authorities without also endangering the Single Market.
 If the UK were to draw up a list of EU rules it would like to make in Westminster rather than Brussels, the other 26 could also do the same, but they might come up with a very different list. The process could become bogged down in serial  reopening of compromises, made years ago, on issues that have little relevance to the urgent existential threat  the EU faces today.
One gets the impression that many in the UK do not really care about that.
 The EU is still regarded by many in the UK as a foreign country, not a Union of which the UK itself has been an integral part for the past 40 years. Membership of the EU is seen as a convenience rather than as a commitment. If the price of satisfying UK voters is to cause more problems for the “foreigners”, in “Europe”, that is not seen by some UK political leaders as such a bad thing.
The difficulty is that the “foreigners” in Europe may not see it like that.
With so many genuinely urgent things to do, such as safeguarding the very existence of the EU itself, the other 26 member states may just not be inclined to devote time to a painstaking case by case analysis of a series of requests for new UK opt outs from some bits of some rulemaking authority, with UK opt ins to others, and to a judicious analysis of whether each one of these decisions might affect the integrity of the Single Market, either now or at some time in the future.
 And the European Court of Justice would certainly have difficulty interpreting the consistency of a special EU menu for one country with the basic freedoms for all on which the EU is based.
 There is also the old question of whether UK Ministers and MEPs should continue to have voting rights on things they are opting out of. As it is, one has to say that it is distinctly odd that the present Chairman of the Committee of the European Parliament that deals with euro currency matters, represents a constituency in the UK, which has no intention of joining the euro.
If,  as is likely at the end of its proposed renegotiation, the UK is dissatisfied with the result, because not enough powers are being handed back to Westminster, it will have little option but to recommend that the UK withdraws from the EU. 
 It is setting itself up now, to find itself in exactly that position, in 2016.
THE UK’S OPTIONS OUTSIDE THE EU
 This will require careful handling because 50% of UK exports go to the EU, and London is Europe’s main financial centre, for the time being anyway.
 How is the UK to protect these interests if it is outside the EU?
One possibility is to join Norway, Iceland and Liechtenstein in the European Economic Area, which would guarantee full access for UK goods and services to the EU market. But the price for that would be having to implement all EU legislation that was relevant to the Single Market, and contribute to the EU budget, but without having any say in EU decisions.
That would be worse from a Euro sceptic point of view than the UK’s present position, even though it would guarantee continued access for the UK to the EU market for both goods and services.
The other possibility is to follow Switzerland and negotiate a series of bilateral trade deals with the EU. The UK would not be entering such negotiations from a position of strength, because it relies more on the EU market, than the EU relies on the UK market.
Switzerland has negotiated full access to the EU market for goods, but not for services. Services are the UK’s key export sector, so a Swiss style deal would not be attractive.
If Britain negotiated a Customs Union with the EU, like that of Turkey, it would find its trade policies with the rest of the world were still being determined in Brussels, but with less input from London than at present. Again it would also only have a guarantee of access for goods exports but not for services.
Finally, the UK might simply leave the EU, without negotiating any special deal. That would leave it paying tariffs on its exports to EU member states, including Ireland, and would necessitate the reintroduction of customs posts on the border in Ireland. It would undermine years of peacemaking by successive   Irish and UK Governments, and would cost thousands of jobs in export firms in both the UK and Ireland.
CONCLUSION
My sense is that the pressures that cause fracture in the EU derive from a lack of understanding among the general public of the extent to which their livelihoods  depend on economic developments in other  countries and of how unrealistic, in modern conditions, is an “ourselves alone” policy.
 Political leaders make little  effort to explain this, because to do so would undermine the  nationalist myths which brought most states into being in the first place, and also because it is often convenient to blame the EU for  the effects of decisions that were necessary but are unpalatable. For these reasons, little effort is made to forge any form of patriotic pride in the EU or its achievements.
No venue has been created in which an EU wide public opinion might be formed.
This must be done, if sufficient mutual understanding and support is to be created to allow the EU to create the degree of burden sharing and mutual supervision that is necessary to guarantee the long term  robustness of the euro, and thus of the EU itself.  In a word, the EU needs more democratic cement to hold itself together.
European Parliament elections are not truly European. They are 27 different elections, in 27 different countries, in which national issues predominate.
The European Parliament itself has refused to contemplate the election of some of its members from EU wide party lists, which would begin the process of creating an EU wide debate because it would necessitate an EU wide political campaign on behalf of the rival EU wide lists of candidates.
The President of the European Commission, and the President of the European Council, are selected in private meetings of heads of government. They do not have to win the votes of EU citizens, and consequently EU citizens do not have the feeling that they can vote the government of the EU out of office, in the same way that they can vote their national government out of office.
Thus the EU does not enjoy democratic legitimacy in quite the same way that national governments do.
As a member of the Convention that drafted what eventually became the Lisbon Treaty, I urged unsuccessfully that the EU should have a Presidential election on these lines.  I suggested that the President of the European Commission should be selected in a multi candidate election in which every EU citizen would vote, rather than be selected, as at present, by 27 heads of Government, meeting in private, to be approved in a single candidate vote in the European Parliament.
This proposal received almost no support at the time, although it has since been adopted as policy by the German CDU. If that had happened when it was proposed, the EU would now be in a much stronger democratic position to devise a more coherent response to the euro crisis, and to find a solution to the UK’s difficulties. The UK press would not be able to argue that EU leaders were “unelected”. The Commission, headed by a President with a full EU wide democratic mandate, would have more authority to propose solutions. The council of 27 heads of government would still play a vital role,  but the EU would be less constrained by the electoral timetables of individual countries, as is the case with the German election of 2013.

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