The UK had its latest testy exchange with the rest of the European Union Wednesday night, as Finance Minister George Osborne had an angry outburst at the negotiating table during talks about bank rules.
“I am not prepared to go out there and say something that is going to make me look like an idiot five minutes later,” he exclaimed, late Wednesday evening after a long day of talks about new European bank capital rules.
“I am not asking for some UK carve out ... I will not be painted as somehow anti-European, demanding something especially for London," he added.
London is the continent’s biggest financial center, and many UK politicians argue that proposed new laws such as the contentious Financial Transactions Tax would penalize the City more than its European neighbors. There are also disagreements over proposed new bank capital rules – which are seen by many as key to preventing another credit crisis.
The UK is backed by Sweden, which also has a relatively large financial services sector and a traditionally arms-length relationship with the EU.
The UK’s position within the European Union has been increasingly awkward after Prime Minister David Cameron became the only EU leader to veto proposed EU treaty changes in December last year.
With the traditionally less pro-European Conservative Party leading its coalition government, the UK was always likely to negotiate harder with its European neighbors.
Pro-European voices have warned that the UK risks losing its influence in Europe if it doesn’t demonstrate its commitment to the EU. Ultimately, the one vindication of the government’s approach would be if the UK outperforms the rest of the EU.
The UK has held on to its triple-A credit rating, after a program of quantitative easing by the Bank of England, despite warnings from Moody’s and Fitch that it is on negative watch. And sterling has performed well in recent weeks, a sign of confidence in the UK economy.
“If you want to stay within Europe, the UK provides you with a slightly better opportunity,” Jeremy Stretch, head of currency strategy at CIBC, told CNBC’s “Squawk Box Europe.”
“It has similar problems but it has greater flexibility than the rest of Europe,” he said.
Yet there are increasing rumblings of discontent about Osborne’s handling of the UK economy.
The country slipped into recession again in the first quarter of 2012, and Cameron has faced criticism over his government’s closeness to News Corp and the Murdoch family in recent weeks. His Conservative Party has slipped behind opposition Labour in recent polls.
“Mr. Cameron may have to switch to the right in policy terms to appease the Tory ‘rank and file,’ which in turn could pose a threat to the coalition government,” Marc Ostwald, strategist at Monument Securities, wrote in a research note. “The opinion poll shift raises the risk of S&P, who currently have a stable outlook on the UK’s rating, joining Moody’s & Fitch on a negative outlook at the very least.”
Inflation is continuing to cause problems for the UK consumer, and there is still a lack of confidence as austerity measures such as pension tax reform affect everyday life.
“We have structural problems and a fiscal environment that is pretty awful. We are undergoing extreme austerity,” Stretch said. “Because we have a flexible labor force and the structural benefits that a large part of core Europe doesn’t have, then that will provide great opportunity for the UK to be able to work its way through over time.”
The fallout from new banking rules comes as Osborne scours the country for a new Governor of the Bank of England to replace Sir Mervyn King – who confessed in a speech on Thursday that the Bank should have done more to warn of the impending credit crisis.
The leading candidate to date has been King’s deputy, Paul Tucker, but a report last weekend suggested that Goldman Sachs’ Jim O’Neill had been approached.