PM says Britain accepts need for deeper integration but he will fight to defend UK interests at EU summit in Brussels
Britain threatened to wield its EU veto for the second time in less than a year if eurozone leaders draw up a rescue plan for the single currency that threatens British interests in the European single market.
As EU leaders embark on a month of intensive negotiations – at next week's G20 summit in Mexico and at an EU summit at the end of June – David Cameron declared in Berlin before meeting Angela Merkel that Britain accepts the need for deeper integration within the eurozone.
But Cameron made clear that Britain would fight to defend its interests at the EU summit in Brussels at the end of the month when eurozone leaders are likely to table a package of measures to shore up the single currency. These are likely to include moves towards a banking union.
"I will make sure Britain's interests, particularly in the single market and the openness and fairness of the single market, are protected and that is the key for Britain," the prime minister said.
The government has dropped Britain's traditional concerns about the creation of a "two speed" Europe – with an inner core run by France and Germany and an outer core led by Britain. Ministers believe it is in Britain's national interest for the euro to succeed – something that can only be achieved if the 17 members of the eurozone agree on greater fiscal co-ordination and even fiscal governance.
But ministers fear that changes to the governance of the eurozone, particularly the creation of a banking union among the 17 euro members, could pose a threat to Britain if they rewrite the rules of the 27-strong EU single market. Any changes to the single market have to be agreed by all 27 members of the EU.
George Osborne made clear that Britain was prepared to use hardball tactics in the forthcoming negotiations. "It is clearly going to be a challenge developing within a single market of 27 member states, of which Britain is one, a banking union of 17 eurozone members. They need to do that to make their currency work. It is massively in Britain's interest that the currency works because an unstable euro [would do] enormous damage to growth and jobs in Britain. I think Britain will require, if there is a full-blown banking union, certain safeguards," the chancellor told Radio 4's Today programme. "Indeed if you cast your mind back to last December and the European Council, where David Cameron vetoed the fiscal compact that was put before us, he was asking for safeguards on banking and financial services.
"We were ahead of the game there. We were identifying a potential issue for the UK. Do we want, as Europe's largest financial centre, to have a banking union on our doorstep without certain safeguards that ensure that the single market in financial services still operates at 27 and Britain has a big say on financial regulation as it affects all member states?"
Eurozone leaders are still debating whether a banking union will require an amendment to the EU's Lisbon treaty – and therefore the consent of all 27 members of the EU. In a sign of the depth of British thinking on potential threats, Osborne outlined specific proposals which would, in Britain's view, require a treaty change.
The chancellor said: "If there are significant steps towards, for example, common depositor protection – in effect German taxpayers stand behind Spanish bank deposits or Greek bank deposits – the most ambitious end of that kind of activity requires treaty change. That would require Britain's consent. We want the euro to work. It will require elements of a banking union. But there will have to be safeguards, there will have to be conditions to protect Britain's most important industry – and, by the way, Europe's largest financial centre."
The prime minister offered reassurances during his visit to Berlin to voters back home that Britain would not be contributing to any bailouts of Greek or Spanish banks. "It's not our currency so it would be inappropriate to do that," he said.
Merkel said that Germany believes that the euro crisis has shown the need for greater integration within the EU. "We need a political union first and foremost," she said in an interview on German television. "This means we must cede responsibilities to Europe, step by step."
Speaking earlier with Cameron, the German chancellor said greater fiscal co-ordination was only one of many measures needed to stabilise the eurozone. "It is necessary, but not the only precondition," she said. "When we look at the medium and longer term, we need more coherence, not just in terms of fiscal policy, but also in other areas. The pact is a necessary step, but is not sufficient."
In a discussion with students Merkel made clear that she will insist on strict discipline for the eurozone. "When you have a common currency, it's vital that we stick to certain guidelines. It can't be the case that one country runs up lots of debt, and the other one makes the money. Neither can it be the case in the long term that one spends 3% of its GDP on research and the other spends nothing on it. That simply cannot work on the long term in terms of our competitiveness.
"The responsibility of being in a common currency brings other duties with it. This is shown in the fiscal pact but it does not call into question the togetherness of the whole EU 27."
Osborne used his interview with the Today programme to rebuff a demand from Lord Owen, the former leader of the SDP, for a referendum to be held on whether Britain should remain in a euro-dominated EU or join a looser single market stretching from Iceland to Turkey. The chancellor said that the government had changed the law to ensure that a referendum would be triggered if the EU demands a transfer of British sovereignty from the UK to Brussels. This is designed to strengthen Britain's hand in any EU negotiations because EU leaders would be determined to avoid a referendum in Britain.
"We have a very clear safeguard in the system now – if there is any transfer of sovereignty from this country to the EU then there would be a referendum. People did not really notice the passage of law but I think it is one of the most significant things this government has done."
Osborne's comments mean the government has no plans for a referendum because campaigners, such as Owen, are demanding a referendum on opposite grounds – a weakening of Britain's ties with the EU. But the prime minister and chancellor may agree to hold a referendum on such terms in the run up to the 2014 European parliamentary elections to see off a challenge from the UK Independence Party.