The European Union’s most reluctant member is again at loggerheads with its partners. Patching up the latest disagreement between the U.K. and the EU may be harder than usual, but it’s in everybody’s interests to try.

British Prime Minister David Cameron certainly bungled his diplomacy at the EU’s Dec. 8-9 summit. He antagonized the other leaders needlessly, and got nothing in return. His error was not so much in leaving the U.K. isolated. It was that he pressed the wrong issue at the wrong time.

The summit’s main goal was to design a fiscal compact that most euro-area governments saw as essential for stabilizing their economies. Cameron demanded as the price of his support a promise that London would retain control over regulation of London’s financial district -- a separate issue. The other leaders saw this as extortion and refused.

The disagreement means that the new compact can’t be written into a new EU treaty, so at least 22 of the 27 EU countries will form an intergovernmental agreement instead. This is awkward because it raises difficulties over using EU institutions to administer any plan. It’s also awkward for the U.K., which may find itself in a minority of one.

Empty-Handed

Cameron obviously miscalculated. He thought other EU countries would meet his demand -- as perhaps they should have, because it was not in itself unreasonable -- but they resented the ambush. Despite the applause for “standing up to Europe” that greeted him when he returned home, Cameron came back empty-handed.

Britain’s EU partners realize that its financial sector has enormous economic weight. The U.K. hosts the world’s biggest markets for foreign exchange and financial derivatives, and is home to the biggest asset management business in Europe. Financial services are a major employer. Alarm about planned EU regulation is understandable, especially the proposed financial transactions tax, which would fall disproportionately on the U.K.

Cameron says his concern is not just to avoid excessive regulation or taxation. In some areas, notably rules on bank capital, he wants to go further than other European governments. This is not a straightforward matter of wishing to go easy on your own producers.

The U.K. can’t expect to control every aspect of financial regulation. It should always want to work closely with EU regulators: In a financially integrated world, such cooperation is essential. But reserving the right to defend a vital economic interest if agreement cannot be reached is justified. Cameron got the timing and diplomacy wrong, but his goals were right.

Had he chosen a better moment to press this issue, could Cameron have cleared the way for consensus at the summit? Not at all. If he had entered into serious discussion of the fiscal pact, he would have had different and better grounds for isolating Britain.

As we have argued, the plan is half-baked, fails to address the immediate issue, and risks imposing a too-severe fiscal system on the EU. Cameron would have asked for an opt-out, and rightly. He might have found himself in a minority of one anyway -- except, in this case, for a good reason.

The U.K. is perpetually ambivalent about its place in the EU. It has often balked at the bloc’s bolder innovations -- most of all the single currency. The falling-out at the summit was hardly unprecedented: The EU has been a multitrack endeavor for years.

In or Out?

The question is how much longer it can continue to be. Closer fiscal and economic integration may eventually make it impossible for the U.K. to stand slightly apart. Once and for all, it might have to choose: in or out. If it ever comes to that, Britain has an enormously difficult choice to make.

There are too many unknowns to answer the question today. What would “out” really mean? Would Britain be on its own? Could it expect to face trade barriers or other sanctions? Would it be a friendly or unfriendly divorce? How would the global trading system have evolved in the meantime? All one can say is that the cost of separation would be huge -- a fact that British public opinion often overlooks.

If these questions were prompted by the prospect of a full political union, the U.K. would not be alone in wrestling with them. There’s no clear appetite among EU governments and electorates for a United States of Europe. The danger is that the EU will drift in that direction anyway, without careful design or popular consent, in response to emergencies like the present one.

Cameron owes his EU partners more goodwill than he showed at the summit. But different countries will continue to desire different levels of integration, and the EU needs to stay flexible enough to accommodate that. Moves that infringe national sovereignty shouldn’t be taken lightly or in a panic -- as they too often have been.

There should be no quarrel about one thing: Preserving the EU as a single market and living political project is an overriding national interest for all its members. Success means never having to ask: “Is it time to go?” Once that question is posed, there’s no happy answer.

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