Illustration by Bloomberg View
Illustration by Bloomberg View

Prime Minister David Cameron lost a symbolically important vote on Europe in the British parliament last week. It’s another setback for the U.K.’s perpetually strained relationship with the European Union and a sign of mounting discontent with European governance.

The EU’s leaders should start heeding such signals instead of ignoring them. Unfortunately, British discontent with Europe is easy to ignore because, forgive the expression, it’s such a devalued currency. So when Tory rebels joined Labour to embarrass Cameron by demanding a cut in the U.K.’s contribution to the EU budget, nobody was surprised.

The Oct. 31 vote isn’t binding on the government. It does little more than express disgust with the European project. What else is new? Mainly this: Disenchantment with the EU is no longer confined to the British. Mismanagement of Europe’s economic crisis has aroused bitter resentment of the union’s leadership -- and especially of Germany’s role -- in many other countries as well.

Thanks to the size of the British economy and the country’s role in international finance -- not to mention its decision to stay out of the euro system -- the U.K. could help Europe develop more flexible modes of EU membership. This would be in everybody’s interests. To do it effectively, however, the British need to temper their disdain.

‘Global Trader’

Many conservatives delude themselves that the country would be better off leaving the EU altogether. A Tory minister and former leader of the party, Iain Duncan Smith, recently said Britain could thrive on its own as a “global trader,” making him the most senior politician to float the possibility of an EU exit. Cameron rightly argues that the country’s economic ties to the EU would make a British exit disastrous.

Greater flexibility -- what Europe’s designers used to call “variable geometry” -- should be considered, even as Europe’s governments cooperate more closely on fiscal affairs. An overbearing European center risks infuriating voters across the EU and in the end could tear the union apart.

Germany’s government is making that gamble when it insists on ever more austerity and tighter EU control of national governments seeking fiscal support. Its demands are understandable, yet dangerously misguided.

Greece, Ireland, Italy, Portugal and Spain are reeling from fiscal austerity so severe it is counterproductive. Recessions are deeper and longer-lasting than they otherwise would be, driving up ratios of public debt to output. A new study by Britain’s respected National Institute of Economic and Social Research -- the first, according to the institute, to examine the EU’s coordinated fiscal cuts -- finds that the results have been “perverse and damaging.”

Growing Resistance

Resistance is growing to the EU’s demands. Its checks and balances are rudimentary at best: Accountability still resides at the level of national governments. This mismatch between the burdens on Europe’s citizens and the lack of popular consent is dangerous. Britain’s euro-skeptics whine to excess, but they have a point, and they are no longer alone.

In the short term, Europe should press on with the measures it has half-promised: steps toward a banking union, direct support of troubled banking systems and a role for the European Central Bank as the lender of last resort. No more discussion of preconditions for distressed sovereign borrowers. Just do it.

Beyond this, the EU needs to adopt some form of debt-sharing. Here, added conditionality is necessary to ensure that the burden is spread equally and has a chance to succeed. But the details matter. If conditionality is seen as an open-ended surrender of sovereignty, voters justifiably will push back. The conditions for fiscal support should be narrowly tailored, with national governments retaining ownership of their policies.

Centralized budget-setting would violate both principles. There are alternatives. Conditional euro bonds, for instance, would allow governments to borrow at reasonable interest rates linked to performance targets and with euro-area guarantees. Euro bonds are just one example of a middle way between throwing good money after bad (as German taxpayers think) and replacing elected politicians with a tyranny run from Brussels and Berlin (as protesters in the streets of Athens and Madrid believe).

With a little goodwill and a better understanding of where their interests lie, Germany’s “more Europe” faction and Britain’s euro-skeptics can still find common ground. Nor is it too late to accommodate the desperate leaders of Italy, Spain and the other struggling countries. Cooperation, yes; further surrender of democratic control, no. If Europe can’t bend on this, it will prove the whiners in London right and eventually break.

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