How to keep Britain in the EU

At a time when some governments are pushing for a more integrated European Union, the British are becoming more eurosceptic. This contradiction increases the likelihood of Britain eventually leaving the EU – an outcome that, if current trends continue, is thoroughly plausible.

In the short term, Britain's decision in December to opt out of the 'fiscal compact' may not damage its interests a great deal. France tried to turn the compact into an inter-governmental club that would sideline the Commission and cover a wide range of economic policies, including the single market, but Germany and other governments shot down those ideas. The Commission will play a key role in the compact, ensuring that the single market remains the business of the EU as a whole. And since December's summit, the countries that value Britain's support for free markets and free trade have made an effort to engage it. In March, 11 of them plus Britain signed a joint letter calling for an extension of the single market.

But in the long run, the gap between Britain and its partners is likely to widen. The eurozone cannot resolve its contradictions without much closer co-ordination of economic policy-making, and that will apply to countries wishing to join the euro. In Germany, many politicians are talking about a 'political union'.

A politically-integrating core will make the EU less congenial to the British, many of whom think its sole rationale is its market. The core can establish new institutions without Britain. But eurosceptics will argue that the other countries' institutional reforms will affect Britain and that its people should therefore be consulted on whether they wish to stay in such a Union.

The 2011 European Union Act requires a referendum in Britain if any treaty transfers further powers to the EU. In theory, an integrating core should not trigger a British referendum, but in practice it would lead to growing pressure for one.

Many members of the governing Conservative Party want a referendum on EU membership. Its leaders are opposed, since a referendum would split the party and be a distraction from sorting out the economy. But future leaders may well choose to give party members what they want.

The growing euroscepticism of the Conservative Party – which was a pro-EU party until the late 1980s – reflects the evolution of British public opinion. Only in 2011 did opinion polls start to show a clear majority for leaving the EU. The euro crisis has made a big difference. Eurosceptics always said that the euro would lead to disaster and they can now claim they were right. Europe's leaders scarcely inspire confidence: countless emergency summits and rescue packages have failed to solve the eurozone's problems.

Many Conservatives – and the small businesses that are close to the party – have come to view the EU as a source of red tape, a hyper-bureaucratic organisation that stifles free enterprise and a slow-growing economic bloc that drags down the performance of the British economy. Some of them see the future in stronger bilateral ties with emerging markets and North America – notwithstanding the fact that the socalled BRICs (Brazil, Russia, India and China) took just 7 per cent of British exports in 2011 while the EU accounted for more than half.

The City of London, in particular, worries that Paris and Berlin are trying to use new EU financial regulations to steal or shackle its activities. Many British people have no great love for bankers, holding them responsible for their economic woes. But a lot of financiers – who are often close to senior Conservatives and newspaper editors – have become eurosceptic. They fear, in particular, that the Commission proposal for a financial transactions tax – an idea strongly backed by France and Germany – could push a big chunk of their business outside the EU.

Migration, a toxic political subject, has also fuelled euroscepticism. Britain was the only member-state (apart from Ireland and Sweden) to let in workers from the Central European countries as soon as they joined the EU in 2004 – though it won little credit with its partners for doing so. More than a million arrived, causing resentment in some communities, and the EU was blamed.

Well-funded and effective lobbying groups, such as Open Europe, bolster the eurosceptic cause, while their pro-EU equivalents lack muscle. Many large companies remain pro-EU but are reluctant to speak out, lest they annoy the government. After the December summit, for example, senior executives from some of the biggest foreign banks in London said in private that Britain's isolation had reduced its capacity to influence future EU financial legislation. But none of them would say so on television.

What can be done to arrest Britain's slide towards the exit? Business leaders should highlight the benefits of membership – such as increased foreign direct investment, and the ability to shape the rules of the world's largest single market – and put money into pro-EU lobbies. Trade unionists also have a role to play. Many of them welcome rules from Brussels on working hours and maternity rights but seldom champion the EU.

Politicians of left and right are fearful of defending the Union lest it cost them votes. They need to find the courage to spell out how the economy gains from membership. And when the EU achieves something in the wider world – such as negotiating a trade deal with South Korea, brokering a global climate agreement in Durban or forging an oil embargo against Iran – politicians should explain how it amplifies Britain's voice.

The British government should come up with positive ideas for the EU – and not only further enlargement (on which it has little support) or the deregulation of services and the digital economy (on which it has allies). Constructive ideas on climate, energy, the neighbourhood, foreign policy or defence would make it easier for Britain to forge alliances with like-minded countries, such as the Nordics, Poland, Italy, and – on some issues – France and Germany. Such alliances would enhance Britain's ability to set the Union's agenda and thus win the arguments in Brussels. This would help to refute the eurosceptic assertion that the EU works against British interests.