David Cameron achieved an unexpected election victory in May 2015. He faces major challenges with Scotland and the European Union dominating his second term as prime minister. To help negotiate EU reforms and support continued EU membership, the author suggests Cameron ask the pro-independence Scottish National Party (SNP) to join UK negotiations with the EU. Having the SNP involved could help Cameron keep his promises to listen to Scotland, present a more rounded UK position, and boost support for the UK remaining in the EU if reforms are achieved. However, the SNP may see this as a trap that could damage their party. For Cameron, there would be little downside to this bold move.

1. By John Nugée
DAVID Cameron, the UK prime minister,
achieved an unexpected election victory
on May 7. After the euphoria, the scale of
hischallengesisbecomingclearer.Mr Cameronre-
alises that Scotland and the European Union will
dominate his second premiership. He can make
one bold move to realise his goals. He should ask
the Scottish Nationalist Party, with 56 of the 59
Scottish seats in the House of Commons, to join
the UK’s team in Brussels to help Britain negotiate
EU reforms ahead of a membership referendum.
To have the SNP – most probably represented
by Alex Salmond, the party’s senior statesman and
foreign affairs spokesman – alongside George Os-
borne, the chancellor of the exchequer, in these
talks would serve several purposes. First, it would
give substance to Mr Cameron’s promise that he
will “listen to the voice of Scotland”, and on a mat-
ter the Scots hold dear as well as the English. Sec-
ond, it would present the rest of the EU not with a
narrow party line but a more rounded UK team, re-
inforced by Mr Salmond, still arguably one of the
canniest politicians in the country. Third, assum-
ing the talks on EU reform do not fail completely,
by giving the SNP some ownership of the out-
come, the Conservative government should lend
extra force to its eventual campaign in support of
continued EU membership.
Privately, the SNP might be horrified by the of-
fer. It has all the makings of a trap. The party
would be given responsibility without ultimate
power, and would be tarred by the Conservative
brush.Thefateof theLiberalDemocrats,whosere-
ward for their coalition with Mr Cameron in the
2010-15 parliament was so bitter, will loom large.
Butequally,thepartywouldfinditverydifficultto
turn down the offer and publicly spurn the chance
to help shape Scotland’s relationship with the EU.
For Mr Cameron, there would be almost no
downside. For this most surprising and unpredict-
able of prime ministers, it might be a master-
stroke.
On the economic front, he has to strengthen a
still nascent recovery and manage an unbalanced
economy where the twin deficits on the fiscal and
current accounts remain too high. On top of this,
he faces three further interlinked tasks: keeping
the UK in the EU, keeping Scotland in the UK, and
keeping the Conservative Party from tearing itself
apart. All are possible. Failure in any one of the
three missions would quite possibly precipitate
failure on the other two as well.
It is very hard to see Scotland remaining in the
UK if English voters demand a UK exit from the EU;
and were both those unions to fail, the third un-
ion, between the pro-business pro-Europe wing of
the Conservative Party and the more inward-look-
ing xenophobic wing, would not long survive
them.
ThefirstfullweekofMrCameron’snewgovern-
ment was replete with statements and gestures on
Europe. Many of them rather more constructive
and conciliatory than the soundbites of the cam-
paign trail. It ended with an Edinburgh meeting on
May 15 between Mr Cameron and Nicola Sturgeon,
the SNP First Minister of Scotland.
Thatmeetingwasbyallaccounts morepositive
than might have been expected. Ms Sturgeon and
Mr Cameron are far apart on the political spec-
trum, as the First Minister admitted, but that does
not mean they cannot work together. History is re-
plete with unlikely partnerships between political
opposites – Ronald Reagan and Mikhail Gor-
bachev, for example, or Anwar Sadat and Menach-
em Begin. Mr Cameron and Ms Sturgeon share one
common goal, that of a prosperous Scotland.
Most of the Edinburgh meeting consisted of
Mr Cameron offering extra powers to Scotland,
and Ms Sturgeon asking for yet more on top. That
is probably inevitable given the nature of de-
volved government. But perhaps he can break the
impasse over both Scotland and the EU by making
Ms Sturgeon and Mr Salmond an offer they would
find very difficult to refuse. If the three can work
together over the EU, this could help Mr Cameron
pull off an accomplishment that could define his
premiershipand hisplacein history. OMFIFBRIEFING
❚ The writer is a board member and senior adviser
of OMFIF, the Official Monetary and Financial
Institutions Forum
A
S the Asean Econom-
ic Community's
(AEC) 2015 deadline
approaches, there
are more detractors
than supporters. The
majority seems to
feel that the initia-
tive's deliverables – namely, an integrated
production space with free movement of
goods, services, and skilled labour – will
not be achieved by December 2015.
This broad statement has some merit.
Butwe mustask, “What was thereal defini-
tion of economic community, when Asean
decided to form an AEC?” Even if we go
with the notion of “Asean cannot deliver
on AEC”, how far is Asean, as an organisa-
tion, accountable for that? And can AEC
alone be responsible for policy changes in
domestic economy, and hence the possi-
ble negative fallouts? To answer these
questions,Iwillattempttoexplainfivecru-
cial facts about Asean economic coopera-
tion. This is important, as regardless of
any criticism Asean will announce the at-
tainment of the AEC on Dec 31, 2015.
Fact one: The AEC was not developed on
the basis of the European Union (EU)
model, though there are some learning
experiences to be gleaned from this pro-
cess.
Since the early days of Asean, the sover-
eignty of nation states and non-interfer-
ence in domestic matters have been the
key principles guiding the organisation.
Economic cooperation is sought in areas
where it is felt necessary, such as to pro-
vide economies of scale to multinationals
doing business in South-east Asia or to an-
chor the production networks (ie, a single
good is not produced in one country but
across multiple countries) that are already
developing in the broader Asian region.
Economic cooperation is envisioned as a
gradual process in Asean, with long-term
aspirations, rather than a mechanism with
strict rules that apply, irrespective of the
economic nature of member economies
and changing global conditions.
Fact two: Although the AEC is a regional
initiative, its implementation is carried
out by the national economies.
Initiatives like tariff cutting, removal of
non-tariff barriers, services sector liberali-
sation, national treatment of foreign inves-
tors, customs modernisation, and many
others have to be adopted in domestic law
and policy decisions. At the national level,
implementation faces difficulties as each
initiative is not the sole preserve of any
one ministry, but rather multiple govern-
ment ministries and other agencies. In the
domestic economy, the AEC also generates
proponents and opponents of integration,
slowing down the pace of implementation
further.
Fact three: The AEC is not the sole cause
of increasing competition.
It is very important to note that the vision
for the AEC was developed with an aware-
ness of current global economic trends,
such as the production fragmentation,
China’s accession to WTO, developments
of the EU and the Nafta and the 1997-98 fi-
nancialcrisis.The10countriesofAseanre-
alised quite soon that WTO membership
by itself is not helpful as there are 150 oth-
er countries, representing different levels
of economic developments, thereby dim-
minghopes forquick outcomes. Moreover,
the concerns and objections of small econ-
omies like the ones in South-east Asia are
not likely to get heard.
In that scenario, Asean or the AEC is a
small grouping where the member econo-
mies will consider the interests of all and
may also accord flexibility for a short peri-
od. Of course, this is likely to slow down
the process of the establishment of the
AEC, but advanced member countries (like
Singapore, Malaysia and Thailand) are not
restricted to this framework only. They
have pursued bilateral free trade agree-
ments (FTAs) with their key trading part-
ners. Thus, for any single country, height-
ened competition is a part of the globalisa-
tion process and there are other frame-
works too – bilateral, regional and multilat-
eral – that further economic liberalisation.
Fact four: Asean economic cooperation is
a top-down initiative and hence aware-
ness among stakeholders is low and un-
even.
Looking back at Asean's history, one notes
that Asean was instituted in 1967 so as to
promote peace and stability and economic
cooperation came much later in 1976 to
the agenda. Slowly economic cooperation
became a form of diplomacy and most of-
ten was carried out in the foreign ministry
of a country, in consultation with the com-
merce or trade ministry.
This led observers of trade agreements
to say that economic regionalism in South-
east Asiais a subjectof politicalelites, with
almost no involvement from other stake-
holders. This has been accompanied by a
generalised low level of awareness of rele-
vant economic cooperation measures, par-
ticularly among the end-users. With the
looming deadline of 2015, voices from the
private sector have begun to be heard.
However, the advocacy for trade initiatives
is not unanimous in nature and is often
driven by the relative strength of particu-
lar firms that bring in foreign direct invest-
ment in the country.
Fact five: The AEC should be seen in con-
junction with the Asean Political-Security
Community and Asean Socio-Cultural
Community.
An economic community in Asean entails
increased economic cooperation, deliver-
ing on free flow of goods, services and in-
vestments, equitable economic develop-
mentandreducedpoverty.Apoliticalsecu-
rity community works towards regional
peace and stability and a socio-cultural
community encompasses regional cooper-
ation in areas like protection of the region-
al environment, limiting the spread of con-
tagious diseases, combating transnational
crime, and cooperation in responding to
natural disasters. It is hoped that all this
put together will eventually cultivate a
sense of regional identity. Hence, the AEC
should not be seen in isolation when judg-
ing whether Asean can deliver on its com-
munity-building commitments.
Given these facts, one should conclude
that the AEC should be seen as a work in
progress, where some promises have been
met, but significant challenges remain. It is
only from 2003 that the 10 diverse econo-
mies started their journey towards the
AEC. Awareness both among policymakers
and final users is just beginning. Of
course, Asean will be repeatedly criti-
cised for weak institutions and that
may be attributed as the main cause
of unfinished implementation. But
only time will tell how far that can be
changed. With the AEC and Asean
Charter, the region has already
evolved as a rules-based association.
Nevertheless, now, more than ev-
er, is the time when the countries
should come together to strengthen
the economic community. The global
economy has been in a constant state
of flux since the 2008 economic cri-
sis, and the exponential growth in so-
cialmedia has meant that every event is in-
stantly transmitted and discussed all over
the world. In such an environment, any
form of cooperation among countries is
welcome.The AEC-2015may notbeable to
deliver on a fully integrated single market
and production base for Asean stakehold-
ers,but itwillhelpAseanmemberstowith-
stand the next global crisis with confi-
dence, whenever it arrives.
A longer version of this article was earlier
published as an ISEAS Perspective.
❚ The writer is an ISEAS fellow and lead
researcher (economic affairs) at the Asean
Studies Centre, ISEAS, Singapore
By Tarun Kataria
AS we ponder the fate of Greece while
watching our portfolios being whip-
sawedby apotential Grexit,weought ac-
tually to ponder the fate of the European Union
(EU) itself.
TheEU traces its origins to the European Eco-
nomic Community formed in the mid-1950s.
The Maastricht Treaty established the EU in its
current form and affirmed an “even closer un-
ion” between its member countries. It was man-
dated that decisions were to be made at the "EU
level” rather than in Berlin, London or Paris. It
was meantto be asystem ofsupranational insti-
tutions and intergovernmental negotiated deci-
sionsbymemberstates.Itwasalsomeanttocre-
ate a unified market of 500 million inhabitants
with a combined GDP of circa US$18 trillion to
rival the United States of America with 350 mil-
lioninhabitantsandUS$17trillion inGDP.Tofa-
cilitate trade flows, the euro (currency) was in-
troduced in 2002.
Foranumberofyears thismodelofthe“unit-
ed states of Europe” worked well. Jobs were cre-
ated, European MNCs found their rightful place
intheworld,intra-Europeantradeflowsexpand-
ed, consumption grew, exports rebounded, the
peripheral economies enjoyed unprecedented
growth, poverty declined and generally the Un-
ion prospered. Indeed there was talk of the “Eu-
ropean Dream” and that Europe would domi-
nate the 21st century!
Lessthanadecadelater,theEuropeandream
has morphed into nothing short of a nightmare!
So what happened? Through the entire evolu-
tion of the EU it was clear that the euro, while a
well-intended construct, was deeply flawed.
Theassumption thatall memberstates couldbe
managedby a single forex and interest rate poli-
cy was, to put it mildly, nuts! Yet despite its
structural flaws, adjustments to the broader
construct of the EU could have been made. The
onset of the global financial crisis (GFC) exacer-
bated the massive fissures in this construct.
The GFC served to create two speed econo-
mies, Germany and the rest. Indeed, in the lead
uptotheGFC,Germanywasthebiggestbenefici-
ary – both politically and economically – of the
stability the Euro provided.
Although one can easily argue that Germany
was clearly better managed than Spain or
Greece, Germany and Angela Merkel’s response
to the GFC has served to create an existential
threat for the EU.
To insist, for example, that fiscal austerity is
the answer to the EU’s problems was a deeply
flawed economic argument. Further, to deny
Greece a partial debt write-off is unhelpful (re-
call that Germany was allowed three separate
write-offs including under the US-led Marshall
Plan). In addition, to insist that Greece run a pri-
mary surplus immediately is simply untenable
(recall that Germany was one of the first mem-
ber states to fail the 3 per cent deficit to GDP
test which was the basis of the euro!).
Indeed her operating style is now “less Eu-
rope” and not more Europe. It’s also about each
member country being left to its own devices to
exit their recessions without having control of
monetary policy.
It’s clear that the German hegemon now con-
trols outcomes as opposed to “intergovernmen-
tal negotiation”. The European Commission’s
voice is simply not heard anymore. The Europe-
an Central Bank had to jump through endless
hoops to get QE initiated in Europe. So while the
Chancellor’s style resonates well with the Ger-
man electorate, it does little to relieve pressure
on the very existence of the EU.
As a former German foreign minister recent-
ly said: “In the 20th century, Germany de-
stroyed itself and the European order twice… in
an effort to subjugate the continent. It would be
a tragedy and an irony if… a unified Germany
were to ruin the European order once again.”
THE BACKLASH
Germany’sapproachto “problem solving” iscre-
ating a massive political backlash in a number
of member countries. David Cameron has
promised the UK electorate a referendum on
the EU; the Greek Syriza Party, a radical left
wing party, can attribute its victory to
Germany’s push for austerity; Finland’s True
Finns Party and Marine le Pen’s National Front
in France want to exit the EU. Right wing parties
have won substantial majority in other mem-
ber states. Indeed I would argue that the break
up of the EU is almost inevitable.
So what can be done to save the EU? There
are two choices. One, someone convinces the
Chancellortobackdownandgivemembercoun-
tries some breathing room. The other option is
for Germany to leave the euro – ie a “Gexit” in-
stead of a “Grexit”. Here’s why.
The “new deutsche mark” would be a strong
currency, something that will assist Germany
manage the onset of growth-led inflation. A
weaker euro would assist the rest of the EU
member countries reflate their economies,
something that the current construct does not
allow. In addition, Germany will have strong
“new DM” assets with weak euro liabilities. For
Greece to have weak “new drachma” assets and
strong euro liabilities is unthinkable. So as radi-
cal as a “Gexit” sounds, it is the only sensible so-
lution to the long-term stability of the EU.
❚ The writer is a private equity investor and
independent director
Although the AEC is a regional initiative,
its implementation is carried out by the
national economies. Initiatives like
national treatment of foreign investors
have to be adopted in domestic law and
policy decisions. PHOTO: REUTERS
AEC should be seen as a
work in progress
It is only from 2003 that Asean economies started their journey towards the AEC.
Some promises have been met, but major challenges remain. BY SANCHITA BASU DAS
❚❚ COMMENTARY
Forget Grexit. It’s Germany that should exit the EU
As a former German
foreign minister
recently said: “In
the 20th century,
Germany destroyed
itself and the
European order
twice . . . in an effort
to subjugate the
continent. It would
be a tragedy and an
irony if . . . a unified
Germany were to
ruin the European
order once again.”
David Cameron
should get the Scots
on board over EU
Economic cooperation is
envisioned as a gradual
process in Asean, with
long-term aspirations,
rather than a mechanism
with strict rules that apply.
The Business Times | Wednesday, May 20, 2015
OPINION | 25