The government is pushing hard for more euro zone integration to stabilise the fracturing 17-nation bloc, knowing full well it may mean a weakened hand and damaging long-term consequences for European Union nations like itself outside the single currency.

Britain has had to fight hard to make itself heard in the euro zone crisis, quarrelling privately and publicly with Paris and Berlin to try to speed along a resolution to a crisis that threatens the British economy, as well as those of its European neighbours.

Prime Minister David Cameron heads to Cannes in France on Thursday hoping to persuade the rest of the G20 economic powers to explicitly tell the euro zone to get its house in order.

As one of the 10 EU nations that does not use the euro, and also not wanting to fund further bail outs, Britain has little influence in a crisis which will dictate its own fate.

Greater union within the euro zone is seen by London as the only logical long-term fix but officials acknowledge that would also risk marginalising Britain from European decision making and threaten its competitive advantage in crucial sectors.

It's Solomon's choice -- the choice between a euro zone that implodes, inflicting huge collateral damage on the UK and blowing apart the coalition government's plans to go into the next election with a growing economy and stronger public finances, said Philip Whyte, a senior research fellow at the Centre For European Reform think tank in London.

Set against that, (there is) the longer term problem of a more tightly integrated euro zone resulting in growing British isolation in the European Union.


Britain has long frustrated its European counterparts, keeping its distance while enjoying the fruits of the single market, lecturing from afar and sidestepping any EU rules seen as too damaging to London's precious financial centre.

But it is hard to see how Cameron can position Britain to benefit from the euro zone crisis, regardless of its outcome.

Cameron's task is made more complicated by strong opposition to Europe among a right-wing rump of his Conservative party.

More than a quarter of Conservative members of parliament defied the prime minister last week and backed a non-binding call for a referendum on EU membership.

Those eurosceptics are likely to seize on any evidence that Britain is being hurt by closer integration in the eurozone.

Officials dismiss the idea that Britain has been sidelined so far, pointing out behind-the-scenes conversations that have helped smooth the way and some success in keeping the full EU at the table for many discussions.

They add that it would be absurd to suggest Britain would be better off inside the euro zone, so the sidelines are the safest place to be. But the truth is there is nowhere to hide.

Any collapse of the single currency bloc would be catastrophic for Britain, which sends more than half its exports to the EU. Even if some nations, such as perhaps Greece, abandon the euro but the bloc survives, the immediate market turmoil could still drive Britain back into recession.

Beyond those short-term horror scenarios, however, lies a worrying long-term prospect for Britain, even if the euro zone pulls through relatively intact, where its interests in the single market could be eroded.

We have been able as a coalition government to get Britain out of the euro zone bailout and keep the (EU) budget increases down, British finance minister George Osborne said this week.

We've now got some serious negotiations to make sure that Britain's interests are protected as the remorseless logic of monetary union leads to greater fiscal integration.

Cameron fought tooth and nail last month to secure an agreement that any further integration would not be at the cost of the wider bloc. But London, seen as a hive of unfettered financial speculation and loose regulation by many on the continent, is exposed.

There hasn't been much evidence as yet that the 'outs' have been negatively impacted by this drive for further integration in the euro zone -- but that could well change, said Mats Persson, director of the Open Europe research and lobby group.

The big risk is that the euro zone starts to take decisions as a bloc.


Britain, which has a veto in Europe over areas such as tax, has to adhere to many rules and regulations agreed at EU level and some changes are voted through on a majority basis.

A more integrated euro zone could have the power to outmanoeuvre Britain, demand the use of more majority voting and take common positions that corner non-euro nations or leave them at a disadvantage within the single market.

The risk would be that euro zone ministers might meet in the weeks of some financial turmoil and decide to beef up, say, a ban on short selling and agree a common position, and then they get the Romanians and the Bulgarians on board and effectively outvote the Swedes and the British, Persson said.

The future for Britain is further complicated by the make up of its coalition government. The larger Conservatives are eurosceptic, the smaller Liberal Democrats are the opposite.

Calls from Conservative eurosceptics for Cameron to claw back more powers from Europe will only intensify.

There's a view among the most eurosceptic that Britain's future does not lie in the EU in any case, Whyte said. They are saying Britain should withdraw from the EU and then trade with it governed by WTO rules.

However, government officials dismiss this best of both worlds scenario, where Britain could leave the EU and enjoy the benefits of trading with Europe without the legislative burden.

Instead, officials say Britain must play the patient neighbour to the euro zone, helping to put the fire out while trying to influence the post-crisis era and tempering some of the more extreme eurosceptic views within Cameron's party.

The idea that Europe would stand by and allow Britain to become a low-cost, financial hub on its border is just very unlikely, one official said.

(Reporting by Matt Falloon; Editing by Peter Graff)