David Cameron had not expected to win outright. But Britain’s electorate had just presented the prime minister with a spectacular election victory and the rest of Europe with a big problem.

Mr Cameron’s victory means that he now has to make good on his promise to put the country’s membership of the EU to a referendum, a high-risk strategy intended to pacify his eurosceptic party and settle a question that has bedevilled British politics since the country last voted on the issue 40 years ago.

Angela Merkel, Germany’s chancellor, declared Mr Cameron’s victory as ‘simply great’; François Hollande, French president, invited the British leader to Paris. But behind the diplomatic niceties was a simple calculation: the time has now come for Europe to address the ‘British question’.

David Cameron must balance pursuit of a reformed EU against the anger of his party’s eurosceptic fringe if he is to avoid losing a referendum that could see Britain leave the economic bloc

While Europe has been obsessed in recent years by a potential Greek exit from the eurozone, the possibility of a British exit from the EU has suddenly assumed even greater significance for the 28-member club. “For Britain it would be a disaster; for Germany it would be a catastrophe,” admits one senior German minister.

For Britain, a trading nation, unlimited access to a single market of 500m consumers could be called into doubt. Deutsche Bank this week announced it could move operations out of Britain if the country voted to leave in a referendum, which Mr Cameron has promised by the end of 2017. Brexit could even accelerate the break-up of the United Kingdom: polls show Scots remain firmly in favour of EU membership.

The departure of Britain would be an unprecedented blow to the European project. The UK might be a troublesome member that is badly trying the patience of its allies, but it adds global reach, military force, budgetary discipline and liberal instincts to a Europe suffering a crisis of confidence.

Both sides have much to lose. The question being asked in European capitals is what is Mr Cameron’s price — he insists there has to be fundamental reform of the EU for Britain to remain a member — and can we afford to pay it?

This week he will introduce a parliamentary bill to pave the way for his in-out referendum; Philip Hammond, foreign secretary, says he wants to move ‘fast’, with ministers eyeing a vote as early as 2016.

Mr Cameron has deliberately set the bar at what he believes is a realistic level — a view not shared in some other European capitals — because he wants to secure his objectives and then go on to campaign for Britain to stay in the EU.

Although he leads a eurosceptic party, the majority of Conservative MPs see the case for remaining part of the world’s richest single market. David Davis, a hardline eurosceptic, estimates that some 60 of the total 331 Tory MPs will vote for a Brexit whatever deal Mr Cameron negotiates in Brussels. But dozens of others are waiting to see: if the prime minister fails to get a better deal, the party’s uneasy peace on Europe could be blown apart.

British public opinion, according to most polls, is in favour of the country staying in, but last year’s close-run Scottish independence referendum is a reminder of how such votes can shred nerves. Although the main opposition parties, most business groups and the City of London will oppose Brexit, the debate would take place in a hostile eurosceptic media atmosphere.

Mr Cameron needs a good deal in Europe and his strategy is built around three main areas: making the EU more competitive, reducing its power in relation to member states and curbing the access of migrant workers to British welfare — an attempt to allay public concerns about the scale of immigration.

While Mr Cameron’s approach is nowhere near tough enough for some in his party, the question is whether it goes too far for his negotiating partners.

There are two looming obstacles. The first is that eastern European countries are opposed to what they see as Mr Cameron’s discriminatory approach on benefits for migrant Poles, Lithuanians and others who come to Britain to work.

“As soon as you have a discrimination between EU citizens it is forbidden in the treaties,” says Jean-Claude Piris, a former top legal adviser to EU leaders.

The second big problem is the opposition of virtually every EU member state to Mr Cameron’s desire for a ‘full-on treaty change’ to enshrine his new deal. No country wants to go through the trauma of trying to ratify with a national referendum a new European treaty. Mr Hollande and Ms Merkel do not want British neuralgia interfering with their 2017 domestic election campaigns.

Mr Hammond said last week that treaty change was not needed ‘for the politics’ but simply to ensure that an agreement was legally watertight.

But senior British officials admit there is a significant risk of failure. The UK demands could trigger an unmanageable race for concessions from other member states.

Above all, senior EU officials say Britain’s growing marginalisation in Brussels will make it hard for Mr Cameron to demand favours. “The [Brits] must not overestimate their leverage — they’ve done so in the past. Solutions can be found,” says one senior official who will be closely involved in the talks. “But asking for too much, aiming high, will bring the negotiation to a dead end. Other member states have domestic politics to handle as well.”

Mr Cameron told Jean-Claude Juncker, European Commission president, that he had to be able to sell the deal to ‘the man in the pub’; then, he believes, he can end the debate about Britain’s role in Europe and prevent it from ‘sleepwalking towards the exit’.

“People say no, no, no, that cannot possibly be done until the point when they say OK we will do it,” says Mr Hammond. “ The EU has shown time and again that for all its rhetoric, in practice it is very pragmatic when it needs to get something done.”

Published in Dawn, Economic & Business, May 25th, 2015

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