Cameron to tread tricky path at EU summit

David Cameron will have to play a subtle game to get Britain's way in the European Union

David Cameron travels to Brussels this week having already given his own MPs what he hopes will be a glimpse of the future.

On Monday, Home Secretary Theresa May announced that the UK would exercise its right to opt out of 130 EU-wide measures on crime, policing and justice.

The prime minister hopes to begin a much wider renegotiation of Britain's relationship with Brussels which would see other powers - for example, on social and employment policy - repatriated.

It is unlikely this process will begin in earnest at this week's summit of European leaders, but there could be an opportunity for David Cameron at least to put down a marker.

The President of the European Council, Herman Van Rompuy, has produced an interim paper - Towards a Genuine Economic and Monetary Union - which considers the prospect of giving the eurozone a "fiscal capacity".

It sounds deadly dull, but lying behind the opaque language of the Brussels bureaucracy is quite a radical idea - that the 17 eurozone countries might have their own budget.

That could be good news for the prime minister on two fronts.

Referendum calls

Although the European Commission wants to avoid any link between a discussion of a future eurozone budget and a debate over the size of the main EU budget - which applies to all 27 member states - Mr Cameron wants the reverse.

He believes that if eurozone countries stump up more, partly as a buffer against future financial shocks, Britain could contribute less to the main EU budget as a result. And that would cheer many of his MPs.

Herman Van Rompuy has big ideas for the eurozone

But there's potentially a bigger prize.

Opening up such a blatant "two-tier" Europe could help him press his demands for Britain to have a looser relationship with Brussels - and ultimately may allow him to put that new "settlement" to the British people in a referendum.

That is important because, first and foremost, strategically David Cameron, as a Conservative, would wish to achieve a single market in Europe which has as minimal an impact on sovereignty as possible, and with as few regulations as are absolutely necessary.

But politically he is also playing a tactical game.

There is growing pressure on him to offer a referendum on EU membership before the election, or to include a pledge to do so in the next Conservative manifesto.

More than 100 politicians are calling for this - a significant and vocal minority - and around 40 of them, including two MPs who were until recently government ministers, met at Westminster this week to organise a campaign.

As Mr Cameron is in coalition with the pro-EU Liberal Democrats, an in/out referendum is unlikely to happen before the 2015 election. But even some of his own cabinet ministers say that threatening withdrawal from the EU could lead to more concessions from Brussels.

The prime minister sees this as a risky game and believes an EU exit would damage British business.

Merkel's Muppet mockery

So the more he can convince his MPs that he is in the process of bringing powers back to Britain, the less likely the clamour for complete disengagement.

Yet he has to be careful not to overplay his hand in Brussels if he wants to forge a new relationship. There are reports that the German Chancellor, Angela Merkel, likens him to Statler and Waldorf, those grumpy hecklers in the Muppet Show, criticising from the sidelines.

European Commission officials were clearly irritated that there was not more discussion with them about the UK's decision to opt out of crime and policing measures - and the lack of meaningful conversation about the areas where Britain might choose to reinstitute co-operation in the future.

And some of the UK's former senior diplomats, dining privately in London this week, believe the government's approach to the EU might actually be counter-productive.

One of them indicated that instructions which emanated from the Foreign Office could raise eyebrows - but those from Number 10 or 11 Downing Street were "lunatic". In other words, diplomats were expected to deliver on near-impossible demands.

Take banking union, the main topic of discussion at the summit.

'Blocking minority'

The supervision of financial institutions, and indeed the baling out of banks, inside the eurozone is seen, in principle, as no bad thing by Downing Street.

But it does not want this new arrangement to impact adversely on the City of London - or branches of UK banks inside the eurozone.

Behind the scenes, British officials and EU officials think they have reached a position they both can live with - that is, safeguards for Britain through the existing European Banking Authority.

But the European Commission believes that an idea floated in British circles of a "blocking minority" - whereby the UK and other non-eurozone countries would effectively have a right to veto over what goes on inside the eurozone if they believe there's a danger of suffering collateral damage - would not be legally enforceable. Therefore it is an impossible demand.

The question is how the prime minister reacts to this at the summit. If he says in simple, straightforward terms that he will veto anything that might harm the City of London, he will get a big cheer from his own party.

But by not being more diplomatic he might further diminish the reservoir of goodwill that he will need to achieve his much-cherished objective of forging that new, and less restrictive, relationship with his EU partners.

The most likely scenario is that big decisions will simply be put off this month - but with more summits scheduled for November and December they cannot be delayed for long.