Cameron, Merkozy – what went wrong with the negotiations?

When two parties in a negotiation both think the other is bluffing, we’re in an interesting situation from a Game Theory perspective. And if neither of them actually ARE bluffing, then there’s a high probability the negotiation won’t end in an amicable settlement.

My take (until last Friday) on the negotiations on the future of the Eurozone was that everything was being set up for a few concessions to be made to the UK on the issues around financial regulation, at which point Cameron could claim a big success back home in the UK, but basically the UK would sign up to what was proposed.

So I was surprised at the outcome on Friday. What happened in the negotiation process? Did Cameron push just too far? Or was Sarkozy perhaps keen to have a split for his domestic political reasons? Was it a failure of negotiation process or technique?  I’ve certainly seen negotiations where there was an area of potential acceptability for both parties, but they never reached it and the deal fell apart.

I wonder whether Cameron thought he was still in the negotiation process – and that the other countries would come back with a modified offer to respond to his demands. But in fact, they came back and simply said “no - the negotiation is over. Just go home”.

And that’s what he did.

What does this mean? The scary thing for Cameron, the coalition government in the UK and the whole country to some extent is that matters are out of our hands. If this is the beginning of the Eurozone pulling itself out of its economic mess, and by 2015 we see real signs of recovery, with employment rising in countries such as Greece and Spain, and everyone playing by the new economic rules, then the UK will look marginalised and Labour must have a great chance of winning the next UK election.

If, on the other hand, the Eurozone lurches from bad to worse, with some combination of further default, countries leaving the zone, or major civil unrest, then Cameron will be a hero (at least in the UK), and will win the election.  And the UK may be well placed to appeal to investors from the rest of the world who may want to avoid the problems in the Eurozone.

But which way it will go is out of the UK’s hands. To a large extent, we can only stand and watch.

Might things get even nastier between the UK and our continental friends? I don’t think so. The UK’s current account deficit with the EU in 2010 was £46.6 billion; our surplus with the rest of the world was £10.3 billion. The UK is also a significant net contributor to the EU budget – around £9 billion last year. So other countries have some good reasons to make sure the UK is not pushed into any more dramatic action – arguably, they have more to lose than the UK, so the prospect for instance of a more protectionist approach seems unlikely.

So if much depends on the economic success of the Eurozone, for the UK and every country in Europe, what are the chances there? How have recent events affected the probabilities? Because that is what is key for business, rather than the pure political implications, and it is of great interest to procurement executives, trying to plan and forecast for next year and beyond.

We’ll come back to that tomorrow.

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