Behind the UK’s hemming and hawing over the EU

January 29, 2013, 7:32 PM UTC
UK Prime Minister David Cameron

FORTUNE — In one big lunge, UK Prime Minister Cameron’s promise of an in/out referendum on membership of the European Union has made explicit a number of simmering issues that are both complex and  consequential — for Britain and well beyond.

Since the first stages of the nation’s participation in the EU, Britain has viewed membership as a means to an end — namely, securing the upside of the welfare-enhancing trade that comes with free access to hundreds of millions of relatively well-off consumers on the continent.

While this may influenced their thinking, this was not the major motivator for other key EU members (particularly, France and Germany). For them, economic and political union was, and remains, an end in itself. It is driven by both internal and external considerations: an ever-closer union that decisively overcomes the threat of war on a continent that historically has seen way too many of them (a success recently underlined by the Nobel Peace Prize awarded to the EU) and that competes on a more equal footing with other large economic powers (initially the United States and now China too).

This simple distinction between Britain and other EU members also explains the strikingly opposing reactions triggered by the eurozone’s debt crisis. For Britain, it calls for revisiting the terms of its relationship with Europe given that the economic payoff is now lower (both immediate and in net present value terms). For France and Germany, it is about the need for even deeper regional integration, supplementing monetary union with greater fiscal union, political integration, and banking union.

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Ironically, Prime Minister’s Cameron’s referendum initiative links the two in an ultimately incompatible fashion.In his speech last week, Cameron identified a three-step path to govern EU membership should the Conservative Party lead the next government: Assess how the eurozone evolves; secure better terms for Britain; and put the package to an in/out referendum in 2017.

In a rather clever way, the approach serves immediately to pacify an increasingly vocal minority of the Conservative Party; limit voter defection to the UK independence Party and its firebrand leader Nigel Farrage; and warn France and Germany about the consequences of going too far with measures to better integrate the eurozone, which constitutes the 17-member inner core of the 27-member EU.

But the referendum is also an attempt to reconcile increasingly inconsistent national and regional priorities. In attempting to do so now in this way, Cameron can score some internal political points by risking some reduction in the country’s growth, given that long-gestation investments will now carry a higher medium-term risk premium on account of the increased uncertainties about EU membership.

Needless to say, the referendum was not received with much enthusiasm on the continent, and understandably so. At the minimum, it complicates ongoing efforts to overcome the region’s debt crisis. It could also detract from the eurozone’s multi-year recovery process, structural elements of which need to be put in place rapidly.

Already, it is hard to see the eurozone returning rapidly to robust growth and comprehensive financial stability. As such, and with full membership of the eurozone off the table, Britain will have a simple choice to make by 2017 if it adheres to the three-step plan: Stay in with only minor modifications to the terms of engagement, thus accepting de facto lower status in an even more stratified EU; or exit and seek some type of association agreement that limits the hit to growth and investment.

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For its part, the EU will take steps in the interim period to reduce the probability that it will again become a hostage to national preferences for backward movement on regional integration. Indeed, regardless of what Britain decides, there will be a fundamental change in how the different levels of institutional are viewed.

From now on, expect access to the EU to come with much stronger expectations of full membership among the smaller eurozone, its inner core.  The time spent in the outer core will no longer provide the wiggle room that the UK has exploited so skillfully for more than a decade now. Instead, it will be seen more explicitly (and contractually) as a presumed stepping stone to the eurozone, and one requiring consistent forward motion.

Whichever way you look at this, Prime Minister Cameron has materially increased the probability that, beyond 2017, Poland rather than the UK will be among the three largest economies defining the scale and scope of European regional integration. Let’s hope that he also has a Plan B that would limit the potential downside to Britain’s standard of living.

Mohamed El-Erian is the CEO and co-chief investment officer of PIMCO. President Obama recently appointed El-Erian to head the U.S. global development council.