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LONDON (Reuters) - Prime Minister David Cameron risks wrecking Britain's financial center with his bid to wrest back powers from the European Union ahead of a vote on whether to leave, one of the UK's most influential Europhiles says.
Peter Mandelson, once one of Britain's most powerful men, told Reuters Cameron was imperilling the country's future by promising to claw back powers from the EU and to hold an in-out membership referendum by the end of 2017.
Attempts to negotiate a new type of EU membership for Britain would fail, the former government minister and EU trade commissioner said, while a 'Brexit' would isolate its $2.5 trillion economy and undermine the City of London's position as Europe's financial capital.
"I don't see any circumstances in which Britain's financial sector and the City of London can thrive or flourish if we are not an integral part of the single financial services market in Europe," Mandelson said in an interview which kicks off a four-day Reuters euro zone summit featuring interviews with Europe's top policymakers.
"We risk killing the golden goose, which in any case has done a pretty good job of shooting itself in the foot already, but which nonetheless remains a key component of our GDP and an important economic driver in Britain."
London is home to over one third of the global foreign exchange market, though its bankers have been castigated by voters and politicians for causing the 2008 financial crisis.
Mandelson, one of the architects of former Prime Minister Tony Blair's "New Labour" Party and a cabinet minister in the governments of Blair and Gordon Brown, said Cameron's European policy was schizophrenic because so many members of his ruling Conservative Party wanted him to get Britain out of the EU.
"It's rather schizoid. He describes the EU in positive and flattering terms ... then on the other hand the other David Cameron talks about the EU as if it's some alien body, some sort of monster, something that's attacking us rather than serving us."
Mandelson warned that Cameron was staking Britain's future place in the world on an unpredictable referendum that could easily be hostage to domestic issues.
"When you think what's at stake for us politically and economically it's a heck of a gamble," said Mandelson, a member of a group of senior politicians who have come together since Cameron's January 23 speech offering a referendum to campaign for British to stay inside the EU.
Mandelson, who refused to call the outcome of a possible referendum, said the British public were split three ways: one third keen to stay in, one third ready to leave and one third wanting to reform the EU.
Cameron says he also wants Britain to remain a member of the EU, but that the 27-member bloc needs reform, greater accountability, and that Britain needs a new settlement.
He insists a new round of euro zone integration will require treaty change, giving him the opportunity to renegotiate Britain's terms of EU membership.
Critics fear he will get little change from EU partners and could inadvertently push Britons into deciding to leave.
Mandelson said Britain could not cherry pick its membership terms "as if it's a cafeteria service where you bring your own tray and pick out what's on offer and then leave.
"That's not how the European Union works."
If Britain sought consensual change as a central player in European affairs then London could defend its economy and help shape the EU's future, he argued.
"If on the other hand we are saying you have got to revise all your treaties to create a separate category of membership for Britain, then forget it," Mandelson said.
He said isolation and ultimately insignificance awaited Britain outside the EU, whose $16.5 trillion economy makes up about 22 percent of global gross domestic product, according to IMF data. Britain's economy makes up 3.4 percent of global GDP.
"If Britain was out of the EU, we simply would not have an economic future in setting ourselves up as some Swiss-style safe haven for derivatives trading and hedge fund industries and for those who want to dodge taxes," he said.
Mandelson, who served as European Commissioner for trade from 2004 to 2008, said many British people were reluctant Europeans, but that British interests were best served by being at the top table of European decision-making.
"It boils down to this: Britain's ability to shape the regulatory agenda from the inside," he said. "Frankly I think the City has got to do a darn site better job of ... bringing home to people the importance of its role in our economy and what the dangers are of our drifting apart from Europe."
As the euro zone economy recovers from a sovereign debt crisis after the European Central Bank's pledge to save the euro, Britain could find its financial sector migrating to the continent if it tried to distance itself from Europe, he warned.
"If we're setting ourselves at odds with the rest of the continent you are going to see banks, exchanges and clearing houses which are backed by the ECB being seen increasingly as more secure and safer," he said. "This is really the great danger."
Europe's elite needed to do a better job of explaining the EU to its population, Mandelson said. It could no longer rest on the case that it had put an end to a century of war and conflict but had to show that only as a united bloc could it compete economically with emerging powers.
"Otherwise we're simply not going to be able to compete with the continental-sized powers liked the United States or China or India and Brazil and others whose economies are growing faster than ours and against whom we are facing a relative decline."
Writing by Guy Faulconbridge. Editing by Mike Peacock