LONDON (Reuters) - Prime Minister David Cameron survived a test of his party leadership on Tuesday after eurosceptic Conservative rebels failed to win backing for tougher curbs on the flow of power to Brussels from Britain.
Financial markets are on alert for signs of disunity in the Conservative-Liberal Democrat coalition which could threaten its viability and derail a plan to slash a budget deficit running close to 10 percent of national output.
While the spotlight has largely fallen on troubles among the smaller Liberal Democrats since the coalition came to power in May, the European Union bill debate will remind markets of the tensions that exist on the Conservative side of the partnership.
Infighting over Europe during the 1980s and 1990s played a big part in the demise of previous Conservative premiers Margaret Thatcher and John Major but, for now, the eurosceptics appear to lack the teeth to damage Cameron.
Party rebels, who blame the Conservative leadership for diluting manifesto pledges on Europe, failed on Tuesday to win enough support for a more hawkish stance.
Only 39 lawmakers voted for an amendment declaring the sovereignty of the UK parliament in relation to EU laws, while 314 voted against.
The flagship European Union bill, which has survived a vote to halt its passage into law, is meant to defend Britain against unwanted EU rulings and laws and would mean any wholesale changes at EU level would have to pass a British referendum.
Conservative Europe minister David Lidington had earlier tried to soothe the rebels concerns, telling BBC radio the legislation would shore up sovereignty and give ministers next to no “wriggle room” on Europe.
“Any future changes to EU treaties, however minor, will need to be ratified by a full act of parliament,” Lidington said.
“For the first time ever ... parliament has the final say in deciding whether EU law has effect in the United Kingdom.”
But Conservative rebel Bill Cash told Reuters that “without a doubt” the bill had been watered down as a result of the coalition arrangements — part of an “alarming stream of acquiescence.”
“Which is more important, the coalition or the national interest and the sovereignty of parliament?” Cash asked.
Among dozens of proposed changes to be debated by parliament in the coming days, some Conservative rebels want a referendum on Britain’s EU membership if British voters were to reject any future EU treaty.
For Europe, the bill is a signal of the British government’s changing attitude towards its biggest export market since the Conservative-Lib Dem coalition replaced Labour last May.
The Conservatives have also raised eyebrows in Brussels by abandoning the mainstream centre-right European People’s Party in the European Parliament for a smaller, anti-federalist group.
Some on the Conservative right were unimpressed by the decision to join forces last year with the pro-Europe, centre-left Lib Dems in a coalition government, fearing the partnership would lead to watered down policies and instability.
So far, however, the Lib Dems have had the worst of life in the coalition, signing up to several policies that they had opposed during the 2010 election campaign — such as higher university fees and the speed of government spending cuts.
Editing by Mark Trevelyan