THE MAIN CASUALTY OF BREXIT WILL BE THE EU
Photo: Yves Herman/Pool Photo
On Wednesday last week, the United Kingdom’s Permanent Representative in Brussels activated Article 50(2) of the Treaty of the European Union. In doing so, he started an irreversible process that will see the UK leave the EU on 29th March 2019.
The story that preceded this is long and complex but the reason for ‘Brexit’ is ultimately very simple: the majority of the British no longer consider EU membership to be worth it.
In contrast to the idealism of their European counterparts, the UK has always seen its relationship with the EU as a balance of costs and benefits. For a long time, the benefits outweighed the costs. Membership of the EU’s single market meant that British firms could trade and invest in a growing European marketplace without the encumbrance of tariffs or administrative barriers, providing a vital boost to prosperity.
This more than compensated for the downsides of membership, above all the loss of national sovereignty, but also open borders, burdensome regulation and large contributions to the EU budget.
However, this changed with the onset of the eurozone crisis last decade. As the continent descended into economic stagnation, poisoning the political atmosphere, limiting economic opportunity and fuelling migration into the UK, the balance of costs and benefits shifted. The loss of national sovereignty is a heavy price to pay for anything and the compensation must be large. In the new political circumstances, this was no longer the case.
The effect in Britain was a surge in support for the UK Independence Party (UKIP), whose sole demand was a referendum on Britain’s membership of the EU. This caused alarm in the ruling, pro-European Conservative Party whose supporters started to defect en masse.
To neutralise the threat from UKIP, the prime minister at the time, David Cameron, took a massive political gamble. In 2013, he announced his intention to re-negotiate Britain’s terms of membership of the EU – above all, new limits on immigration - and submit these terms to referendum. Voters would get to choose between remaining in the EU on new and better terms or leaving altogether.
Opinion polls at the time suggest Cameron would easily have won a referendum that offered this particular choice. However, political reality brutally intruded on his plans when his European counterparts refused to engage in meaningful negotiations. As a result, Cameron was instead forced to offer the British people a simple choice between remaining in the EU on existing terms or leaving.
On 23rd June 2016, the British people delivered their historic verdict.
In accordance with Article 50(2), London and Brussels will now engage in two years of negotiations over the terms of the UK’s departure.
At the core of this negotiation is the question of money: how much London must pay as a ‘divorce’ settlement. The two sides must also work out how to disentangle around 700 areas of potential policy overlap ranging from trade to policing to funding for academic research. And they must resolve questions about the status of EU citizens in the UK and British citizens in the EU and decide what regime applies on the UK’s border with Ireland.
From a British perspective, the ideal is a mix of cessation in some areas (the free movement of people, the jurisdiction of the European Court of Justice, agriculture and fisheries, and the UK’s EUR21bn annual subscription fee) and continuity in almost everything else.
But whether the UK can achieve this is another matter. On the face of it, the UK is by far the weaker party, which must negotiate a deal with an opponent seven times its size whose reserves of goodwill towards the British are in short supply. Worse, whatever terms the UK agrees with the European Commission must be ratified by 27 national parliaments, eleven regional parliaments and the European Parliament. If any one of these rejects the deal for whatever reason it chooses - including simple punishment for a perceived act of betrayal - then the deal fails.
In this context, many are warning of a ‘cliff edge’ scenario where everything comes to an end, including free trade. Not only would this mean the imposition of tariffs on British exports to the EU. It could also see an outflow of investment as foreign companies with operations in the UK move them to the EU. In the face of a 10% tariff on cars, the massive UK automobile industry is at particular risk. So too is the City of London, the engine of the British economy, which could lose its status as the eurozone’s offshore financial centre.
There could also be political costs. In Scotland, the regional parliament has just voted for a new referendum on independence which the Scottish government hopes to win on the back of a bad exit deal for the UK.
In the meantime, the UK’s departure creates an opportunity for the EU to embark on a new phase of integration, shorn of its most troublesome and obstructive member.
The EU has a long history of turning crises into opportunities, and has already responded to Brexit with some bold new thinking about its future. Last month, the president of the European Commission, Jean-Claude Juncker, published a report outlining various scenarios for a more closely-integrated EU.
This, in fact, is essential for overcoming the eurozone’s inherent structural defects and ending economic stagnation in the Mediterranean. It is now clear that the EU must support its monetary union with a fiscal union, involving a central treasury with the power to tax Europeans and transfer funds from north to south. To give it legitimacy, this treasury needs an executive to make tax and spending decisions, and a properly-constituted parliament to scrutinise that executive.
The UK’s departure also creates the opportunity to pursue other integrationist goals including a properly-constituted EU foreign and security policy, backed up by a European army and intelligence service – something the British previously vetoed.
However, this is only one scenario, and events might take a very different course.
For one thing, the UK’s bargaining power is much stronger than at first appears. The country remains the primary guarantor of European security on this side of the Atlantic at a time of growing hostility with Russia and Turkey, a burgeoning terrorist threat and diminishing American interest in Europe. It is not in the interest of Europeans to alienate London and jeopardise their access to British intelligence and military resources.
As regards trade, the other 27 EU members sell far more to the UK than the UK sells to the EU, meaning that failure to agree a free trade deal and the mutual imposition of tariffs would hurt the EU more than the UK. Similarly, limiting the reach of the City of London would cause severe damage to the eurozone.
Of course, it is possible that these considerations are subordinated to broader the political goal of upholding the integrity of the EU by ensuring the UK is worse off outside - and the European institutions are calling on Europeans to unite around this goal. However, London is wise to this and is already exploiting the manifold divisions within the EU by appealing to the rational self-interest of individual governments, parliaments and industry groups.
In the final analysis, German manufacturers and French agriculturalists care more about the success of their businesses, and Eastern Europeans more about their physical security than any of them do about the EU’s abstract political goals.
Some deal is therefore likely.
But even without one, the UK will probably be fine. The fifth largest economy in the world can withstand the imposition of tariffs by the EU. At just 2.3% on average, these are hardly an insurmountable barrier. Moreover, any decline in trade with Europe would eventually be compensated by freer trade with the world’s other major economies. The US, China, Japan and many others are keen to sign trade agreements – something which was impossible while the UK was trapped inside the EU’s customs union.
And politically, the UK is a massive player: a nuclear power, a permanent member of the UN Security Council with a global diplomatic network and intimate connections with the Anglosphere and the former British Empire. As for Scotland, opinion polls point firmly in the direction of the status quo rather than Scottish independence.
By contrast, the EU may struggle to overcome the shock of Brexit.
By any measure, the departure of the EU’s second most powerful state, its pre-eminent military and diplomatic power and a major contributor of resources, ideas and administrative competence is a major loss to the union. It shatters the EU’s legitimating myth that European integration is historically inevitable.
The EU also loses one of its major sponsors of further integration. Contrary to popular belief, the UK has not blocked integration but has called on the eurozone to do what is necessary to stabilise the monetary union. The fact this has not happened is not a consequence of British obstructionism but the divergent interests of other Europeans and their lack of political commitment. Significantly, Europeans rejected the Juncker proposals last month without any help from the British.
Perhaps most importantly, the UK’s exit will profoundly destabilise the delicate balance of power inside the EU. London has always played a crucial role as a third party in the complicated relationship between Berlin and Paris and as a counterweight to Germany in the rest of the EU. Inevitably, this will now change. With the UK’s departure, the EU will become more Germano-centric, at the expense of the union’s peripheral members.
However, we should not expect others to passively accept this. Instead, Brexit is likely to accelerate the internal fragmentation of the EU into a series of regional blocks that exist to counter German domination. In Central Europe, the Visegrad Four is emerging as a powerful caucus hostile to German-imposed multiculturalism. In the eurozone’s south, a new ‘Club Med’ is forming opposed to fiscal austerity.
But the biggest impact could be on France, a powerful misfit whose interests are increasingly at odds with Germany. Euroscepticism in France is rife and the anti-European Front National is exerting massive pressure on the mainstream political parties. If the UK proves it is possible to leave the EU and not only survive but thrive outside its structures, then France could be next in line to leave. At this point, the EU would effectively be finished.
Nothing is certain. But the most likely casualty of Brexit will not be the UK but the fragile organisation from which it is departing. And when the history of the EU is eventually written, 29th March 2019 could be the date at which historians identify when the collapse of the union finally and irreversibly began.
This article first appeared in Serbian in the political journal NIN on 5th April 2017