Guest Post: Why Brexit could be Europe’s last chance to build a stronger union
Current political discourse suggests that the European Union’s negotiating position is so strong that the UK will be forced into making painful and embarrassing concessions. But European over-confidence is misplaced, and the political and economic consequences of a “No deal” are more harmful to Europe than is commonly imagined. In this guest post, Christopher Jackson warns that a failure to use Brexit to reform the EU, would be a wasted opportunity and a serious threat to the union’s longevity.
Since the United Kingdom voted for Brexit, the popular perception on the continent has been that the UK made an “historic mistake” and that the European terms will be severe. The EU’s response to the declaration of Article 50 was swift, with exacting conditions clearly laid out by the end of April 2017. The aggressive nature of the EU’s negotiating schedule, forcing the UK to make all concessions up-front before receiving any carrots on trade negotiation, is based on the belief that the EU’s economy is less vulnerable to economic and political shocks than the UK. This belief is founded on very specific narratives of the events that have taken place in 2017.
Reckless assumptions about Brexit talks
The first narrative is that political stability is returning across the European Union. EU politicians have viewed 2017 as a triumph of EU liberalism over right wing populism, a phenomenon that we can call the “Macron effect”. As a result, commentators believe that the EU has become “increasingly integrated, and increasingly powerful”, while uncertainty generated by Brexit and a botched general election has left Britain looking weak and unstable.
The second narrative suggests that the combination of positive economic momentum in the eurozone, combined with the fact that the EU’s single market is significantly larger than the UK, reduces the EU’s exposure to economic headwinds from a hard Brexit.
Combined, these views suggest that the EU is in a much stronger negotiating position than the UK and that negotiators should reflect this strength in their positioning. But this narrative of events is dangerously simplistic.
While the 2nd and 3rd quarters of 2017 have undoubtedly eased the pressure for Europe’s mainstream political leaders, the fragility of Europe’s position has been grossly neglected. As the election results in Germany, the Czech Republic and Austria have shown, the far-right in Europe remains as powerful as ever. While the events in Catalonia have shown that the EU remains politically vulnerable to populism and nationalist movements.
The economic effects must also be put into context. European stocks have been a strong buy throughout 2017, as a result of continued economic stimulus by the ECB and the initial strength of the US dollar following the US election, which made European stocks look comparatively cheap. Unemployment also remains stubbornly high across Europe. Given these underlying realities, a responsible EU negotiating position would acknowledge the risks of a no-deal and structure discussions in a way that builds confidence that the UK will get a reasonable trade deal. This has not happened.
The EU has many strings in its bow, but the automatic assumption that the EU would emerge as the less affected party in the event that Brexit talks collapse is reckless. In fact, a disorderly Brexit, followed by an economic crisis in the USA and/or China, could push the European Union’s very survival to the test. Given widespread warnings of overheating in the US stock exchange and concerns around Chinese domestic debt levels, these are not purely theoretical risks.
Hard Brexit means hard losses – but for whom?
On the current trajectory of negotiations, there will be a hard Brexit. Such an outcome will have immediately negative effects for economic growth in the UK and the EU in the short run, though there are arguments that Brexit may lead to enhanced economic growth in the long run. But given the fragility of the EU’s current political and economic position, a short-term return to recession in parts of the eurozone, followed by job losses in politically important sectors, would be far more destructive to the EU than is commonly imagined. Nor is this solely a Eurosceptic view. The President of the European Commission has recently warned that the EU’s leaders are failing to appreciate the dangers of a no-deal.
Most projections of Brexit show that in the short to medium term, the UK’s GDP will decline by a greater proportion than Europe’s. This is only half the story. The Bertelsmann foundation finds that hard Brexit would cost the EU 0.1 – 0.36% in GDP growth by 2030, with Ireland losing 2.66%, Belgium losing 0.99%, Sweden 0.48% and Germany 0.33%.
Moreover, given that trade creates dispersed winners and concentrated losers, it is important to consider who these “losers” would be.
For Germany, Deloitte predict that a hard Brexit would have a similar effect on the auto industry to that of the 2008 financial crisis and could cost Germany 18,000 direct jobs in the auto sector. In Ireland, the President of the Irish Food Association has said that “Brexit presents the most serious threat to Irish farming and our agri-food sector for half a century”, with 40% of all Irish food exports going to the UK. For Spain, the tourism, agriculture and housing sectors would suffer a significant proportion of the government’s own estimated €1 billion in losses, while the country’s GDP as a whole would decline between €2-€4bn.
Source: Deloitte
None of this is to say that the UK wouldn’t take losses. Far from it. But in a negotiation where brinkmanship is the chosen method for garnering concessions, there is always the risk that the other side may call your bluff. Whatever Europe’s size and ambitions, the UK remains its largest bilateral trading partner bar none, as well as a vital security partner.
The UK, for its part, has a record low unemployment rate and even if the worst forecasts of a hard Brexit were realised, with up to one million jobs lost, it’s important to acknowledge who would be affected by those loses. The first line for job cuts in the UK due to declining domestic demand would be in retail and sales of goods to the EU, the sectors where EU nationals are disproportionately employed. Even in such a dire outcome, UK unemployment would rise to 8%, still below France, Italy and Spain. This point is not appreciated by EU commentators.
The UK can absorb a significant hit, but how would most of Europe’s economies respond to an increase in unemployment of even 1%? Moreover, with a separate currency and an independent monetary policy the UK can react to economic events in a much faster manner than its EU counterparts. Witness the response by Gordon Brown and the Bank of England in 2008-09 in rallying the UK economy from a near certain collapse. Simply put, the UK has a lot of flexibility to weather a storm. It is far from clear that the EU would be so resilient and flexible.
An opportunity for a stronger European Union
Despite the high stakes, Brexit negotiations can create a “win win” outcome for Europe. The current EU political structures are unsuited to resolving the challenges facing the union today and a new treaty is a question of when, not if. There is a clear split in the union between those members who cannot politically accept “ever closer union” and those nations who have no alternative but to seek further integration. But these challenges can now be resolved through Brexit by the formal creation of a two-tier Europe.
In the current structure, the EU is afraid of giving the UK a deal that is “too generous” for fear of encouraging others to leave. This creates a dangerous scenario where the EU feels it must offer a Brexit deal with harsh terms, acknowledging that the deal will harm the EU itself. This is a false choice. The EU must take the chance to recognise that not all members of the Union will accept deeper integration in the future and thus a formal split between the two groups would enhance the long-term stability of the union.
In order to enact this process, the best initial course of action for the EU would be to design a system that allows the UK to exit, while creating a parallel structure that offers wide ranging areas of mutually agreed cooperation. Whether this could be achieved through a reform of the EFTA is subject to debate, but whatever the chosen vehicle, this parallel structure should allow other nations join. Such a structure could even accommodate countries like Turkey, Ukraine, South Korea, Australia, Canada and non-eurozone members in the longer term.
Europe can use this opportunity to reform and build a stronger future, or it can overplay its hand and jeopardise a Union that has been over 60 years in the making.
Hubris can be a tricky thing.
Christopher Jackson is a regular blogger on energy, British politics and finance. He has worked for a range of private sector and multinational institutions, including the World Bank, JLT Group, Temporis Capital and the Asian Development Bank. Chris has a first class honours in Politics with International Relations from the University of York and a Masters in International Economics, Politics, Energy & German from the Johns Hopkins School of Advanced International Studies.
