Europe Is Ready to Move On From Brexit
(Bloomberg Businessweek) -- At the end of June 2016, Nigel Farage arrived at the European Parliament in Brussels for one of the most important speeches of his career. Five days earlier, in a stunning electoral upset, Britain had voted to leave the European Union—the first country to do so in the EU’s nearly six decades of history. The leader of the United Kingdom Independence Party, feeling his political career had finally been vindicated, took the opportunity to launch a stark warning to his colleagues from across the continent. “What happened last Thursday was a remarkable result,” he said. “It was a seismic result. Not just for British politics, for European politics, but perhaps even for global politics, too.”
Two years later, Britain is still reeling from that institutional earthquake. The political landscape has been radically transformed: David Cameron, the Conservative prime minister who’d called the referendum and campaigned for Britain to remain in the EU, resigned immediately after the humiliating defeat. He was replaced by Theresa May, who subsequently lost her majority in a new general election and has been forced into a political partnership with the Democratic Unionist Party. The British economy has slowed, its growth rates plummeting from the top to near the bottom of the Group of Seven table. Most worrying, the country still lacks a realistic plan for its future relationship with the EU, even though these ties will be crucial in determining Britain’s prosperity and place in the world in the decades to come.
By contrast, for the rest of the EU, Brexit has turned from brutality into banality. The other 27 member states are quietly seeking to preserve their mutual interests in the negotiations—and then move on. The hard truth is the EU has plenty of challenges already: A trade confrontation with the U.S. has exposed its lack of global clout; in Italy, a populist coalition of the League and the Five Star Movement threatens to set Rome on a collision course with its partners; the euro zone is struggling to strengthen its economic governance, which remains vulnerable to a repeat of the recent sovereign debt crisis. Brexit is simply one concern too many to fret about.
In theory, Farage was right: Brexit had the potential to cause havoc across the EU. In the months after the referendum, analysts busily looked for countries that might follow in Britain’s footsteps and leave the Union. Exhibit One was France, where Marine Le Pen, the leader of the far-right National Front, was topping the polls on a promise to take the country out of the single currency. The Netherlands was also flirting with an exit, thanks to the strong polling of Geert Wilders, leader of the euroskeptic Party for Freedom.
The ensuing elections, at the start of last year, frustrated the hope that there could be a rapid domino effect from Brexit. The Netherlands has since put together a varied coalition, led by Prime Minister Mark Rutte, that has placed a cordon sanitaire around the euroskeptics. In France, Emmanuel Macron obtained a resounding victory against Le Pen in the presidential elections on the basis of an unashamedly federalist platform. And while the recent Italian election has seen a strong showing of anti-establishment parties, more recently both the League and the Five Star Movement have ruled out an “Ital-exit.” For now, Brexit is more an exception than the start of a trend.
One reason may be that the European economy has responded much better than expected to the shock of the referendum. Only months after the vote, in the autumn of 2016, the European Commission had predicted that gross domestic product in the euro zone would rise 1.5 percent in 2017 and 1.7 percent in 2018. In fact, the euro zone economy grew 2.4 percent last year and is on course to expand 2.3 percent this year, according to the latest Commission forecasts.
The U.K. economy, too, came out of the referendum more strongly than expected. But while others accelerated, London slowed down: In 2015, Britain’s national income climbed faster than the euro zone (2.3 percent against 2.1 percent). Last year it rose more gently (1.8 percent vs. 2.4 percent)—and the trend looks set to continue in 2018. Investors have little doubt about the relative long-term prospects of the two economies: At the start of 2016, £1 could buy €1.36. In mid-May, it can purchase only €1.14.
This relative political and economic stability would have not counted for much had the rest of the EU splintered during its negotiations with Britain. Some Brexiteers had hoped they could “divide and rule” the Union to advance the commercial interests of the U.K. “The first calling point of the U.K.’s negotiator in the time immediately after Brexit will not be Brussels, it will be Berlin, to strike the deal: absolute access for German cars and industrial goods, in exchange for a sensible deal on everything else,” said Conservative Member of Parliament David Davis on the eve of the referendum. “Similar deals would be reached with other key EU nations,” he added.
It didn’t work out that way. After the vote, Davis went on to become Secretary of State for Exiting the European Union—the man in charge of leading the day-to-day talks with Brussels. Since then, he’s quickly realized that his negotiations will mostly take place at the EU headquarters in Brussels rather than in Berlin. The EU has been very disciplined in standing behind its chief negotiator, Michel Barnier, a dogged Frenchman and former member of the European Commission. So far, Barnier has succeeded in obtaining pretty much everything he was aiming for, including an explicit commitment by the U.K. to pay a steep exit bill.
Meanwhile, the British government has yet to produce a coherent plan for what kind of trade arrangement the country would like to have with the rest of the EU after an initial transition period. The clock is ticking, as Barnier expects the contours of this new relationship to be clear before the U.K. leaves at the end of March 2019. The cabinet is currently considering a backstop deal, which would allow Britain to stay in a close customs arrangement—to avoid imposing a hard border with Ireland—until further notice. But it’s unclear what will happen next and, indeed, whether Brussels will accept such a plan.
Differences among the remaining EU states exist, and more may emerge over time. Germany and Italy are said to be more open to a compromise, mainly to preserve trade links, while France has taken the hardest line, probably to lure away investments now in Britain. But, for now, all member states have understood that the EU is better off if it negotiates united. This has contributed to the snoozy climate surrounding the talks. Whenever the likes of Macron or German Chancellor Angela Merkel give a speech, it is typically to remind Britain that “divide and rule” will be a failing strategy. “Let us stay united. Don’t let anyone drive a wedge between us,” said Merkel in a speech in Berlin last year.
Of course, some are more concerned than others. European regulators, including the European Central Bank, are busy ensuring there will be no disruption to the financial plumbing between the City of London and the rest of the EU after Britain leaves. Many exporters—including carmakers in Germany and prosecco producers in Italy—would surely like tariffs to stay as low as possible between the two economies.
Above all, Ireland is following the negotiations intensely, since it has the most to lose from a disorderly Brexit, in terms of economic prosperity and political stability. According to a study commissioned by the Irish government, were the U.K. to leave the EU and fall back on the rules of the World Trade Organization, the Irish economy would lose as much as 7 percent of national income by 2030. This would be bad enough, but it would be a smaller problem than the political danger of reimposing a hard border with Northern Ireland. Building a new fence would scupper the Good Friday Agreement, which has calmed hostilities between Catholics and Protestants for the past two decades.
Leo Varadkar, Ireland’s prime minister, has succeeded in ensuring that a first agreement between the EU and the U.K., which was signed at the end of December, included the commitment to rule out a hard border. While Ireland needs to care deeply about Brexit, it knows it can rely on its European partners to help it obtain what it wants.
The seismic event Farage referred to in his speech at the European Parliament could certainly happen again. Populist leaders in countries such as Hungary keep attacking the EU over its handling of immigration—which is bound to inflame resentment. The euro zone still lacks the necessary mechanisms to ensure that citizens feel better off inside the currency union than outside. A possible confrontation between Italy and the rest of the EU over the spending plans of the League and the Five Star Movement has rocked financial markets and could still push Rome out of the euro. Were Rome to leave the currency union, it would inevitably default on its enormous public debt and trigger a cascade of private bankruptcies, which would send shock waves across the euro area.
But the parable of Brexit holds an important lesson for almost any country that might consider leaving the EU—let alone the euro zone: Just as an earthquake causes the most damage at the epicenter, the inevitable problems springing from a departure are, above all, the leaver’s.
To contact the editor responsible for this story: Howard Chua-Eoan at email@example.com
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