Monday, 4 July 2016

Brexit: What to expect

The outcome of the Brexit referendum may be one of the most important geopolitical events of the early twenty-first century. Some think that the EU would be dissolved by similar referendums elsewhere; others think that Britain would be dissolved when Scotland (and even Northern Ireland) decides to leave. In this essay, I discuss the long-term impact of Brexit on both the EU and Britain itself.

The rest of the world was quite surprised when Britain voted on 23 June 2016 with a 52/48% margin to leave the European Union of which it was a member since 1973. Financial markets reacted with alarm: the British sterling fell to a 31 year low against the dollar and stock markets lost 2 trillion dollars on 24 June – the biggest one-day loss on record (it lost 3 trillion dollars in total). Shortly afterwards various credit rating agencies downgraded Britain's sovereign credit score. David Cameron, the prime minister, resigned and said that he would leave it to his successor to trigger Article 50 of the Lisbon Treaty which would start the process of Britain leaving the EU.

There can be no doubt that Brexit would have a far-reaching impact on both Britain and the EU. If Britain leaves the EU, its economy may be severely affected by such a move. It is especially the power of the City of London – the leading financial centre in the world – that may be diminished. And if Scotland leaves, Great Britain may be reduced to Little England. Some commentators think that Brexit would also have a domino effect which may lead to the undoing of the EU. This is unlikely to happen. In fact, the EU would most probably be in a much stronger position after Britain has left! We might even see that the EU and the US start drifting apart over the next few decades. This may be the most important outcome of Brexit.

Geopolitical trembles

Why is Brexit such a great deal? It is because of the geopolitical significance of Britain's place in the EU. Over the past few decades, Britain served the Anglo-American establishment's interest in the EU (also nowadays called "Atlanticist"). Since the Anglo-American establishment fears that the EU would rise to become an independent player on the world-stage, they tried their best to control the process of EU integration. They fear that the EU would develop in accordance with the Gaullist vision for Europe, named after President Charles de Gaulle of France, who vetoed British membership when that country originally applied to join the club. In recent times that vision was represented by French president Jacques Chirac (1995-2007) who resisted the George W Bush administration's ideas for the Middle East (and who became a hated figure in the Anglo-American press).

In the context of geopolitics, Britain anchors the EU within the Anglo-American world. As such Britain played two very important roles since it joined the European project, namely to represent the Anglo-American interests in the EU and to keep the process of EU integration within acceptable parameters. Originally Britain held (with the other EU countries) veto powers over a wide spectrum of EU matters. These were phased out within the context of a compromise between the Anglo-American and Continental (Gaullist) factions in the EU according to which every significant step in "deepening" the project through further integration was be complimented with a corresponding "widening" of the European project (which provided the Anglo-Americans with a larger market). During the first decade of the twenty-first century we, for example, saw a significant enlargement (in 2004 ten new countries joined) as well as a significant increase in political integration (with the Lisbon Treaty of 2007).

The effectiveness of Britain's power to block EU integration has, however, waned over the last few years since she lost her veto right in many areas. As such Britain was outvoted in 2012 when she tried to stop the Fiscal Compact as well in 2014 when she tried to stop the leader of the winning party in the EU elections (Jean-Claude Juncker) from becoming president of the EU commission (which was effectively a devolution of power from the EU Council to the EU parliament). Britain was also unable to block the financial transactions tax in court that 10 EU countries want to install (which has not yet been finalized). The main reason for Britain's setbacks in all these areas is that many other EU countries regard Britain as obstructionist. And the EU treaties – especially the principle of "enhanced cooperation" – allows groups of countries to establish advanced integration or cooperation within EU structures without the other members being involved.

The EU has now come to the point where there is a strong impulse to proceed with further integration in the context of so-called "economic governance". This basically means that some Eurozone countries want to proceed with further economic integration – they even envision a Eurozone finance ministry with its own budget. Britain is afraid that the Eurozone countries would introduce rules and regulations which would be enforceable in the City of London. In an effort to differentiate Britain within the EU, David Cameron concluded a "special status" agreement with the 27 other EU countries in February 2016 on which the British people voted in the 23 June referendum.

Although the agreement between Britain and the EU (now discarded) included various aspects of which the provisions regarding migrants and welfare benefits were especially accentuated, its most important feature was that it presented a framework to regulate all financial transactions in a fair manner. Both Britain and the other EU countries are afraid that the other would gain some undue advantage over her/them. The agreement states in this regard that a "single rulebook is to be applied by all credit institutions and other financial institutions in order to ensure the level playing field within the internal market". But even in this context, the City of London would have had a large influence over the process of EU economic integration due to its more favourable regulatory environment.

If Brexit leads to Britain leaving the EU (which is not yet a foregone conclusion), then the Anglo-American establishment may eventually lose control over the process of EU integration. This would in the first instance involve economic integration – although the relevant EU countries (especially Germany and France) would probably wait until the period of "reflection" after the British referendum is over before commencing with a process of deepening "economic governance" of the Eurozone. The German chancellor Angela Merkel is especially concerned that too much talk of further integration at this stage would play into Euroskeptics' hands. After Brexit the EU would also be able to establish an EU army – something over with Britain still has a veto right. With Britain out of the EU, a core of EU countries would be able to pursue their vision of an "ever closer union" which could make the EU a very powerful economic and military player.

The Anglo-American and Continental factions in the EU have different visions as to what the EU should eventually look like. The Anglo-Americans want the EU to consist of various overlapping "clubs" whereas the Continentals want it to develop a multi-speed approach according to which a core of EU (Eurozone) countries would be allowed to proceed with further integration. The Eurozone and Schengen (a shared EU visa) areas may be regarded as such "clubs" in the framework of the EU. If the Continentals get their way, these would be further strengthened in such a manner that an EU "core" is formed through further economic and political integration - which would stand in contrast with those EU countries which stay in the slower lane. Brexit would in time provide a strong impulse to realize the second vision.

The Anglo-Americans would do all in their power to bind the EU within their geopolitical sphere even when Britain has left the EU. As such they would try to bring the Transatlantic Trade and Investment Partnership (TTIP) to fruition. Although this agreement seems to establish merely a common economic zone, the leaders of these countries also view it in geopolitical terms – as integrating the economic interests of the USA and the EU. We can also expect that the EU's military capabilities would be integrated into the context of NATO – already during the next NATO summit. The question is whether these arrangements would be sufficient to keep US and EU interests aligned.

The EU would disintegrate?

There are two kinds of EU countries which stand to lose a lot when Britain leaves the EU. The first are those countries who share Britain's "Anglo-Saxon" approach to financial and economic matters. These include the Netherlands and Denmark. These countries traditionally relied on Britain to lead the pact of free marketeers in the EU (especially regarding financial services). There have been suggestions that some of these and other countries may also hold referendums and leave with Britain.

Whether or not more countries join Britain in leaving the EU (if it comes to that) would be determined by the divorce-deal that Britain would be able to negotiate with the EU. At this stage the EU holds the best cards – they have the much sought after market of about 500 million people. The challenge for the EU is to give Britain a fair deal (to not destabilize Britain's friends in the EU) but at the same time to discourage other countries from following Britain's lead. The strict terms that the EU leaders have set for the divorce – no informal negotiations before Article 50 is triggered and no exemptions from the four basic principles of the free trade zone (free movement of workers, capital, goods and services) are intended to discourage others from doing the same. Although an eventual deal might see some leniency in some of these areas, the EU would not agree to a deal that would lead to its own destruction.

The other country that would find itself in a weaker position when Britain leaves the EU is Germany. Since Germany is an export country, and many of its cars (for example) are sold on the British market, she would work to not upset this arrangement. Germany also needs Britain to offset the French initiative in the EU (the French are openly hostile to the "Anglo-Saxon" model and would like to see more lenient fiscal policies in the EU). Although Germany and France have traditionally been regarded as the engine which drives the process of EU integration, Germany is not always at ease with the French ideas in this regard and Britain – as the second largest economy – often brought the balance. With Britain out of the EU, we may expect to see more of the trio Germany-France-Italy in action which means a much stronger role for the southern EU states and their particular approach (for example, in opposing the German idea of austerity).

There is, however, another even more important way in which Germany would be affected by Brexit. With Britain out of the EU, the power of Germany with regard to the other EU countries would become an issue of major concern. Various southern EU countries (especially the Greeks) already view the Germans as the strict and uncompromising masters of the EU who force their view on them.

The new situation that Germany would find itself in would be similar to the period directly after the reunification of Germany in 1990 when there were fears that the new Germany would be too strong for the EU – which led to the Maastricht Treaty that created the European Union in 1993 and to the creation of the euro. The argument then was that a strong Germany necessitates a strong EU. One can expect (in the case of Brexit) that the same argument would be heard again in the not too distant future – which would pressure Germany to accept the French proposals for "economic governance" which may involve shared liability in some areas. This would be an important step towards the EU eventually becoming some sort of United States of Europe.

What about Britain?

Although it is possible that Britain might come out of Brexit as a stronger country, the odds are greatly against this happening. There are just too many things that can go wrong over which the British government has very little control. Some of these concern the City of London and others the geographical integrity of Great Britain.

The economic welfare of Great Britain is closely connected to that of the City of London which has grown over the last decade into the leading financial centre of the world. The City has a GDP of about 17 % of that of Britain, which is larger than that of several EU countries! An important part of the City's wealth is in turn dependent on its access to the EU market – especially regarding financial services. As such it has what is called "financial passport" rights which made it the best place from where to sell financial services throughout the EU. Brexit may change this.

There are various conflicting opinions as to whether the City would be better or worse off outside the EU. A major concern is whether the City would be allowed to keep its financial passport rights after Brexit. If this access to the EU market is lost, it may have a significant impact on the City's long-term future as a major financial centre. Although the financial culture in the City is both specialized and global in a manner that cannot at this stage be equalled by other EU centres such as Frankfurt or Paris, future EU regulation may impact on the City in ways that are not conceivable at the moment. The French might not be willing to extend its offer of a "level playing field" to Britain during the divorce negotiations.

Another area of concern is whether Scotland would stay a part of Great Britain after Brexit. Both Scotland, Northern Ireland and Gibraltar voted in the Brexit referendum in favour of staying in the EU. The Scottish First Minister Nicola Sturgeon has proposed that parts of Britain – which would include Scotland and maybe Gibraltar and Northern Ireland – stay part of the EU even when the rest of Britain leaves. There is a president for this – whereas Denmark is part of the EU, Greenland, which is an autonomous part thereof, is not. For Scotland to stay part of the EU after the rest of Britain leaves, it would have to negotiate its own special status agreement with the EU to retain its current EU benefits and obligations while the rest of Britain negotiates its departure. Since the Scottish parliament may have to agree to a Brexit, the Scots may have some leverage in this regard.

The reason why Sturgeon takes this option instead of merely going for full independence from the rest Britain is that once Scotland is outside Britain (and the EU) it would be very difficult to get back into the EU. Spain would most probably veto an independent Scotland's joining the EU since it fears that Catalonia would do the same. If Scotland stays part of the EU after the rest of Britain has left, it can always become independent without endangering its place in the EU. We might, therefore, find that Scotland leaves Britain - and she might not be alone. There is also renewed talk of the reunification of Ireland. Such developments would significantly reduce Britain's stature in the world. One does not know what Britain (Little Britain or even Little England) would do with its nuclear submarine fleet stationed in Scotland.

In the final instance, it seems that Brexit might result in the City of London losing its financial EU passport rights and in Britain losing Scotland. In the end, this might leave Britain a much-diminished country – maybe somewhat like Venice who was once a major financial centre in Europe.


Although there are many commentators who think that the EU would become weak and disorientated after a Brexit, I am not one of them. In my view, the EU would become stronger. In time, it would become much stronger! The EU would not disintegrate. Instead, we might expect over the next few years that the EU would proceed with its program for stronger economic governance and stronger military cooperation. If the EU leaves Britain behind, it would proceed not only to form a political union; it would become one of the most powerful players on the world scene.

We might expect some surprises in the Brexit game. A large part of the Anglo-American establishment was caught by surprise by the Brexit vote. Since it has such far-reaching implications, they might even try to turn the wheel backwards and keep Britain in the EU. There is already a lawsuit filed which would require that the British parliament agrees to Brexit. Some EU countries like Germany would also prefer that Britain stays in the EU. The Continentals would, however, rejoice. They would try to block all such efforts. They have an opportunity to place the City forever behind in their efforts to build a great United States of Europe. Coming events in Britain and the outcome of the negotiations with the EU would show how successful they were in this regard.

Author: Dr Willie Mc Loud (Ref.