14 April 2016

Paul Goldschmidt: The British Referendum

In his introduction to Open Europe’s recent analysis on the challenges facing Britain after “Brexit”, Lord Leach describes the debate as “underwhelming”. This judgement must surely rank fairly high on the scale of British “understatements”.
 
The paper itself, purports to give an objective assessment of the conditions needed to limit the negative impact of Brexit that it endorses implicitly. It is both misleading and incomplete.
 
Misleading because it implies that the risks of leaving the EU can be contained provided that some (highly questionable) objectives are attained: some, relate to future domestic policies, which are totally under British control but will be far from easy to implement as the report recognises; others, concern mainly future international trade relations which require the collaboration and good will of third parties that are by no means certain.
 
Incomplete because it focuses on a single post Brexit scenario postulating a broadly unchanged EU and totally overlooks alternatives which, if they occurred, would negate the premises on which the argument for a fairly benign outcome is based. Two main possibilities come to mind:
 
First, in the aftermath of the Referendum, the EU pulls itself together and implements long overdue reforms. This implies first and foremost further integration of the Eurozone on which the UK will have lost any possibility of weighing (as the agreement with Cameron will have lapsed). Any subsequent trade agreement with the UK will be sufficiently harsh to avoid contagion, limiting to a large extent the financial benefits of Brexit as well as the anticipated gains from the repatriation of sovereignty to Westminster. The tougher the agreement, the greater negative impact on the UK service industries (in particular financial services) as well as on foreign direct investment in the UK seeking to access the EU single market. Under such a scenario the negative impact of Brexit is likely to exceed significantly the report’s assessment.
 
Cynical observers may argue (perhaps correctly) that the EU will prove incapable of getting its act together so that the UK, as is its wont, will be able to exploit to its advantage the squabbling among the remaining Member States, delivering the “broadly unchanged EU” postulated by Open Europe.
 
Unfortunately, should such a scenario develop, it is highly likely that it would lead sooner rather than later to an even worse outcome: the disintegration of the EU under the combined pressures of financial markets and further significant gains among continental nationalist Eurosceptic parties building on the Brexit example. At this stage, “Brexeteers” might well rejoice that, having stayed out of the single currency, they may have avoided the worst of the chaos resulting from the collapse of the €. However, it also negates simultaneously all the fantasies of securing a favourable trade agreement with its no longer existing main trading partner. There is no way in which the UK would escape the worldwide dire consequences of an EU collapse among which reestablishment of exchange and border controls would lead to a severe economic and financial crisis. Being (perhaps) slightly less affected will be no great consolation.
 
The unescapable conclusion is that the risks associated with Brexit are far greater than generally envisaged. By voting for Brexit the EU the British citizen will contribute materially to increasing the likelihood of either the disintegration of the EU or the reinforcement of the Union on whose future it will have no further say; a lose/lose proposition with little if any upside potential.
 
Reforming the EU – hopefully with the positive participation of the UK – is by far the most desirable outcome. Reforming the EU without the UK is second best (and maybe easier than the first option); but there is nothing to gain either for the UK or the 27 other EU members from the disintegration of the Union.

Full article on Paul N. Goldschmidt website

© Paul Goldschmidt