The EU in 2017

When a narrow majority of British voters decided last year that their country should leave the European Union, this came as quite a shock to the political elite both in Brussels and in most member states of the EU; the prevailing opinion was that such a decision could only be the result of some fit of madness. Wild xenophobia, a kind of irrational nationalism not seen in Western Europe since 1945, and the irresponsible behavior of some overambitious politicians such as the frivolous Mr. Johnson who does admittedly often look and behave as if he were a figure invented by the writer P. G. Wodehouse (a kind of Bertie Wooster as foreign secretary), seemed to be the only explanation for a decision which was bound to lead to Britain’s terminal economic decline, not to mention her complete political marginalization in Europe.

The Fallout from the Brexit Referendum

It is certainly true that it will be hellishly difficult to re-negotiate the relationship between the United Kingdom and the remaining EU countries. Whatever the divorce is going to be like, it is not going to be an amicable one, but then divorces rarely are. Britain’s financial industry in particular will not find it easy to adjust to the new conditions after Brexit and may take many years, perhaps up to a decade to do so. Moreover, given the fact that the electorate was deeply divided about the issues at stake, it will be difficult to heal the divisions which the debate about Europe has opened up and is still creating; in the case of Scotland these divisions may turn out to be so deep that the Anglo-Scottish Union will break up so that Scotland can remain in the EU. That will in part depend on the price of crude oil over the next couple of years as an independent Scotland would desperately need the income from the oil industry.

Nevertheless, one is surprised that few commentators so far have dared to reflect on the impact Brexit will have on the rest of the EU. The UK is, in economic terms and depending on which year you look at, the second or the third largest economy in Europe (for year 2015 it was 2.6 trillion euro GDP compared to 2.2 for France and 3.0 for Germany) and many forecasts assume that in 15–20 years it will be Europe’s largest economy, partly because of demographic factors. Admittedly, Brexit might reduce both economic growth and immigration and therefore prove these forecasts wrong, but still, as some economists have pointed out, if all countries of the EU were to leave the Union except the eight strongest economies (these eight would include Poland and Sweden) the effect in economic terms would be the same as that of Britain alone leaving the EU. Germany at the moment is exporting slightly less than 60% of her goods to other EU countries, after Brexit this figure will be down to about 50%. The effect is even more striking in terms of defense policy. There are only two countries in Europe that still have armies of their own which can be deployed to achieve limited political objectives by military means without direct US support, France and Britain, and one of these two countries will in future no longer belong to the EU.

The Flawed Monetary System of the Euro and the British Decision to Leave the EU

In other words, whatever Brexit may mean for Britain, it is bound to be a disaster for the EU. Admittedly the British electorate was always more skeptical about the European project than let us say German or Italian voters. But Brussels was clearly unable to persuade a sufficient number of British citizens that this project remained an attractive one and lacked the will to reassure them that in future the European institutions such as the Commission or, perhaps even more importantly, the European Court of Justice would refrain from extending their authority silently ever further, thereby undermining national sovereignty, something that had always been deeply resented in the United Kingdom.

The deeply flawed project of the euro also played a major and a possibly decisive role. That is all the more true as the euro crisis created the impression in Britain and elsewhere that Europe was once more under the rule of Germany as a malevolent hegemonic power imposing austerity and unpopular economic reforms on its unwilling partners. In reality this is largely a distortion of the truth as Germany has to stand by impotently while the ECB is creating a de facto mutual liability for all public debt in the eurozone through its program of buying almost unlimited amounts of government bonds. It was such mutual liability that Germany had openly rejected when the euro was created, and in theory the statutes of the ECB do not allow the central bank to engage in direct monetary financing of government spending; but with an extremely compliant European Court of Justice there are virtually no limits to what Mr. Draghi can do. The rule of law may be a splendid idea, but it is not what the EU is really good at when it comes to the euro and how it is being managed. This may be inevitable given the seriousness of the crisis (silent leges inter arma), but how can different nations cooperate when they cannot trust each other because virtually no legal rules apply when push comes to shove?

However, this was not the real concern of the British press when it analyzed the euro crisis. Most papers both left-wing and conservative rather relished the chance to depict Merkel as a slightly milder version of some evil German political figures from the past. Thus the vote for Brexit had also strong anti-German undertones. In this context Merkel’s refugee policy was certainly less than helpful, one has to admit. It created the impression that the German chancellor wanted to impose a policy of completely open borders on all European countries. This may never have been her intention, however, the fact that she and her government clearly lost control in late 2015 and early 2016 over the situation during the refugee crisis had a huge political impact. As the discussion about the EU in Britain was very much about immigration policy, this may have been crucial in giving the Brexiteers the push which they needed to win the referendum.

Thus Merkel is at least to some extent responsible for a political decision taken by Britain which will greatly harm German interests in the EU. Britain, although never an easy partner, always opposed protectionist trade policies and the vision of the EU which saw the Union primarily as a mechanism designed to distribute ever-growing amounts of subsidies to industries and regions which are unable to compete without such support within the Single Market. With Britain gone, the advocates of a more dirigiste, anti-liberal economic policy may well win the day in Brussels.

Where Does Brexit Leave Eastern and East Central Europe?

One might say that the end of British opposition to more subsidies within the EU is quite good news for the countries of East Central and Eastern Europe (if one ignores the fact that Britain is a major net contributor to this budget), in particular for Poland which in the past has received a huge amount of financial support from Brussels. But is that really true? Even before Britain decided to leave the EU it was the eurozone countries that called the shots in Brussels, the politics of the last six years were very much about the future of the eurozone. With Britain gone, the influence of non-eurozone countries in Brussels will decline further.

The situation could deteriorate even more dramatically once a separate eurozone budget and a eurozone ministry of finance will have been set up. These ideas are unpopular in Germany, but as Germany has lost most of the rear-guard actions in the war about the euro over the last couple of years, it is only too likely that this battle will eventually be lost as well. And once there is a separate eurozone budget, countries outside the eurozone might well find themselves deprived of many of the subsidies which they enjoy now. After all, the total amount of money available is not unlimited.

Of course there is a solution to that problem: the Eastern European countries could all join the eurozone. But their governments will be well advised to think twice before they take such a step. Once a country has entered the eurozone, there is hardly any way it can escape from it no matter whether it needs a weaker currency such as Greece (or, less urgently, Finland) or wants to escape from the problem of debt mutualization, like Germany. Essentially, the euro is on the one hand a mechanism which ensures that less competitive countries are permanently de-industrialized (this effect is clearly visible in Italy and France and to a slightly lesser extent in Spain as well), and on the other hand it forces the more successful countries which have imposed harsh reforms on pensioners or welfare recipients in the past to underwrite the debt of the deficit countries in one form or another.

That is the logic of the commons and the euro follows such a logic. In the end, Poland and the Czech Republic might even find themselves paying out subsidies to Italy to rescue Italian banks as the bail-in-rule for the shareholders and creditors of bankrupt banks is now about to be scrapped (the Monte dei Paschi case is highly significant here), shortly after it has been officially agreed upon. Same procedure as every year, one might say. Those are the rules of the game and one should know them before one participates in it.

A Future for the EU without Britain?

Where does all that leave the EU? Theoretically, at least from the perspective of the Brussels mandarins and the perpetual advocates of an ever-closer union (men like the grandiloquent Martin Schulz or the overenthusiastic Guy Verhofstadt), in the best of all possible worlds. With Britain gone, one has managed to get rid of a perpetual troublemaker, the black sheep of the EU family one might say. The weight of the EU as a whole in world affairs has of course been much diminished, but some sacrifices need to be made from time to time. Moreover, Germany has more or less acquiesced in her defeat in the battle about the future of the euro and accepted debt mutualization as long as this can be hidden from the eyes of voters in Germany.

However, the underlying problems remain unresolved. Economic growth in crucial countries such as Italy and France—Greece we all know has been written off long ago—remains very sluggish. And there is little hope for the future. Matteo Renzi’s policies in Italy have been largely rejected by the electorate, and in the upcoming presidential elections in France a majority of voters, though perhaps a narrow one, seems to prefer candidates of the far right or the hard left, candidates who promise that painful reforms can be avoided and who more or less want to return to the economic policies of the 1980s, either outside the monetary union or within. Draghi—that is the implicit hope in the latter case—or the German tax payer will willingly finance an even more generous welfare state and an even bigger public sector than at present.

The real problem is more serious. Not just in France but even in the Netherlands and Germany the political class is losing the trust of the electorate. Many voters have lost all confidence in professional politicians and even in the political system as such. This pronounced distrust that politicians encounter has always been a feature of the political culture of countries such as Italy and Greece, but in other countries such as post-war Germany it is a more recent phenomenon. It is at least to some extent due not so much to the “evil populists” who spread xenophobia and resentments—although such people do benefit from the prevailing mood—but to the fact that the political elite has invested its moral and symbolic capital in schemes which just do not work in the way they should. The common currency is among these projects, but
it is not the only one, as the entire EU structure (including the rules for immigration and the free movement of employees within the union) has been designed for much fairer and milder weather than the force ten economic and political gales we have to endure at the moment.

Politicians in most European countries try to stem the tide of the so-called populism and nationalism by upholding the old idea of European
unification and by repeating the traditional incantations about Europe as a peace project and the euro as the basis of everlasting prosperity. The British Prime Minister Theresa May, whatever one might think about her otherwise, is quite different in this respect; admittedly she has little choice given the outcome of the referendum last year. She tries to ride the wave of “populism” and by taking her country out of the EU she hopes to contain the rising protest against the entire political system and the metropolitan elite. That is admittedly a risky policy to follow and her alliance with the madcap American President “The Donald” Trump will hardly make it less risky, but in the end her policies may be more successful in the long run than the attempts to keep afloat a ship that is leaking left, right, and center; pumping ever growing quantities of hot air into the EU’s political and financial ballast tanks may not be enough in the long run.