THE WORLD AF­TER BREXIT

Will the U.K. and the EU be able to be­come friends with ben­e­fits?

Bloomberg Businessweek (Asia) - - FRONT PAGE - −Peter Coy

“No man is an is­land,” the English poet and Angli­can cleric John Donne wrote in 1624, pre­sag­ing the Brexit vote by al­most four cen­turies. “If a clod be washed away by the sea, Europe is the less.”

Europe is in­deed the less to­day. A wave of pop­ulist anger is wash­ing away from Europe not just one clump of dirt but the en­tire U.K., pop­u­la­tion 64 mil­lion, the sec­ond-big­gest econ­omy in the Euro­pean Union. “I felt as though I was at a friend’s fu­neral,” Vaira Vike-Freiberga, the for­mer pres­i­dent of Latvia, said in an in­ter­view af­ter the June 23 vote for Bri­tain to leave the EU. “This is no longer the Euro­pean Union that we joined.”

Her an­guish is un­der­stand­able. The EU isn’t just a mar­riage of eco­nomic con­ve­nience. It’s a bul­wark against the na­tion­al­ism, mil­i­tarism, and plain ha­tred that caused two world wars. Be­fore the vote, Euro­pean Coun­cil Pres­i­dent Don­ald Tusk, a for­mer Pol­ish prime min­is­ter, told the Ger­man news­pa­per Bild, “As a his­to­rian I fear that Brexit could in fact be the start of the process of de­struc­tion of not only the EU but also of Western po­lit­i­cal civ­i­liza­tion.”

The job now is to move past the pain and make sure that Tusk’s stark warn­ing doesn’t come true. Brexit is chaotic at the mo­ment be­cause the prime min­is­ter an­nounced his res­ig­na­tion and fi­nan­cial mar­kets swooned. Even­tu­ally, though, the Bri­tish will grope their way to a new re­la­tion­ship with the EU, prob­a­bly more friends with ben­e­fits than mat­ri­mony. It won’t be as lu­cra­tive or lib­er­at­ing for the U.K. as the Leave cam­paign­ers promised, but it could well work out bet­ter than the Re­main camp warned. The big­ger chal­lenge is keep­ing the EU it­self from crack­ing up.

In the lead-up to the ref­er­en­dum, “each side made claims that could not be sus­tained,” says Mervyn King, for­mer gov­er­nor of the Bank of Eng­land and au­thor of a new book, The End of Alchemy: Money, Bank­ing, and the Fu­ture of the Global Econ­omy. It’s time, he says, to “have teams of peo­ple work­ing be­hind the scenes so the new prime min­is­ter can move for­ward.”

The work of an­other Angli­can cleric, John Venn, points the way to­ward a new modus vivendi for Bri­tain and Europe. There is no uni­tary con­ti­nent. In­stead, Europe is al­ready a com­plex of as­so­ci­a­tions and unions, a vast Venn di­a­gram of over­lap­ping cir­cles of au­thor­ity (page 10). Coun­tries choose the spot in the over­lap that gives them as much to­geth­er­ness as they de­sire while sac­ri­fic­ing as much au­ton­omy as they can bear.

Even be­fore Brexit is for­mal­ized, the U.K. is out­side a lot of Europe’s cir­cles of au­thor­ity. BBy choice, it’s not 1 of the 19 coun­tries us­ing the eeuro cur­rency. It’s also not part of the 26-na­tion ScSchen­gen Area, which pro­hibits border con­trols bet­be­tween mem­bers. It’s in­side the EU’s Customs UnioUnion, a free-trade zone that ne­go­ti­ates tar­iffs with non­mem­bers. The Brits will want to keep that ar­range­ment with the EU even af­ter leav­ing.

In other words, Bri­tain’s choice is not all or noth­ing. For the U.K. to leave the EU is less jar­ring than for Texas to se­cede from the U.S.

What the Euro­crats call dif­fer­en­tial in­te­gra­tion is a strength of the sys­tem, not a weak­ness, says Frank Schim­melfen­nig, a pro­fes­sor of Euro­pean pol­i­tics at ETH Zürich. Al­low­ing dif­fer­ent coun­tries to have dif­fer­ent re­la­tion­ships rec­og­nizes na­tional dif­fer­ences and pre­serves democ­racy. It’s a safety valve for pop­ulist pres­sure.

Elites make a mis­take if they ig­nore or dis­par­age an­gry rally cries to “take our coun­try back,” which is as pow­er­ful in the U.K. as it is in the U.S. In­deed, the sup­port for Brexit re­vealed just how far vot­ers will go when they feel op­pressed and de­cide that their lead­ers aren’t stand­ing up for them. Bri­tain’s econ­omy has been fairly healthy

by the re­gion’s stan­dards, and Bri­tish prime min­is­ters have man­aged to carve out sev­eral ex­emp­tions from EU rules.

So imag­ine how much more frus­trated vot­ers must be in coun­tries with weaker economies that must fol­low all the rules, in­clud­ing the full con­straint of the euro cur­rency. It’s no won­der that Marine Le Pen, pres­i­dent of France’s right­ist Na­tional Front party, has taken to call­ing her­self Madame Frexit. “France has pos­si­bly 1,000 more rea­sons to want to leave the EU than the English,” she said be­fore the ref­er­en­dum.

For decades, the pre­scrip­tion for prob­lems in Europe has been sim­ply more Europe. The 1957 Treaty of Rome com­mit­ted sig­na­to­ries to “lay the foun­da­tions of an ever closer union among the peo­ples of Europe.” Jean Mon­net, the French econ­o­mist who was an EU founder, wrote in his mem­oirs that “Europe will be forged in crises, and will be the sum of the so­lu­tions adopted for those crises.”

Mon­net’s phi­los­o­phy en­cour­aged over­reach. Europe’s lead­ers pushed fur­ther and faster than their cit­i­zens were will­ing to go. They en­gen­dered a back­lash. All of the ma­jor Euro­pean na­tions have grow­ing anti-EU par­ties. On the right, the in­flam­ing is­sues are im­mi­gra­tion, bailouts, and red tape. On the left, it’s aus­ter­ity im­posed by for­eign masters. Both sides com­plain of a “demo­cratic deficit” in the EU.

As the re­crim­i­na­tions over Brexit show, the wellintended ef­fort to bring the na­tions of Europe closer to­gether is in­stead threat­en­ing to drive them apart. The best ex­am­ple of that is the euro, the one EU in­sti­tu­tion for which there’s no safety valve, no outer cir­cle of au­thor­ity to es­cape to. The Brits were smart enough not to join the sin­gle cur­rency.

The euro dif­fers from im­mi­gra­tion as a prob­lem for EU unity in one key re­spect. Un­con­trolled im­mi­gra­tion from out­side Europe is uni­ver­sally rec­og­nized as an ur­gent prob­lem, whereas the euro con­tin­ues to be seen by elites as some­thing worth pre­serv­ing. In re­al­ity, the euro acts the way the gold stan­dard once did: as a mon­e­tary strait­jacket. It’s too strong for Greece, mak­ing Greek goods and ser­vices too costly and pre­vent­ing thet coun­try from get­ting its econ­omy back on track.trac It’s too weak for Ger­many, un­der­pric­ing Ger­many’sGer out­put and lead­ing the coun­try to pilepi up huge trade sur­pluses that sap growth anda jobs from its trad­ing part­ners. The EU has no pro­vi­sion for a coun­try to drop the euro. YetY there’s lit­tle ap­petite for cre­at­ing the fi­nan­cial­cia in­sti­tu­tions that would be re­quired to make theth euro a suc­cess, such as cen­tral­ized tax­ing and spend­ing au­thor­ity. “Europe is in a quandary,” says Se­bas­tian Mal­laby, a se­nior fel­low at the Coun­cil on For­eign Re­la­tions in New York. “You can’t go back, but you can’t go for­ward.”

In the­ory, the best choice for Europe would be to forge ahead to full fis­cal union, es­sen­tially cre­at­ing a United States of Europe, ar­gues Joseph Stiglitz, the No­bel lau­re­ate econ­o­mist at Columbia, in his forth­com­ing book, The Euro: How a Com­mon Cur­rency Threat­ens the Fu­ture of Europe. But be­cause “there is more than a small prob­a­bil­ity that it will not be done,” he pro­poses var­i­ous ways that Europe could es­cape from half­way-in, half­way-out pur­ga­tory. He sketches a way that Greece could in fact de­part from the euro zone: sim­ply break the link, so Greek eu­ros be­come cheaper than reg­u­lar eu­ros. That would help trade by mak­ing Greece’s ex­ports cheaper and im­ports costlier. The key would be per­suad­ing cred­i­tors to ac­cept re­pay­ment in Greek eu­ros. (Not sim­ple, Stiglitz con­cedes.) Or, he says, Ger­many could leave the euro zone. Or the euro could be split into a north­ern and a south­ern cur­rency.

The fu­ture of Europe lies in a “vari­able geom­e­try” of diplo­matic re­la­tions that sat­is­fies those who want more in­te­gra­tion as well as those who want less, ar­gues Philippe Sch­mit­ter, a po­lit­i­cal sci­en­tist re­tired from the Euro­pean Univer­sity In­sti­tute in

“Hur­rah for the Bri­tish! Now it is our turn. Time for a Dutch ref­er­en­dum!” ——Geert Wilders, founder of the PVV, wwhich is lead­ing Dutch opinion pin­ion polls, in a tweet onn June 24

Florence. To use John Venn’s di­a­gram­matic lan­guage, Europe and the Bri­tish Isles will no longer be in the same cir­cle. Still, they ought to be able to find a space where their vi­tal in­ter­ests over­lap. No man is an is­land, and in the era of glob­al­iza­tion, no is­land is an is­land, ei­ther.

Nigel Farage

D David C Cameron

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