EU shouldn’t respond with revenge

Making an example of the UK to discourage others from leaving will be repeating the Brexit campaign’s mistakes

The UK has voted for the “most expensive divorce proceeding in the history of the world,” in the words of US billionaire Wilbur Ross, with BBC projections showing voters backed “Leave” by 52% to 48% for “Remain”. The challenge facing both Britain and its newly-ditched European partners now is to ensure that the separation doesn’t deteriorate into acrimony and revenge.

The EU should regard the referendum result as a wake-up call. Discontent with how the bloc operates isn’t restricted to Britain. A survey of more than 10,000 voters across Europe published by the Pew Research Center earlier this month showed rising dissatisfaction. The proportion of French respondents with a favorable view of the EU, for example, slumped to 38% from 69% in 2004; in Spain, the deterioration was to 47% from 80%.

The most sensible EU response would be a retreat on at least some of the issues that were at the forefront of the UK referendum but are also pressure points across the bloc—immigration, the centralisation of decisionmaking and the broader agenda of trying to impose “ever closer union” on a reluctant populace.

An alternative solution, however, might see the EU accept the reality of a two-speed Europe. That is, it could formalise an arrangement by which a core group led by France and Germany commits to full-fledged union with shared fiscal powers, a central Treasury and common bond issuance and a full banking union—a proper UnitedStatesof Europeformedfroma coalition of the willing. Those countries who don’t want to be part of the core, including Britain—or which cannot meet the requirements— could remain fullyfledged members of the EU trading bloc and single market, without having to accept further integration. Either way, the EU can’t proceed as it has before, as German finance minister Wolfgang Schaeuble acknowledged on Tuesday.

France should resist the temptation to pull up the financial-services drawbridge. Banking business is likely to flow naturally to Paris, Luxembourg and Frankfurt and away from London. Europe’s banks are in enough trouble— Deutsche Bank’s shares are worth about half of what they were a year ago—and attempting to prevent London from clearing or settling trades in euro-denominated securities risks smothering those trades rather than simply repatriating them.

At home, the ruling Conservative Party needs to heal the rifts caused by a divisive and ill-tempered campaign. Prime minister David Cameron and chancellor of the exchequer George Osborne backed the “remain” side, trading barbs and insults with Conservatives Boris Johnson and Michael Gove, who fronted the “leave” campaign. With last year’s surprise election win a fading memory and a risky referendum bet gone badly wrong, Cameron has resigned, reaffirming Enoch Powell’s dismal maxim that all political careers end in failure.

Whoever becomes the next UK leader—Johnson is currently favorite with the bookmakers—should resist the temptation to lecture Britain’s European partners. Any antiEuropean hubris on the part of the UK would be both inflammatory and unnecessary. Britain’s leaders need to prove to business that they can secure viable trade agreements with Europe in the next two or more years of negotiations; otherwise, investment will flee.

The Scottish question will also come to the fore again, given that polls prior to Thursday’s vote showed twice as many Scots wanted to stay in the EU as wanted to leave. Denying Scotland a second referendum on whether to leave the United Kingdom would be undemocratic. The breakup of the UK seems an inevitable result of the referendum vote, and needs to be handled sensitively.

As predicted by countless international bodies and economists during the campaign, the EU vote casts a long shadow over the UK economic outlook. Futures markets had already suggested there was no chance of the Bank of England raising rates before February, with a much higher chance of lower rates. The central bank will probably have to consider cutting its benchmark rate from the 0.5% level that has held since 2009. That in turn will exacerbate the drop in the pound.

Osborne, though, should backtrack on his threat to introduce an emergency austerity budget that would increase taxes and reduce government spending. His mid-month warning that leaving the EU will leave a “black hole” in the UK budget of 30 billion pounds ($43 billion) was guesswork at best and scaremongering at worst. The fragility of Britain’s recovery from recession means the last thing the country needs is yet more austerity.

It is still in Europe’s self-interest for Britain to remain economically strong—“a super-Singapore at the gates of Europe” as Markus Kerber, who represents 100,000 of Germany’s biggest companies as head of the Federationof GermanIndustries,putitin February. Punishing Britain to encourage other countries not to leave would repeat the campaign mistake of using scaremongering rather than accentuating the positive. The EU needs to start emphasising the benefits of membership—otherwise the UK will be just the first nation to decide that the privileges of membership aren’t worth the subscription fees.

The EU needs to start emphasising the benefits of membership— otherwise, the UK will be just the first nation to decide that the privileges of membership aren’t worth the subscription fees

Bloomberg