Brexit, Eurexit, or…?

Now that the initial shockwaves brought by the recent referendum in the UK have rippled through, I’d like to offer my own perspective upon the unfolding events. Truth be told, it will be a perspective of a person who doesn’t have real skin in the issue in the sense that I don’t reside in the UK. On the other hand, this gives me the advantage of not being directly involved and thus having a clearer sense of the unfolding events. My analysis will focus upon both the economic repercussions and the implications within the realm of international relations.

I would like to start out by saying that I don’t believe in the democratic value of referendums. I know that this statement alone will generate hate and may prompt readers to exit this text, but allow me to explain. It has been proven time and again that when people vote for referendums they tend to vote with respect to who is posing the question and not about the question itself. During an especially ugly campaign, where the quality of public discourse was low and where the “leave” campaigners appealed to the voters’ most basal instincts, one cannot possibly hope for voters to come to a rational result. As has been the case with the referendum in Greece, people voted with respect to who represented each side of the argument. To make a long story short, my take of this is that a lot of people voted to leave the EU as a giant “up yours” towards the Westminster establishment.

Another major reason why I dislike referendums is because both within nature and the human environment the duality of bipolar arguments is very rare. In International Relations theory we often joke that you should be extremely happy when a certain problem only has two faucets to it because that is very rarely the case. The nature of problems that states face is often non-linear, full of complexities and constraints and they’re rarely if ever solved or even alleviated by answering a simple binary argument. And there is yet another problem; black and white arguments are highly divisive in nature. The manichaeistic nature of a referendum often translates as “you’re either with me or you’re my enemy”. Such an absolutist line of thought is never productive and hardly ever leads to better equilibria. The losing side is bound to be hurt or alienated especially during such a brutal, propaganda ridden campaign. These short of confrontations lead to long lasting fractures and divisions within societies, the consequences of which are neither easy to heal nor can the damage be readily evaluated.

Historically, referendums and plebiscites have been used by dictatorships and other such absolutist regimes in order to baptize their decisions within the so called “people’s free will”. Again, as I mentioned earlier, it is extremely easy by playing upon the people’s fears and basal instincts to incite the result that one wishes to see. As Goebbels wrote in his extensive memoir on propaganda, the success of a propaganda initiative depends upon the perception that the people have of the person or organization delivering the said propaganda. In the UK case, the voters’ confidence upon both the prime-minister and the Labour party leader appeared to be especially low hence the lack of traction for the delivery of their “stay” message. Let us not forget finally, that very recently, Vladimir Putin used a referendum to “sanitize” his annexation of Crimea.

I also do not like referendums because they tend to be used to absolve leaders of their responsibilities. A leader is there not to provide soft spoken words of comfort for his voters, not for naysaying and handwringing, not for cheap tactical manipulations. A leader is there to provide vision, leadership and grand strategy. Being a leader is a crushing burden few people can undertake. It is therefore unethical to push that problem off one’s plate, to wash his hands like Pontius Pilate and thrust an extremely complex problem upon the hands of his people.

In David Cameron’s case, the referendum was used for purely political and tactical reasons in order for him to win the general elections. He thought that it would never come to this, or foolishly enough, that he would be able to tame the genie once it got out of the bottle. Alas it would appear that he will join a string of other conservative leaders in the UK, like the Iron Lady or John Major who have had their fingers burnt upon the question of Europe.

Now, as far as economic repercussions are concerned, I believe that the short term volatility of the markets will be contained, although as we say in international relations, we are scientists and not prophets. There will be some short term economic pain which will materialize due to the increased uncertainty and loss of investment prompting perhaps some sort of recession or slump. But that is just looking at the tree and forgetting about the forest. The UK is a member of a giant common market of nearly 500 million people. This common market functions as a unit when delegating with other major powers about trade relationships. One can easily understand that one has much more clout when bargaining a trade treaty as the EU than the UK on its own. The EU is the UK’s major trade partner. More than 40% of UK exports find their way to European Markets. The assumption that the UK is going to be granted Norway’s or Switzerland’s status “just because” is entirely unfounded. First of all, both Norway and Switzerland follow about 70-80% of EU regulation in order to be able to participate in the common market. They do so without having the benefit of a vote upon the decision making. I strongly believe that the leading powers within the EU will not wish to grant a “favored nation” status upon the UK with respect to trade. If the UK wishes to participate in the common market they’ll have to follow the regulations that the “leave” campaigners so vehemently said they’ll kick to the curb. This is just not going to happen. If France and Germany where to allow such behavior, then the EU would crumble overnight.

The UK enjoyed considerable economic benefits within the EU which are not always depicted within the ledgers and accounts. First off, numerous corporations from other countries opted to use London as their European HQs because of the ability to have the best of both worlds: being based in one of the Meccas of the financial world which also happens to offer access to one of the world’s largest common markets. If this duality is broken, London loses the ability to offer immediate access to the EU. This in turn makes it less appealing as a destination for direct foreign investment. Other major financial markets (Frankfurt, Paris and Dublin) will be more than happy to try to steal London’s meal and they will push for a no-frills, no-benefits severance.

As far as the so called immigration issue is concerned, one cannot help but laugh at the frivolity of some of the “leave” campaign’s claims. The UK has profited enormously from the so-called brain drain which has been taking place for some years now. Highly educated and specialized young people are leaving the poorer countries of the EU (especially those of the south) and they have been populating the UK’s universities, research institutions and other such establishments which require intense human capital accumulation in order to function. When a fully qualified medical specialist (consultant) leaves his home country to work for the NHS, the UK immediately pockets upwards of half a million pounds in human capital investment. It does so because that is what it costs to fully train a doctor from the time he enters the university until the time he becomes a consultant. These individuals, such as the example I offered above, are young, dynamic and intelligent professionals, they’re not beggars or benefit tourists. They bring along their savings and their young families thus further denuding their home countries of resources. And their next break-through publication or patent, who’s that going to benefit? Their home country or maybe the UK? Yes, you also might have the Polish plumber and the Lithuanian fruit-picker, or the benefit tourist. But that is truly a tiny price to pay compared to the benefits that the UK reaps out of the common market. You cannot choose to join a club without respecting the rules of the club or abiding to only those which you deem favorable. That’s just not how it works. The UK’s immigration problem is centered mainly around non-EU immigrants. In a booming economy with nearly full employment status (5%) it is only natural that people will seek their future there.

Last, but not least, the UK has benefited enormously by projecting an image of a free, tolerant, open, ethnically diverse society. Historically, the English people profited because of the unparalleled prowess of their traders and financiers and not because of its protectionism and closed borders. The very notion of a free market was born and bred in the UK. The smear tactics and the fear campaign used prior to this referendum has cast a dark shadow upon the core values of the British as a nation. The potential utilization of border controls and restrictions in employment of EU nationals casts uncertainty upon prospective talents migrating to the UK. Nobody wants to live someplace where he feels he’s not wanted and in general, when labour mobility is hindered the economy stands to suffer.  

But the UK stands to suffer more than purely economic losses. Its participation within the power structures of the EU allowed it to act as the voice and conduit of other powers (most notably the USA) within the European decision making bodies. The UK also functioned as the focal point of those states which are opposed to the Franco-German dominance within the EU. The UK gained influence by acting as a moderating counterweight within the EU. Now, all this indirect power will be lost, as already, the US has hinted that, special relationship or not, it will have to look elsewhere for its strategic partner within the EU (most notably Germany).   

Then of course, there are internal issues which have sprung up, the most notable of which is the Scottish problem. Scotland voted overwhelmingly to remain (66%) and this puts them at odds with their English brethren. This is a serious issue which will not easily go away. Scotland represents 10% of the UK economy and within its territory lie important military installations. A new Scottish referendum for independence would only serve to increase uncertainty and instability further adding stresses upon the UK economy. But there are implications which go beyond the British Isles. The case of Scotland acts as an example and already Spain has hinted that it will veto any automatic EU membership for Scotland as this presents a grave threat to its own integrity.

With the termination of the Second World War, Europe emerged deeply traumatized out of the ruins and devastation of the war. The post-war free world was fortunate enough to be led by visionary stewards such as Churchill, Roosevelt, Adenauer and Schuman who helped create the international structures which secured peace and prosperity within Europe and the western world in general. Organizations such as the World Bank, the IMF, the UN, NATO and the EU where created by such visionaries in order to ensure that problems where resolved by cooperation and agreement and not by resorting to armed force. Within Europe specifically, the creation of the European Coal and Steel Community as early as 1952, helped to heal war wounds and to eradicate the divisiveness and friction caused by national borders of the past. The firm establishment of peace and collective security as well as the abolishment of national barriers and unnecessary antagonisms served as the foundation of an unprecedented economic rebirth and prosperity. The post-war generation lived within a climate of hope, where in general every new year was better than the next and where opportunities for one’s betterment steadily increased.

This steadily increasing wealth led to the establishment of extensive welfare states. The offered benefits however, where based upon the assumption of steadily increasing populations and wealth. The uninterrupted explosive economic growth of the post war years was thought to be a naturally and rightfully occurring phenomenon, where in fact it was an unprecedented economic and historic rarity. From the 70s and onwards however, the income of the middle class started stagnating. In order to keep up the standard of living, two major shifts occurred: public and private spending exploded and the birth rate declined. Nowadays, we live in a world where it is not a given that our children will surpass their parents’ wellbeing and where working until our very old age is thought of as the norm. Europe’s population is getting older and much less vibrant. This gerontocracy so to speak is putting enormous pressure upon welfare budgets at a moment in time when states are already heavily laden with debt after the recent hugely expensive salvaging of the financial sector. The general populace witnesses the erosion of its wealth and the extensive changes brought upon its traditional way of life by an increasingly globalized and interdependent world economy. Taking as a given the post-war prosperity, voters, especially those of lower education and income brackets, fall prey to the notion that by creating a national safe haven they will guard what has been left of that era.   

This line of thinking is wrong for many reasons. First of all, it is incredibly difficult to grasp the complex interdependence of today’s economies. As the very recent economic crisis has shown, the Lehman Brothers bankruptcy was enough to trigger enormous economic shockwaves throughout the world. We should always keep in mind the lessons from the 1929 economic crisis where the ensuing depression was greatly aggravated by the then followed policies of trade barriers, tariffs and closed national borders. Should all states follow such protectionist policies then everyone stands to lose. There is no such thing as “splendid isolation” in today’s world unless we’re talking about North Korea.

There is no doubt that the referendum result has acted as a giant slap in the face for the European edifice and sadly, it provides further proof of a worldwide rise of populism and fear politics worldwide. As has been said above, David Cameron bears a considerable amount of blame because he thought he could control the situation after opening the Pandora’s Box. As always however, it takes two to tango. The European Union as it stands today is a deeply flawed organization where kicking the can down the road and procrastination about problems is the rule. The vision and ideals of the past have started fading fast as the Union has failed to take action in order to secure a minimum level of economic growth for all its member states. The EU as it is today lacks a risk-sharing mechanism and above the people lack faith in the EU being a key aspect within their lives. The voters of member states lack the commonality of destiny between them and that is what is eating the roots upon which the tree stands. More importantly, today’s world is destitute of statesmen. We live in a world where Donald Trump and Boris Johnson have serious chances of becoming their respective countries’ leaders where once the likes of Roosevelt and Churchill where at the helm. The western world today needs more than ever a positive reset, much like the Marshal Plan did for post-war Europe. I’m afraid however, that such a positive shock is not in the cards at the moment.

The people are constantly being bombarded about costly salvages of banking wrecks. They keep on hearing about difficult to understand European stimulus packages whose effects rarely trickle down to the common folk. And, as is well known, people tend to have a very short historical memory and future horizon. It is often claimed that globalization took away the blue collar jobs of low income, low education white people in the west and repositioned them in the developing world. The proverbial populist snake offers an image of a blemish free national paradise, where protectionism and national borders are going to re-open the steel mills and the coal mines. Unfortunately, this is but a chimera; as is well known there is no static equilibrium in nature or human societies for that matter. There is no magic wand which can make things go back where they were. We cannot just enjoy the benefits that a free market offers and reject those aspects that we don’t like. When a state projects its own national particularities and enforces protectionism and border controls, other states are going to follow suit.

The EU as it is now is deeply flawed. One must think the following however: how are we better off? By staying inside a union of states and trying to slowly fix the problem or by jumping into the unknown? Europe is a geographical area which enjoys far greater global wealth than its aging population is entitled to. Europe is an area surrounded by billions of youthful, poverty stricken populaces. Europe’s share in the world economy is declining as other powers are emerging. How can a state best defend its national interests? By going at it alone, believing that it is safe and secure behind the waves? Or by sticking together with others as a block, increasing our bargaining power in today’s turbulent world?