The rise of the Eurosceptic party UKIP and its leader Nigel Farage have forced British Prime Minister David Cameron to organise a referendum UK-EU membership, fulfilling a pledge made during the general elections of May 2015. It is interesting to consider the economic and political consequences of leaving for the United Kingdom, and more fundamentally, for the EU as a whole and as a political project.
In case of a Brexit, the overall economic outcome would be negative for the British
Tackling the issue from an economic angle, numerous studies have been carried out to assess the expected “cost” and consequences for the British economy if it leaves the European Union. However none of them agree about the scale of the effects, largely because the situation is unprecedented, as are the effects of the outcome of the negotiations following a vote for Brexit. The Centre for Economic Performance predicts a drop of £1,700 (€2,100) per household per year in the most pessimistic scenario. This study provides more specific analysis of the consequences by looking at the cost on a micro-economic level. However, this type of aggregated result ignores the complexity and diversity of the economic consequences, and demonstrates that it is impossible to exclude value judgements from thi
s type of question. It also leaves itself open to eurosceptics’ allegations that figures have been manipulated. The eurosceptic think tank OpenEurope concludes that if the flow of migration to the United Kingdom does not change, GDP would increase by 6% by 2030 (€134 billion) in the best-case scenario, or drop by 5% (€120 billion) in the worst-case scenario. Another study, carried out by the Confederation of British Industry, predicts that a million jobs would be lost, at a cost of £100 billion. However, the agency Moody’s only predicts a weak impact on the British economy.
Furthermore, in case of a Brexit, some economic sectors, particularly the banking sector and multinationals, have let it be known that there is a risk that they would relocate from the United Kingdom to the European Union, because of differences in regulations. Likewise, if the flow of foreign direct investment dries up, the balance of payments deficit would grow, causing Sterling to lose value (up to 20%).
Despite differences of opinion, the different economic sectors are generally concerned about the possibility of Brexit. The confidence of economic agents, or the “business climate”, as Keynes described it, determines future activity as much as the present reality, if not more so. If different groups expect an economic depression to start after Brexit, their fears can become “self-fulfilling prophecies”. If this is the case, Brexit will certainly not benefit the British economy.
Similarly convinced that the British economy will have more to gain inside the EU that outside it, David Cameron negotiated concessions with the EU in early 2016 to avoid the risk of Brexit. This brings us on to the political side of the question.
Cameron’s campaign is based on the argument that he has managed to achieve significant concessions from the EU during the European summit of 18 – 19 February 2016. The agreement that was reached promises the UK various opt-outs: it does not have to work towards ever closer union, it will not be obliged to offer migrant workers from other parts of the community the same rights as British workers (such as access to social housing, in-work benefits), and the EU can no longer demand that countries outside of the Eurozone make contributions to costs related to the single currency. These compromises give David Cameron a guarantee of stable relations with the rest of the European Union, and he hopes they will enable him to avoid an exit from the EU with risky consequences. If the United Kingdom left the EU, it would have to renegotiate its trade relations with the Union, and also with all the countries with which the EU has signed agreements by virtue of its exclusive trade powers. Ultimately, a Brexit would indeed lead to great political and economic uncertainty, while “business as usual” is predictable and has already been negotiated. Donald Tusk has already announced that the agreement was “legally binding and irreversible”, and that it could not be cancelled by the European Court of Justice. This declaration is questionable as decisions made by the European Council are not legally binding, and they have been subject to verification since the Treaty of Lisbon. Nonetheless, it carries considerable political weight, as he is speaking on behalf the Union.
Cameron’s manoeuvre shows the political weight of the United Kingdom in the EU: “I have negotiated a deal to give the UK special status in the EU”, he said triumphantly, reasserting his claim that his country would never join the Eurozone. More specifically, it shows his ability to influence decisions incrementally: “The EU is not perfect, it needs additional ongoing reforms, but the United Kingdom is better placed to achieve this from inside.”
So the British government is trying to ensure as far as possible that it is in its interests to be a member of the EU; but how is it in the interests of the other Member States? We can now turn the tables and look at the issue from the perspective of the European Union to assess the extent to which a Brexit would generally be in the interests of the Union and its political project.
Less significant economic consequences for the EU
If the United Kingdom left, this would call into question free trade with other Member States in its current form. This would lead to a drop in EU exports to the United Kingdom, which currently represent 10% of exports within the community. However, this dependency seems to affect the United Kingdom more. Looking at the balance of trade between the United Kingdom and the EU, exports from the EU to the United Kingdom represent just 3% of the GDP of the countries concerned, while British exports represent 13% of British GDP. However, the consequences would not be the same everywhere, and they would be greater in the countries that have closer commercial and financial relations with the United Kingdom: Ireland; the Netherlands; Luxembourg; Belgium; Sweden; Malta; and Cyprus. Considering the weight of the financial sector in countries such as Cyprus (7 times GDP), Luxembourg (22 times GDP) or Malta (7.6 times GDP) compared to the average (3.46 times GDP overall in the Eurozone), one wonders if a reduction in these flows might not be a good thing for the real economy of the EU as a whole.
Regarding the consequences of re-establishing border controls, the German research institute Prognos has carried out a numerical study on the consequences of a Brexit for trade, using an optimistic scenario and a more pessimistic one. In the first case, restoring border controls for people would increase production costs by 1% over 10 years (€470 billion). If it takes longer for people to pass through customs, the increase would be 3% (€1.4 trillion). The cost considered here depends on the time spent at border controls by people (workers, commuters, tourists) and vehicles. These studies are based on the hypothesis that there would be a return to border controls and an increase in customs duties, although this is not the only possible outcome if Brexit were to happen. If “leave” wins on 23rd June, negotiations would be started to redefine relations between the United Kingdom and the Union. The United Kingdom could return to the status of a simple non-Member State, like the United States or China, or it might sign a free trade or customs union agreement with the EU. A third possibility is that it might join the EEA (like Liechtenstein, Iceland and Norway). In this case, free movement of goods, services, capital and people would be maintained, and European directives/standards would still apply. The United Kingdom’s contribution to the EU budget would be reduced, but it would lose influence over decisions.
These different possibilities follow Balassa’s typology of regional integration; however, the consequence in this case would be a “regression” in this process, which is generally analysed according to the logic of “spill-over” and the “ratchet effect”, in accordance with the law of integration. In this sense, a Brexit would cause an unprecedented change to European integration and related theories. Moving on from economic considerations, we shall now examine the political consequences of a Brexit for the EU.
Brexit: a blow to the European project?
In some areas, the United Kingdom has certain assets that the Union would lose if this Member left: it is a diplomatic power; a permanent member of the UN Security Council; and the 5th global military power. What would it mean for foreign policy and common defence? In economic terms, the United Kingdom accounts for 16% of the GDP of the European Union, and the City is the top financial centre in Europe. Outside the EU, it would be impossible to regulate the City. Indeed, Brexit itself brings a risk of “contagion” to other Member States. States such as the Netherlands, Sweden, Finland, the Czech Republic or Hungary might also be tempted to leave the European project. A recent poll in Sweden showed that a vote for Brexit would indeed lead to a shift in opinion between pro- and anti-EU positions: the current balance of 44% (pro-EU) versus 32% (anti-EU) would change to 32% versus 36%. There is a very real risk of opening Pandora’s box.
Should we be concerned about this general trend? Paradoxically, this process started by the United Kingdom might strengthen the cohesion of the Union and its political and economic integration. In case of a Brexit, Sweden and Denmark would lose a significant ally to support their refusal to join the Eurozone. Indeed, in theory all the countries in the European Union are called upon to join the Eurozone. Only Denmark and the United Kingdom negotiated an opt-out from adoption of the single currency when they signed the Maastricht Treaty (in Protocol 25). The case of Sweden is more complex: no opt-out has been signed and the country will have to enter the Eurozone as soon as the entry criteria have been met. However, Sweden is not part of the European Exchange Rate Mechanism (ERM), which details as one of the criteria for joining, so it will not join the Eurozone. Keeping the United Kingdom as a Member State allows the exceptions made for some countries to continue, stopping real economic governance and putting a brake on the greater integration called for by federalists. Correcting the original mistake made when the euro was conceived – creating a single currency without a state and without real economic governance – could enable economic and monetary union, a more advanced stage of integration according to Balassa’s typology, and it could allow federalisation of monetary and budgetary policy.
Some feel that losing this Member would mean that the EU was losing any hope of helping Europeans to evolve together. This analysis is based on two underlying principles. Firstly, Cameron’s defiant position is short-term, and the current blockage should be seen in the context of the general amount of euroscepticism within the Member States. Secondly, there are progressive, pro-European forces in the country.
Is the British position a short-term one? It turns out that this reticence about deepening European integration cuts across political boundaries in the majority Conservative and Labour parties. Labour victory in 1997 under Tony Blair did indeed allow integration of the Social Chapter affecting salary, health, and health and safety at work in the community “acquis”, but it did not revive the debate about British integration in the economic and monetary union. Blair would have been interested in joining the euro when he came to power, but he was denied by the Chancellor of the Exchequer at the time, Gordon Brown, as it was not guaranteed to have a positive effect on the British economy. This is a key sticking point, as it prevents the EU from having a consistent budgetary and monetary policy, and it halts any attempt at federalism in the EU. This stinging observation raises the question of whether a Brexit would not in fact be a victory for the European project, and whether this has always been the case.
This means that the position of each Member State is implicitly simplified, and the United Kingdom is relegated to the status of the eternally eurosceptic country, although there are progressive forces there. The campaign run by the British Greens, for example, aims to show that the EU makes a contribution to the country, particularly in environmental terms: the EU enables policies that protect labour rights, strengthen police cooperation etc. Following this logic, the British Greens believe that leaving the European Union would be tantamount to refusing to reform it to ensure that pro-environmental, progressive regulations apply. These pro-European, progressive positions, supported by the majority of people in Scotland, are overlooked if we only consider national positions.
Support for Brexit in the name of the European ideal and European integration also reveals an intrinsic failure in the federalist project. It implies reducing transnational political divisions to divisions between countries. Thus, in a way, being a federalist means giving up transnational battles at a European level, and recognising that integration will be carried out through states and it will come more through an intergovernmental approach than through a federal EU. This pragmatic approach might make it possible to relaunch the process of European integration, but it would lead to marginalisation of progressive movements such as the Greens. Is it worth it?
Brexit in the general interest of Europe?
First of all, we can put the losses caused by a British exit from the Union in perspective. London categorically refuses to invest in “ever deeper” union. Indeed, Cameron has said “We will never adopt the euro, we will never take part in bailouts of the Eurozone, we will never be part of the border-free zone [Schengen], nor a European army nor a European super-state”. Even if the United Kingdom leaving means a loss of economic weight, the European project is not merely a question of economic integration. Furthermore, post-Brexit negotiations could lead to strengthened free trade with the country as part of membership of the EEA. In this respect, it is also interesting to note that certain points considered to be the limits of the EEA coincide with the opt-outs granted to the United Kingdom as part of its participation in the EU: the area of justice and internal affairs, and economic and monetary union. The areas in which the current situation would change are the Common Agricultural Policy (CAP), the customs union, common trade policy, and the Common Foreign and Security Policy (CFSP). The negative economic consequences for the EU should therefore be seen in perspective. The same applies for the United Kingdom itself: Iceland and Norway, often cited as economic models outside the “constraints of Europe”, are indeed members of the EEA, so they apply European legislation on free trade.
On the question of foreign policy and common defence policy, and the diplomatic and military weight of the United Kingdom, the country will still put a brake on more integrated and community-focused defence, and Catherine Ashton’s performance as High Representative of the CFSP may cast doubt on the United Kingdom’s ability to strengthen the EU in the area of international diplomacy.
Losing the United Kingdom as a Member State would mean losing the 4th largest contributor to the European budget after Germany, France and Italy: the UK pays a total of €11.3 billion (2014 budget). The United Kingdom contributes 12% of the EU budget, despite the reductions due to the British rebate. However, arguing that Brexit is hazardous or dangerous because the EU would have to make up the €11.3 billion seems a weak argument for progressive forces that want a federal union in the long-term. In addition to the British rebate, the United Kingdom has attempted to reduce the overall level of the European budget, using its influence in the two bodies responsible for the budget vote: the Council, representing the governments of the EU, and the Parliament (73 MEPs – as many as France or Italy). With the United Kingdom gone, the path would be clear for a substantial increase in the EU budget, in which own resources are limited to 1.23% of the Gross National Income (GNI) of the Member States, although they only generally reach 1% of the GNI of the EU. Such a low federal budget in fact makes it impossible to have a policy to absorb asymmetric shocks: it is estimated that it should be 8 – 9% of the GNI of the EU to fulfil this role, while the average budget of a federal state is 25% of GNI.
These facts indicate that a Brexit could help supporters of increased integration and progressive elements in the EU. In case of a Brexit, Germany fears that the centre of gravity would move to the south of Europe, towards countries like France, Spain and Italy. Similarly, Poland, Sweden and the Czech Republic are concerned about losing a valuable ally. In terms of the issues currently under debate, a UK exit could cause problems with TTIP discussions. Obama, while cautioning against a failure of negotiations between the EU and the United States in case of Brexit, reinforces the view that this situation would lead to a swing in a progressive direction in the EU. The hypothesis that the EU would swing in a progressive direction may explain the reticence among liberal and conservative Europeans to see the United Kingdom move away from the EU, which in turn explains the concessions granted to the UK.
The agreement of 19 February: establishment of Europe “à la carte”
David Cameron negotiated concessions from the other European leaders during the meeting of the European Council on 18 – 19 February 2016. Many observers interpreted this as a form of blackmail by the British Prime Minister. The question is whether the concessions are significant, and if so, to what extent a member state can legitimately exert an influence on the European project.
Juncker presented the agreement as a balanced compromise: “It respects the key principles of the European Union, and at the same time it takes on board the concerns, the wishes and the suggestions of the United Kingdom.” However, one might ask if it is beneficial for the EU.
According to this agreement, the two million EU nationals settled in Britain will not be able to claim the same in-work benefits as British people until 4 years after the start of their employment. This measure is not just a break with the equality of European citizens; it also opens the door to more derogations within the Union and social dumping for European workers. It leads to a levelling down of the European social model, in which EU workers find themselves in a similar situation to people from outside the EU. If the agreement is applied, the United Kingdom will also have managed to impose a change to a European regulation voted by the two co-legislating institutions, regarding coordination of social security systems.
The agreement will also weaken integration based on legislation produced at a federal level by giving national parliaments the option of vetoing European legislation. Whatever the political divisions and the political benefit that might be gained by progressive forces, this measure goes against the idea that European integration must be strengthened. Thus, the seed of the risk of disintegration indicated by the opponents of Brexit is already present in the agreement, although it is intended to prevent it.
The EU is declining to work towards “deeper political integration in the European Union” if it offers the United Kingdom the option of not participating. This provision, which is present in the preamble to the Treaty on the Functioning of the EU, is not legally binding, but it still has vital symbolic value for the political project of the EU. Thus, if the United Kingdom decides to stay in the Union, the agreement reached opens the way for more “opt-outs”, allowing a Europe “à la carte”. These concessions are in line with opt-outs that already benefit the United Kingdom. We have already mentioned non-participation in Economic Monetary Union (Protocol 15), which has allowed the country to exceed the 0.5% structural deficit authorised by the Treaty on Stability, Coordination and Governance, but the country also benefits from clauses allowing non-participation in the Schengen Agreement. According to Protocol 19 of the Treaty of Lisbon, the United Kingdom has 3 months to inform the Council if it does not want to apply a measure decided in the Schengen framework. Protocol 20 also allows the United Kingdom to exercise border controls on people entering its territory. The country also has a derogation on the EU Charter of Fundamental Rights. Although the Charter has been granted the same legal status as treaties since the Treaty of Lisbon (Article 6 Treaty of the EU), no examination has been carried out to see if the laws of the United Kingdom are compatible with it (cf. Protocol 30). According to Protocol 21, the United Kingdom may participate in the Area of Freedom, Security and Justice, but any measure under Title V is not binding for the country. In fact, since 1st December 2014, the United Kingdom has been able to stop applying the majority of the acts of the Police and Judicial Co-operation in Criminal Matters, which was adopted before the Treaty of Lisbon, in accordance with Protocol 36 (Article 10, §4 and 5).
Through this agreement and the other points mentioned here, the United Kingdom is blocking European integration once more, both in social and monetary terms. The text of the agreement also shows the negotiating force of the United Kingdom: “The concerns expressed by the United Kingdom in this regard are duly noted, in view of further developments of Union legislation and of relevant national law.” However, it would be a mistake to believe that the United Kingdom is the only country creating sticking points within the EU, although this would be quite a convenient idea. For example, if the tax on financial transactions at a European level was not torpedoed by France and the future commissioner Pierre Moscovici, they certainly only paid it lip service. Similarly, those who believe that a UK exit would enable more progressive policies in the EU that would be less favourable to nuclear energy are forgetting that this sector is supported by a broad consensus in some European countries, including France.
The opposition from the British government essentially concerns the budget, foreign policy and foreign aid, and it has little to do with the internal market, transport, the environment and fishing policy. This means that if the United Kingdom were to leave the EU and join the EEA, for example, the European Union would no longer be blocked in these areas, while the United Kingdom would not be overly concerned, as the key points of EU trade policy are accepted by the British.
It is possible to reform the EU, as successive treaties demonstrated, particularly during the Eurozone crisis. However, the continued existence of derogations, notably those enjoyed by the United Kingdom, show that the system is becoming increasingly schizophrenic. It seems impossible to conceive of two parallel decision-making systems within the European institutional system, for greater political integration within the Eurozone on the one hand, and an essentially economic union on the other. Why not just accept that some countries want to leave the project for “ever deeper integration” to become privileged partners in a free trade area? Brexit concerns European leaders because of the uncertainty about how it will affect economic relations. It throws up the possibility of barriers to economic trade that would be damaging both to the United Kingdom and the EU. However, it also reveals the EU’s original sin: it did not take on a federalist project. The same pitfall led to establishment of a single currency in a monetary zone that was truly not optimal, and in a broader sense, lacked real political integration.