As the UK comes to terms with the result of its referendum decision to leave the EU, the challenges facing what is left of the union are mounting, writes Brian Caplen.
The UK economy will struggle over the next few years as it adjusts to the new environment following the country’s departure from the EU. But providing common sense prevails, there are reasons to be positive about the final outcome. The best outcome would be a Norway style-deal giving access to the single market (at the price of budget contributions and free migration fudged to make it work with domestic politics) plus trade deals with key emerging markets such as China and India.
Ironically Scotland, with its majority vote to stay in the EU and ever-simmering threat of independence, could be the critical factor turning in favour of a Norway style deal.
The EU wants to stop other independence movements taking hold, such as in Catalonia in Spain, so may favour a deal that keeps the UK inside the EU in everything but name.
By contrast, fixing the EU and the ill-designed euro currency area is a whole lot more challenging. To make the eurozone work properly requires centralised economic government, common taxation and common debt issuance as an absolute minimum but the political will to finish such a project has evaporated as a result of the eurozone crisis.
That leaves the eurozone muddling through at best, but also facing a political divergence, the extremes of which make the debate between the UK’s 'Remain' and 'Leave' sides seem quite moderate. The UK electorate after all is fairly united in its eurosceptism and the in/out debate was more about whether remaining and putting up with the EU with its economic certainties was better than leaving with all the hassle of renegotiation and ensuing economic turbulence. I would have preferred the former but am now busy adjusting to the latter.
In the EU, the divisions are much greater. There are arch federalists such as European Commission president Jean-Claude Juncker and former Belgian prime minister and leader of the liberal grouping in the European Parliament Guy Verhofstadt on the one side, and on the other side arch nationalists such as Marine Le Pen the leader of France’s anti-EU National Front, and the leaders of the Alternative for Germany political party.
Mr Verhofstadt wrote a book some 10 years ago called the United States of Europe and he wants Brexit to be the spur for further European integration. But just as a currency zone without common economic government is a misnomer, so too does the United States of Europe concept fail to take account of the huge differences between the US and Europe.
Mr Verhofstadt is right in his argument that the eurozone actually needs more free movement of people than at present so that, as in the US, the labour force moves to where the jobs are. But the federalists seem to forget that in Europe there is no common language; national culture takes precedent over continental culture (few people in the US says they are Californian before they are American, but in Europe people are generally Spanish or German first, and European a distant second) and there are no continent-wide political parties. In fact, it is doubtful whether more than a minority of ordinary Europeans can even name their member of the European parliament, or know who the European Commission president is.
When there is a crisis in Europe, such as that in Greece in the aftermath of the global financial crisis, the conversation quickly reverts to a discussion between nation states – between Greece and Germany – rather than one to be resolved at the European level.
Pushing on relentlessly with the United States of Europe idea is just going to alienate further those in the centre ground – which should be the majority – and push more of them into the arms of the nationalists. Pulling back is just as difficult given that the current system is an unworkable hybrid.
Brexit has been portrayed by some as the UK’s retreat from globalisation. Looking back from 10 years hence, it may be that Brexit was more on the right side of history than the United States of Europe.
Brian Caplen is the editor of The Banker.
