Whether the UK is in or out, the EU must face up to its problems
While the EU must address the immediate threat of a Brexit, issues more fundamental to its existence remain unresolved.
The best economic outcome of the UK’s referendum on EU membership would be if it led to wholescale reform of the EU. Growth might resume and the forces of discontent across the continent moderate. In the wider scheme of things, whether the UK stays or leaves is not the most critical factor for the future of the union.
Of course, for the UK’s banking sector, it is vitally important to be inside the European single market. A British departure would have a much more severe effect on the services sector than on manufacturing. The UK's surplus in financial services with the EU is about £20bn ($27.7bn) and it is one of the few industries where the UK has a competitive advantage.
The danger of leaving is that UK-based financial firms lose passporting rights whereby they can operate freely across the single market. There would be further issues of whether the UK regulatory regime was recognised as having ‘equivalence’ by the EU and the prospects for euro-denominated business staying in London would be doubtful.
The UK might be able to strike a post-Brexit deal that took care of these problems but, in any case, the long-term damage would be much more to the country than to the banks. The banks would simply reorganise a scaled-down version of their operations based in London, with Frankfurt or Paris the beneficiaries.
Yet, after all this, that still leaves the EU as an institution that has lost legitimacy and that has failed to deliver on its promise. The eurozone project is unfinished business, with governments lacking much will to reach the logical final destination of fiscal union. Meanwhile, the European Central Bank is left to try to save the day with ever more monetary largesse.
In eurozone banking there are concerns about having more than one regulator – the ECB as well as national bodies – the feedback loop between sovereigns and banks remains a problem, and an essential EU-wide deposit guarantee scheme is still a long way in the future. On a broader front, continued austerity and the migration crisis have shaken the foundations of the union and caused bitter internal struggles.
One British complaint is that the convoluted decision-making process of the EU is unaccountable and produces poor outcomes. Whether the UK is in or out, the EU still has to address this problem or face the reality of a growth in anti-EU sentiments in other countries apart from the UK.
