Economics and politics - comment and analysis
13. June 2016 I Heiner Flassbeck I Europe, Events, General, General Politics

Brexit: Much ado about nothing?

‘Much ado about nothing,’ as Shakespeare wrote, may perhaps be slightly exaggerated in the Brexit case, but ‘Alot ado about little’ would be absolutely appropriate. Even the play of words between Brexit and Grexit is misleading. A Grexit means that Greece would leave the euro zone. It would issue its own currency, depreciate it in order to stimulate its exports and it would probably encourage other countries to follow its example. The United Kingdom, on the other hand, is not even a part of the euro zone. If the Brexit camp wins in two weeks from now, the British will opt out of some European treaties. This is being portrayed as almost a matter of life of death these days. It is not. As long as we do not know what will come in the place of the old treaties, the process is like the one of the famous bicycle that just fell over in China. Then, why do so many create such so much noise and spill such an extraordinary amount of ink over this non-event? This can only be explained by the European spin doctors and their collaborators in the media who work according to the motto ‘Control all the damage and make sure it does not spread.’ The fear that drives all thoughts and actions of these people is that the British would decide against Europe on 23 June. It has to be made sure that others do not try the same. But this panic has no rational ground. The analogy between an exit from the monetary union and a possible example function of a Brexit is being exaggerated, consciously or unconsciously.

Even Nigel Farage would not end all agreements with the EU

As a rule, shocks in the economy come to the surface, often quasi overnight, when prices of essential good substantially rise or fall and many actors suddenly see their normal expectations curtailed and are forced to make quick adjustments regarding spending and investment in a situation that is fundamentally characterised by great uncertainty. None of this will happen if the British exit the European treaties.

Even if David Cameron would resign because the Brexit camp wins, little else would happen. Boris Johnson would presumably take his place. None of the major parties in the UK want elections at this point. The Conservatives are afraid that they would lose the general election to Labour, which is a distinct possibility. The situation within Labour has been complicated since Jeremy Corbyn became leader. The election can only be won if the right wing and the left wing of the party unite and this will certainly not happen anytime soon. Regardless of anything else, no one will work together with Nigel Farage’s UKIP. Even Farage will not exit all or most of the EU agreements, because it is simply absurd to exchange highly technical and finely tuned trade and other agreements for a vacuum and a lot of uncertainty.

Imagine what would happen if a majority of the British people votes for the Brexit. The point that will be made the next morning is that all agreements remain valid until new treaties are adopted. One can very well imagine that the European Commission, of course without making this public, has been working on the formulation of bilateral treaties between the EU and the UK in case of a Brexit. These bilateral treaties will replace the multilateral European treaties and keep the substance of the relationship between the two economic regions largely intact. No one will throw overboard free trade, change the mechanisms of the internal market or any other significant regulations.

A Brexit would decrease the UK’s power within the EU. It may well be true that, in the longer term, new rules will favour the British government and the City of London, the financial centre, less than before. If the UK exits, the British government can no longer use its veto or organise majorities across Europe to support policy proposals. In the short term, however, no one will act against the UK or the City. It will be a matter of not adding more fuel to the fire. The expectation that some in Brussels would be eager to punish the British for their exit in order to warn others not to try the same is unrealistic (see for example here). In fact, Denmark is the only country that could be ‘warned’ in such way. The situation of the countries that belong to the euro zone is very different from the position of the UK within the EU.

When one is once again free in a sovereign country …  

In the long run, things will certainly be different, especially from London’s point of view. The British will be free and sovereign again. They will feel like the Swiss, who firmly believe that they are the freest people in the world because they are not bound by any treaties. But this is of course not true. Switzerland is linked to the European Union by many bilateral agreements and treaties. The vast majority of these bilateral agreements give Switzerland exactly the same rights as EU member states as well as the same obligations. The crucial difference between the bilateral agreements that bind Switzerland and the multilateral treaties that bind all the member countries, is that these members had a say in the formulation of the texts and the decision-making process that led to them and, of course, at the end of the process, they had a vote. Switzerland has no vote. It can only rubber-stamp agreements. Being a mini-state, it has no real bargain power with regards to the EU.

Something very similar will happen to the UK is the Brexit becomes a reality, of course it remains highly unlikely. The UK will have to take a back seat in Brussels, everything will be settled by bilateral agreements and the UK will basically be treated as a member state. The clear disadvantage to the UK would of course be that it would no longer be possible for them to take part in the negotiations of European agreements. The member states will present agreements to the UK with the message that they can take it or leave it. That is, if you like, also some form of freedom and one can feel wonderfully sovereign, just like the Swiss.

The European Union will not break apart if the UK decides to exit on June 23. The British are too far removed from the central problems within the euro zone for their displeasure to jeopardise anything fundamental. An unlikely Brexit will certainly shake up European politics for a while before things return to the European normal. The real danger for the European Union does not come from across the Channel. The real potential breaking point lies, as was so often the case in history, behind the Rhine.  An entity such as the European breaks apart right in the middle or it does not break apart at all.