BlogSpot – Brexit: Is European Political integration a pipe dream?

“Brexit” Proposals: Another rumbling in a slowly decaying EU

“A live-and-let-live Europe, a flexible Europe”: Cameron’s proposals—From David Cameron’s re-election in May 2015, with a promise to hold a referendum on the UK’s EU membership (RTE news), to his recent speech clarifying its expectations concerning EU renegotiations (Full speech video) and letter to the President of t

he European Council (Full Letter), a desire to take back Britain’s EU membership to its original motivation is emerging (European council statement to the Commons), namely « a single market of free trade » (Osborne's interview for OE) but not a political entity (European institute & LSE). Gideon Skinner (IPSOS Mori) writes that there is a currently clear public support staying in the EU, but opinions towards EU is volatile. Many British commentators noted that the demands did not go as far as expected—notably short of demanding an outright veto for Britain on questions concerning migration. The key points are (Open Europe):

(i) A “formal, legally-binding and irreversible” end of Britain’s obligation to work towards an “ever closer union” as set out in the Treaty

(ii) Legally binding safeguards to protect the integrity of the single market from Eurozone integration

(iii) A more ambitious push on economic competitiveness (deepening the single market, cutting red tape and concluding FTAs with other global economies)

(iv) An enhanced role for national parliaments including a collective veto right over new legislation

(v) Four years restriction on new EU migrants’ access to UK benefits and a more general crackdown on abuse of free movement.

What if”: the consequences of a Brexit for the UK. First, it is all about expectations—as a full Brexit would take at least 10 years, according to this Brexit timeline. Still, in the view of Global Counsel, it could impact the UK through 10 channels: FDI, liberalization, industrial policy, immigration, trade policy, international influence, budget, and uncertainty on markets. The most worrisome issue would be a collapse of the financial sector - leading sector of the British economy. Frank Gill (S&P's) argues that it could dent the UK’s current net trade surplus in insurance and financial services—depending on what alternative free trade arrangements the UK government could agree with its European partners. Model estimations of the trade impact, based on various alternative agreements, range from a 2.2% decrease in GDP to a 1.6% increase according to Open Europe.

Failing to find a common EU position towards British proposals. The various positions across the EU are summarized by the LSE on foreign policy, Dgap think thank and Open Europe—reflected in our Killer Chart. The European Commission sees a number of elements that seem to be feasible like finding ways to increase the role of national parliaments, some issues which are difficult like the relation between euro ins and outs, and some things which are highly problematic as they touch upon fundamental freedoms of our internal market.

IMF calls for further European cooperation. After the ‘Refugee crisis’, the possibility of ‘Brexit’ comes as an additional threat to European integration as warns the IMF (Maurice Obstfeld).

From « an airplane flying on one engine » corporate financing to a Capital Market Union in Europe

European corporations mainly rely on bank financing for their external funding. The CMU (a pillar of the Commission Investment Plan) is identified as a priority for completing the Economic and Monetary Union by the Conclusions of the European Council. The EC has defined a number of priorities to achieve the purpose of CMU (Deutsch Bank):

(i) Lowering barriers for accessing capital markets

(ii) Widening the investor base for SMEs

(iii) Building sustainable securitisation

(iv) Boosting long term investment

Goldman Sachs expects from this wide-open, accessible and liquid European capital market to broad the range of investment opportunities available for both institutional and retail investors. Yet, some of the big issues are longstanding (FT):

(i) How will we encourage investors to make cross boarder investments when national insolvency laws are so divergent across the UE?

(ii) How can investors gain access to comparable credit information on SMEs?

Early October, the European Commission launched the Capital Markets Union Action Plan to help build a true single market for capital across the 28 EU Member States. The proposal comes as Europe remains gripped by an investment crunch, with businesses, especially small and medium-sized ones, struggling with diminished access to bank financing and limited market financing options. Previewing the proposal Commissioner Hill assured that the proposal does not aim to disrupt markets that work well and urged the UK to help shape the system. The plan is short on specifics.

The Short View... Political uncertainty continues in Portugal as a left wing union based on a fight against austerity (WSJ) gained a majority to overthrow the government, with a mostly market-negative program (NYT), yet committed to Europe (Politico.eu).

French GDP growth equals German GDP growth in 3rd quarter, as the latter feels the pinch of the euro zone crisis (Reuters), while the French consumption and private investment are getting stronger (Natixis).