NAVIGATING THROUGH BREXIT
(Re-)Assessing the Implications
High costs and changes in economic fundamentals—Ivo Pezzuto (EconoMonitor) reviews the expected economic costs of Brexit. The costs will come first through trade, and will grow as the economy looses the benefits of the single market, according to Simon Wren-Lewis (MainlyMacro) (see the National Institute’s analysis for example). Olivier Blanchard (PIIE) writes that Brexit has changed economic fundamentals, with long-run costs and even larger short-run costs for the UK; and for the European Union, with risks of similar political dynamics.
Risks to the role of London as a financial center—Jon Danielsson, Robert Macrae, and Jean-Pierre Zigrand (Voxeu) see as a likely impact of Brexit on financial markets a fall in the quality of financial regulations, more inefficiency, more protectionism, and more systemic risk, and for the EU, a sharp possible increase in its regulatory intensity, and a more costly, more homogenous, and consequently less safe financial system. If the UK cannot secure a “Norway” deal and stay within the internal market, the UK will lose the passporting rights which make London attractive as a financial centre, according to Dirk Schoenmaker (Bruegel) and politico notes that there is no way that the EU will allow the U.K. to retain valuable passporting rights without shouldering obligations the referendum rejected (led by freedom of movement).
A political and constitutional crisis—Guntram Wolff (Bruegel) notes that the referendum has left the UK in a political and constitutional crisis, with no one accepting the responsibility of triggering the Article 50 exit negotiations. For Carl Bildt, Britain’s bitter divisions now seem unbridgeable and its political direction is unclear, with pro-market, pro-globalization “Brexiteer” Conservatives that won the referendum on the back of a nationalist, populist campaign and that need to square their support for free trade and deregulation with their vow to working-class voters to do more to protect jobs and public services. Jacob Funk Kirkegaard (PIIE) looks at the political crisis in the UK—heavy divisions among the Conservatives and Labor party alike, creating opportunities for the United Kingdom Independence Party (UKIP) and the Liberal Democrats. The geopolitical consequences could also be vast, according to Joseph Nye—and creates a large risk for the global standing of the UK, according to Adam Posen (PIIE). Some mention a risk of disintegration of the UK itself, with Scottish FM Nicola Sturgeon saying that Scotland’s forced exit from Europe was “democratically unacceptable” (Politico).
Losses of EU status are already materializing—no British EU-presidency as scheduled on July 2017, relocation of the clearing business away from London (FT) (and, anecdotally, London will not be the HQ of the new Anglo-German stock exchange.
How did we get there? The blame game
The over-extension of the EU mandate was a major factor behind the Brexit vote, according to Martin Feldstein (Project Syndicate), and the ambiguous subsidiarity principle that governs the division of powers between the EU bureaucracy and member states—creating discomfort (see the recent Pew poll). For Harold James (Project Syndicate), Brexit was driven by a sense that political and economic elites were both corrupt and wrong about the potential implications. The sharp widening in inequality in Britain is a major factor (Guntram Wolff (Bruegel), EuroIntelligence and Jeffrey Sachs), with globalization a key reason why populists have gained ground (Sławomir Sierakowski). For Cameron, European leaders’ refusal to reform freedom of movement rules was one of the main reasons for the UK’s decision to leave the EU (The Times, FT and Telegraph). Reviewing the motivations behind Brexit in a BlogSpot, Philippe Legrain (Project Syndicate) looks at Kenneth Rogoff’s argument that it was the absurdly low bar for exit, requiring only a simple majority, that prompted Brexit.
Next steps and the mechanics of Article 50
How article 50 works—Article 50 TUE implies that the government’s notification to the EU sets a clock ticking, which incentivizes the parties to find an agreement on the terms of separation within the following two years—as noted by Nicolas Véron (Bruegel). A key question for the UK, therefore, is this: when does its government notify its decision to withdraw under Article 50 following the vote on June 23? A joint statement of the heads of all relevant EU institutions on June 24 asked for the negotiation to start quickly but in practice, there is little the EU can do now to force an acceleration of the notification process.
The probable delay—Simon Wren-Lewis (Mainly Macro) reviews the possibility of the no Brexit suggestion (made also by first Jolyon Maugham, then Nick Pearce and Gideon Rachman in the FT) as unrealistic. For EuroIntelligence, this would lead to the full destruction of mainstream political parties as it goes against popular vote—and is wishful thinking. Angela Merkel clearly noted that there is no way for the vote to be overturned. For Wren-Lewis, this stresses on the importance of delaying Article 50—to avoid passion becoming part of the forthcoming negotiation. Yet Europeans are giving no incentives to delay triggering Article 50 (EuroIntelligence): no informal talks before trigger, need for a noticeable difference between Britain's status as an EU member and as an ex-member. EuroIntelligence argues that the European Council will accept a small delay in triggering article 50, as suggested by Angela Merkel but for a time-limited delay given political risks in Europe. Economics also call for a limited delay as uncertainty will continue as long as there is no clarity—with potential costs in Europe, notably Italy that could experience a deep political crisis if Matteo Renzi loses his referendum in October (see Wolfgang Münchau in the FT).
The negotiation tactics and posturing—The map for the next steps is complicated, as laid out by Jacob Funk Kirkegaard (PIIE). The EU’s remaining 27 members must first decide how aggressive they should be in making demands to the UK as it launches the formal Article 50 procedure to leave—and this creates a political divide between the representatives of the EU institutions (European Commission (see Euractiv), Parliament) pushing for quick exit (see The Times and Expansion) and the leaders of other member states taking a more cautious approach—a view supported by Merkel and therefore likely to prevail. A major point of contention will be over labor mobility, and many are suggesting that the principle of unrestricted movement might be reconsidered (see Martin Wolff, FT, as also argued by PM Cameron).
Who’s in charge of the negotiations? The EC produced an opinion advocating that it’d be in the lead (Gabriele Steinhauser in RealTime Brussels and politico), a point supported by Martin Schulz, the president of the European Parliament given the EC’s experience, the expertise and also the capacity, the ability to lead the negotiations—but the council’s legal service, meanwhile, argues that the exit talks with the U.K. represent a “special case,” since the U.K. will still be a member of the EU during the negotiations, rather than a “third State.”
The way forward?
While it is desirable that Britain and the EU agree on some form of associate membership that preserved as much economic and political cooperation as possible, politics militates against that according to Anders Åslund.
The Norway option (see Wolfgang Münchau), with a number of benefits: respects the referendum result; already exists; would have the mildest economic impact; reduces the risk of a splits of both the Conservative and Labour Parties; It would preserve the unity of the UK as neither Scotland nor Northern Ireland would have few incentives to leave (also made by Alex Massie). But: it does not honor the central Leave campaign promise of a cap on immigration. For Münchau, this could be dealt with in a two-step solution: first, the EEA and then decide whether to adopt a simple free trade agreement. The Economist Intelligence Unit argues for a modified version, which curtails Britain's access to the single market, especially in services, while allowing Britain to place some controls on immigration, like emergency breaks.
Whats Next for the EU
The risk of disintegration—George Soros (Project Syndicate) writes that the disintegration of the EU is practically irreversible, as floodgates for other anti-European forces within the Union are open (e.g., France’s “Frexit,” and Dutch “Nexit”, according to Mark Leonard). The implications of Brexit for Europe could be far worse than for Britain, with already exceptional strains between creditor and debtor countries within the eurozone—ruling out a serious program of eurozone reform, which would have to include a genuine banking union, a limited fiscal union, and much stronger mechanisms of democratic accountability. Given the risk of political contagion (Steven Blockmans & Stefani Weiss (CEPS)) and the agenda is heavy: a constitutional referendum in Italy this autumn, presidential elections in April/May 2017 in France and federal elections in Germany later next year, a post-referendum consensus on Europe’s future should create a buy-in for European citizens.
Conflicting views: More or less integration?—Marcel Fratzscher says Europe requires a post-Brexit plan made up of four elements: a policy to support the financial system to avoid panic; an EU-wide fiscal stimulus focusing on infrastructure investment of 2% of GDP; a social program to reduce growing income inequality; and a reform of the EU's institutions. Michael Spence hopes for a major rethink of European governance structures and institutional arrangements, with inspired leadership. Yet others, e.g., Niklaus Busse (Frankfurter Allgemeine) argue that dissatisfaction with the EU should use a period of reflection (see Dominique Moisi), including towards the possibility of partial re-nationalization of policies. EuroIntelligence refutes this as it would create even more divergences—saying that the fundamental problem is that political union is required. According to EuroIntelligence, Germany will be resisting any serious eurozone reforms as a result of the Brexit crisis. Guntram Wolff (Bruegel) emphasizes three concrete steps: (i) the euro area and its governance with a particular emphasis on achieving policies of better demand management and relative price adjustment; (ii) the relations between the euro area and the remaining countries outside the euro area, with a single market agenda; and (iii) a sustainable and inclusive growth model. Stefano Micossi (CEPS) calls for tangible and achievable goals instead of unrealistic leaps forward, to show the EU can grow stronger. He proposes a few concrete steps: reopening negotiations on Banking Union and completing it with the European Deposit Insurance Scheme (EDIS) and a common backstop for the Single Resolution Fund (SRF); restoring the integrity of the Schengen Area and the credibility of joint decisions on the management of migratory flows; and on security, the creation of a common border force to patrol the Union’s external frontiers.
A tension between ambition and realism—Olivier Blanchard (PIIE) reflects on the need to reinforce the European Union (see the Resiliency Authors’ VoxEU) and writes that a detailed discussion about the precise nature of the institutions affecting the behavior of financial actors and governments is what will make or break the eurozone project: (i) identifying the nature of the challenges (document), and (ii) assess the degree of agreement about the remaining challenges and solutions. Blanchard makes three conclusions: (i) the basic architecture is largely in place, (ii) some strengthening is needed but does not require dramatic political steps, and (iii) the most important set of measures to take is a strengthening of the European Stability Mechanism (ESM)—with two main sources of resilience: the ability of the banking system to withstand shocks and the sustainability of public finances. Other commentators (argue for more ambitious steps, from a common fiscal policy, to euro bonds, to euro-level deposit insurance, etc. (e.g., Bradford DeLong and Paul Krugman) (based on a manifesto written by economists). Macroeconomic policies can also play a role, according to Laura Tyson who call for more stimulus and unconventional measures in Europe to boost growth and employment. For Blanchard, the plan is to see if the eurozone could function and handle shocks without further political integration if political realities made it impossible for the time being.
