Brexit Spillovers: Alarm Bells for Eurozone?

Cover Story By Dr. Stephen Barber

"There will have to be compromise in these negotiations but if forced to choose between prosperity and free movement, it is difficult to see how Theresa May can satisfy all domestic constituencies. Remember, she has inherited Cameron’s small majority of just 12 in a Parliament overwhelmingly in favour of Remain. This will not be an easy deal to agree - in Brussels or Westminster."

'Brexit means Brexit', has become the favoured mantra of new British Prime Minister Theresa May to explain her policy in the wake of June's referendum. Leaving the political establishment in shock, Britons voted by a narrow margin to ‘Leave the European Union’ despite the weight of mainstream expert opinion about the consequences of exit. But the fact remains that 'Brexit means Brexit' does not really mean very much; it does not adequately explain the favoured relationship between the UK and the EU. And as the dust settles, numerous competing scenarios are emerging to explain what a post referendum environment might actually look like. Furthermore, there are implications on domestic and European levels that need to be unravelled to properly understand what has happened and what could happen now. The vote has implications for Britain, of course, but it also raises questions for the European project and the health of the troubled Eurozone which sits at its heart. One crucial point to be made at the outset is that for the 48 percent of the electorate who voted ‘Remain’ in the EU, all is not lost and there are reasons to believe that Britain could still retain its membership of the Union or that new arrangements are constructed that makes the split ‘Brexit-lite’. But all depends on the machinations of domestic politics in Britain and pressures on the European project across the continent.

The referendum on British membership of the European Union can be characterised as one almost entirely centred on domestic party politics and the failure of successive governments to include large segments of the population in the prosperity brought about by successful negotiation of globalisation. For a start, there was no overwhelming need to have a referendum at all. When former Prime Minister David Cameron announced plans for the ‘in/out’ vote in his 2013 Bloomberg speech, the motivation was clearly to neutralise the threat from the UK Independence Party, which had been eating away at Conservative Party support for many years and whose sole coherent policy was to pull out of the EU. Even then, Cameron might have gambled that the referendum would not actually take place. After all, in 2013, he was in coalition with the pro-European Liberal Democrats and the decline in electoral support for his own and the Opposition Labour Party over twenty five years not only made coalitions more likely but also suggested he would struggle to increase support sufficiently at the 2015 general election in order to win a majority. Being able to blame coalition partners for abandoning the referendum pledge might have been convenient. Meanwhile, Ed Miliband's Labour Party had refused to commit to holding a referendum had it won office. Alas, events conspired to deliver Cameron a slim Parliamentary majority in May 2015 and in the circumstances the Prime Minister was obliged to deliver on his promise. The referendum was scheduled for 23 June, 2016, after a so-called renegotiation, where Cameron gained a few disappointingly modest concessions from EU partners.

Commentators at home and abroad have bemoaned the quality of debate during the referendum and it was unspeakably poor. But don’t forget, this was not some sort of exercise in civic education; it was a political campaign where both sides did what was necessary to win. The Leave campaign in particular focussed relentlessly on a popular discontent about immigration and exaggerated fears about accession countries such as Turkey joining the EU and the consequences for further waves of ‘cheap’ migrant labour 'undercutting' local workers. Again, this was about domestic politics. Those voters most attracted to rejecting EU membership were those who could be said to have been left behind by policies, which brought prosperity and growth to Britain over the past couple of decades. Those who saw an inequity in huge bailouts for failed banks while they struggled to get by in more precarious circumstances – low wages, job insecurity, limited prospects – voted to kick the establishment. Cameron's warnings about the economic catastrophe of leaving went unheeded. That abandoning the EU was no route to social justice simply did not matter – this was a rare opportunity to voice that discontent. Former Cabinet Minister and committed Eurosceptic Ian Duncan Smith let slip as to why in the small hours of that Friday morning. 'This isn't like a general election', he told Radio 4 listeners still awake, 'in a referendum every vote counts'. Indeed, this was unusual because at a general election the concerns of the left behinds can be ignored such is the workings of the first-past-the-post electoral system. Here, they could and did make a difference. And the divisions between ‘Remain’ and ‘Leave’ voters are divisions of geography, wealth, social class and education. One legacy of this vote is that the concerns which for so long have gone unheeded will have to be listened to.

Referendums are a form of direct democracy - they give the people a say on particular policies – and jar with representative democracy as epitomised by the Westminster Parliament where elected MPs decide on behalf of constituents. If the issue is important enough, referendums can make for irresponsible government since politicians not only give up power over a decision but they also give up responsibility. The people have spoken! This principle also explains why David Cameron had to resign when it was clear he had lost. Here, the people had given the prime minister instructions, which were contrary to his strongly articulated advice. On the morning of June 24, Cameron's authority had been taken away.

But as politicians across the continent grapple with the consequences of this vote, the only thing that is clear is that nothing is clear. The referendum itself was advisory and has no legal force. 'Brexit means Brexit' suggests that there has to be some noticeable difference in the relationship between Britain and the EU. Hard line ‘Leave’ campaigners want to cut off all links including being part of the single market. But at her first Prime Ministers Questions in the Commons, Theresa May pointedly refused to commit to this. She knows all too well that Britain's economic interests lie in membership of that single market but that if the vote means anything at all it is an instruction to limit free movement of people from across Europe coming into Britain. Squaring that circle (or ‘pie in the sky’ as one French Minister put it) will be the starting point for negotiations. It suggests some sort of arrangement comparable to that of Norway, which has associate membership of the EU; access to the single market but in return for free movement and a hefty fee. European leaders, most notably French President Hollande, have emphasised that there will be no compromise on the principle of free movement for countries part of the single market. There will have to be compromise in these negotiations but if forced to choose between prosperity and free movement, it is difficult to see how Theresa May can satisfy all domestic constituencies. Remember, she has inherited Cameron’s small majority of just 12 in a Parliament overwhelmingly in favour of Remain. This will not be an easy deal to agree – in Brussels or Westminster.

There is however a sensible approach adopted to trigger Article 50 of the Lisbon Treaty which sets off a formal timetable for leaving the EU. No one expects that to happen in a hurry. Meanwhile, legal arguments are taking place to ensure that Parliament must first give its consent ensuring that notice cannot be given solely by the Prime Minister under prerogative powers. This also means more deliberation and delay. Meanwhile May has placed considerable emphasis on maintaining the Union of England and (broadly pro-EU) Scotland giving the devolved government an implicit say in negotiations. This gives rise to a scenario where ‘negotiations’ go on indefinitely and little changes. Indeed it even suggests the possibility of a rethink (tested by a second referendum or general election perhaps) as ordinary voters start to feel the real effects of leaving in terms of their jobs, wealth and freedoms. This could be all the more likely if parts of the EU– led by France – remain intent on punishing Britain by making a grab for its lucrative financial services industry.

Just how European powers will deal with the referendum in Britain is still unclear and don’t think for one minute that they speak as one. There are noticeable differences in the traditionally united Franco-German axis; there are outside pressures including a refugee crisis and instability in Turkey and there are questions about future of the Eurozone. Naturally there has been an instinct to treat the UK with a hard line and of course it is inconceivable that a better deal could be struck outside of the EU than as a member. EU leaders naturally want to be tough on Britain to dissuade others, who might be attracted to leaving the Union. European leaders are nervous at the prospect of a domino effect where the whole project unravels before their very eyes. And it can be observed that the reaction of Brussels (as always) is to push for even more integration amongst those who are left. This has included within the single currency that has appeared in peril at times since the financial crisis and where the solution to keep it together has been de facto to assume a degree of fiscal policy union alongside monetary union – and without the consent of the people. For the Euro to survive long term, this needs to happen more systematically but do not think this will enjoy popular support. The Brexit vote has sent a signal that eventually the will of the people must be listened to.

Indeed, it would be wrong to think of Euroscepticism as something peculiarly British. The Danes. the Dutch, even the French have noticeable voter dissent and the clamour for the people in different parts of the EU to also have a say has become noticeably louder. Germany and France each have difficult elections to get out of the way by next year. In France, there is a growing threat to the establishment posed by the anti-EU far right National Front (who promise ‘Frexit’). The outcome of those votes together with the more comfortable situation of having dealt with them could make negotiations easier in a practical sense or could even lead to a movement that erodes the principle of ‘ever closer union’ in favour of looser arrangements in the EU, which might be more to the liking of Britain. Here, it would be easier for Britain to take advantage of a more flexible ‘pick and mix’ approach than a country like France which is immersed in the Euro.

Those who think that June’s referendum was in some way decisive are sorely wrong. The vote was a wakeup call in Britain but also one in Europe. Those left behind by globalisation have found a voice while the aloofness of Brussels has begun to be challenged. ‘Brexit means Brexit’ is the meaningless slogan that currently holds together Theresa May’s new government made up of ‘Remainers’ and ‘Leavers’ alike. Brexit could mean Britain left out in the cold, suffering economically from this rash decision. Or it could mean an unravelling of the European project. But there are scenarios where Britain stays engaged with the EU either because of a deal pragmatic enough to give Mrs May something she can sell back home, because of a move toward greater flexibility in the EU or simply because negotiations fail to reach any conclusions acceptable to both sides.

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