The outcome of the forthcoming referendum on Britain leaving or staying in the EU seems more and more unpredictable, raising the prospect that the majority will vote for leaving. This warrants a hard look at the consequences for Britain, Europe, the United States and the world.
1. Irrespective of who wins, Britain will be ungovernable for at least a decade.
The Conservative Party will be engulfed in an internecine, vociferous civil war. A number of its MPs including leading members will quit politics. It is highly unlikely that Prime Minister Cameron can continue with a battle for party leadership taking no prisoners. It is not too much to predict a kind of political chaos with the Tory party not capable of playing a leading role as it has done for 250 years and no viable alternative in sight. The Labour Party has put itself on the sidelines selecting Jeremy Corbyn as leader. The Liberal Party is out of the game. UKIP is not capable of governing.
Over the last thirty years the balance of payments current account has only been close to balance three times, and the deficit is now running at more than 5 percent of GDP, the highest figure since 1948. The last time government finances recorded a surplus was in 2001; the deficit there currently runs at close to 4 percent of GDP. These figures tell volumes about an economy out of tune with reality, requiring hard and drastic actions to redress the balance. It is more likely than not that these imbalances will grow, bringing Britain’s economy closer to the brink of disaster. Just for comparison, the eurozone runs a sizeable surplus on the current account (2.8 percent of GDP) and a much lower public deficit (1.9 percent of GDP).
Should Britain vote to leave, treaties provide two years for negotiating terms for the future relationship between the country and the EU. If no agreement is reached, Britain will be a WTO country vis-à-vis the EU, which means giving up its status as member of the single market and becoming a third country like, inter alia, New Zealand. But it could be worse. Many WTO countries have concluded free-trade agreements with the EU. Britain, as an EU member state, has not, and it will take years to do it. Much of Britain’s trade with the rest of the world enjoys preferential treatment granted to EU member states, which will no longer apply.
A Norwegian or Swiss model (access to the EU’s single market on a reciprocal basis) is praised by many Brexiteers, but these two countries should serve as a warning to Britain. In reality, it means application of EU rules without any influence on what they prescribe, plus a sizeable financial contribution. It is palatable for Norway and Switzerland, in view of their size and economic strength, but it would be odious for Britain. One of the arguments for leaving is refusal to “take orders” from Brussels, but the rules are decided by the Council of Ministers among representatives of member states (statistics show that Britain has voted for more than 80 percent of these), while access to the single market is only granted to outsiders if they conform to the rules laid out without their participation.
There are approximately three million foreign EU citizens in Britain. Studies show that they contribute more in taxes to the British economy than they get in welfare payments. Approximately two million Britons live in other member states. The majority are retirees enjoying lower living costs and better weather. They do not work. If as a consequence of a Leave vote these people have to go back to their own country—the single market’s provision for free movement of persons is abolished—Britain will say goodbye to three million people paying taxes, and two million people who do not work but ask for welfare services will return. That could well be a major drag on the public finances in the future.
Proponents for Leave point to the virtues of deregulation, especially of the labor market, as a way to improve competitiveness. That may indeed be a hidden agenda for some in the Conservative Party wanting to shift the burden to the working class. The price would be an even more divided nation. From 2008 to 2013 real wages for the typical worker fell by almost 10 percent and real family income for families of working age with the same percentage. Britain is number twenty-three among twenty-six OECD countries’ real hourly earnings growth 2008–13. Germany and France recorded a 5 percent rise. According to the OECD the British economy is the least regulated among G-7 nations. If a Brexit government tries to squeeze that orange harder, social divisions will aggravate, sowing doubts about social coherence.
After forty-three years of membership, a big share of British economic legislation is either EU regulations (directly applicable as domestic law in member states) or legislation meant to cast EU directives in British law. Brexit would mean that EU regulations would be abrogated, producing legal and administrative chaos. The number of such regulations is difficult to estimate, but it may be as high as ten thousand, indicating that close to one-third of British economic legislation is linked one way or another to EU rules. An administrative option is to transform them into UK law, but if so, why leave? Those advocating deregulation would cheer about this vacuum, but those doing business will ask which rules will apply and, with no answers, shy away from new projects. Uncertainty is already impinging on investors, but this is peanuts compared to what will happen when it dawns on the business sector that no one knows which laws and regulations will apply when doing business in Britain.
2. The consequences for eurozone economies, and even more so for the rest of the world, will be limited.
Several international institutions, including the IMF and the OECD, have flagged potential negative repercussions on the global economy. But Britain’s share of global GDP is not more than approximately 2.5 percent. Britain’s growth for 2016 is estimated to be roughly 2 percent. Let’s assume it turns out to be half of that. The impact on the global economy would broadly speaking be equivalent to a fall in China’s growth rate of 0.26 percentage points, or a fall in U.S. growth rate of 0.16 percentage points. Continued stagnation in Britain would be unwelcome, but not seriously undermine the global economy. Even the largest trading partners would not feel serious pain—with the possible exception of Ireland, for whom Britain is the main trading partner, accounting for approximately 15 percent of total trade while three-quarters of a million Irish people work or live in Britain.
3. You couldn’t find a worse moment for the future of the City of London as a global financial center.
The eurozone is fast establishing a banking union, and even if that long-overdue enterprise is played down by those advocating Leave, the unavoidable conclusion is that the City of London will find living outside uncomfortable. Business with the eurozone would gradually have to conform to rules set by the banking union—and those rules will be set without a British voice.
The City of London will unquestionably survive as one of the world’s largest financial centers, and the largest in Europe. The question is how much business it will lose. Parts will go to financial centers on the continent like Frankfurt, Paris and Amsterdam, Other parts may go to Dublin. Financial institutions would probably be reluctant to jump to conclusions and hold the horses, waiting for clarification of Britain’s future status vis-à-vis the EU.
What may have been overlooked is that, Brexit or no Brexit, the banks and other financial institutions are not living in happy days. The competition from low-cost countries playing host to a variety of services, and new financial-technology systems, force banks to severely cut costs. London is not a cheap place, and some of the banks will look at Brexit as an opportunity to cut staff and move services to India or the Philippines.
The financial industry provides 1.4 million jobs and pays £25.7 billion in tax and national insurance, accounting for 12 percent of the national economy. HSBC has warned that it could shift one thousand jobs from London to Paris—there have even been rumors that it would relocate its headquarters—Deutsche Bank is reviewing whether to move some of its substantial British operations to Germany, and JPMorgan has told staff that as many as four thousand may lose their jobs. All this may be classified as stage thunder by Brexiteers, but why should these institutions say what they will do if it is not the truth?
Britain’s credit rating is good. Standard & Poor’s says AAA, Fitch gives AA+ and Moody’s Aa1. Only a handful of countries rank equivocally better (Canada, Denmark, Norway, Singapore, Sweden and Switzerland, inter alia). This has allowed Britain to finance its deficits at low cost. The reigning loose monetary policy will continue to help doing so, but it is almost certain that Brexit will lead to a downgrading, if for no other reason than uncertainty about the economy and politics.
In May 2016, the governor of the Bank of England stated that “a vote to leave the EU could have material economic effects—on the exchange rate, on demand and on the economy’s supply potential—that could affect the appropriate setting of monetary policy.” He did not say so, but Brexit would leave the bank between the devil and the deep sea. On one hand, falling growth is likely—the bank has mentioned recession as a risk—which would call for expansionary monetary policy, while falling exchange rates (the pound has fallen 9 percent over the last six months) and maybe higher inflation would point towards higher interest rates.
In such circumstances, it requires a good deal of courage and ability to put facts aside to expect foreign creditors to play business as usual. There may not be a run on the pound, but creditors may reduce pound-denominated assets and be reluctant to lend to Britain.
4. Scotland may decide that the moment has come to break up the United Kingdom.
Polls indicate that the majority for Remain is two-to-one in Scotland. Leaders of the Scottish National Party (SNP) have stated that they will not acquiesce to England taking Scotland out of the EU against the will of the Scottish people, implying a referendum on whether Scotland should remain in the UK. Under those circumstances, the result would probably reverse the 55 percent that elected to stay in the UK in the referendum of September 18, 2014.
Similar movements may surface in Wales, though sentiment is less strong there. Northern Ireland would suffer tremendously from a Leave vote, and could also start to contemplate its future. England itself is divided. A clear majority for Remain exists in London, according to polls, which should not come as a surprise in view of London emerging as a cosmopolitan rather than an English city—geographically in England, but in fact a global city.
Leaving the troubles for Britain and England aside Scotland’s secession rises a number of questions.
The union between England and Scotland entered into force 1707, more than three hundred years ago, and since then a number of international agreements and treaties has been signed in the name of the UK—membership in the International Monetary Fund, the World Bank and the World Trade Organization, to mention a few.
Will England automatically be the successor state to the UK? Without a doubt England will claim so, and point to its share of population and GDP, but what happens if Scotland contests this or if other member states of these organizations raise objections? What happens to bilateral agreements if the other party does not automatically accept England as successor state? When the USSR broke up in 1991, the Russian Federation declared itself to be the continuator state of the USSR; this was accepted formally by the other former states of the USSR and no other country voiced objections. But this cannot be taken for granted. When Yugoslavia broke up in the early 1990s, the rump state named the Federal Republic of Yugoslavia claimed to be the continuator state. This was contested by, among others, the United States blocking the rump state from assuming the seat at the UN. The dissolution of Czechoslovakia took place in 1993 and followed a different path, as neither of the two new nations—the Czech Republic and Slovakia—claimed status as successor state or continuator state to Czechoslovakia. At the UN, Czechoslovakia’s seat was terminated and the two new nations entered in their own new names.
Britain’s seat as permanent member of the UN Security Council may be disputed. Will the other four permanent members automatically welcome England? What will the UN member states say? For years, reform has been deliberated without any result, but England claiming to be the successor state to the UK may trigger not only a new debate, but a long overdue reform of the system—needless to say, with England out of the UN Security Council as a permanent member.
Scotland has let it be known that it would not play host to England’s nuclear deterrent. This position may change, or else a lease covering a number of years may be forged. Whatever happens, the cost for England to maintain its status as a nuclear power will be very high, casting doubt on whether the money is there. If it decides to continue financing nuclear weapons, and relocate them from Faslane in Scotland, the rest of the defense budget will suffer heavily—among other things, sowing doubts on whether the two new aircraft carriers HMS Queen Elizabeth and HMS Prince of Wales will be commissioned and, if so, whether there will be money to build the accompanying task force without which the carriers would be extremely vulnerable.
Britain used to be an indispensable partner in supporting the United States globally, having endured the two Iraq wars and plugged the “GIUK gap” in the North Atlantic, plus being host (at RAF Fylingdales) to a ballistic missile early warning system and a member of the so-called Five Eyes intelligence system. Withdrawing from the EU, and Scotland leaving the UK, is not synonymous with all of these elements being cast in doubt, but the atmosphere of unpredictability and uncertainty about Britain or England as a privileged partner continuing its special relationship with the United States cannot be brushed aside.
The United States has recently calibrated its relations with Europe, slightly upgrading relations with other countries (France) and intensifying its relations with central and eastern European countries. An American antimissile defense system has just become operational in Romania, and a second one will be operational in Poland 2018. Anakonda-16—the largest NATO exercise for a long time, with thirty-one thousand troops—is currently underway in in Poland. In case of Brexit, America may continue to take these steps. England may try to convey the message that it is still there, but the United States will look for capabilities—that is, hardware—and conclude that it may more easily be found on the continent than in England. This is especially the case if, as rumors have it, Brexit triggers stronger German-French defense cooperation.
The United States may also launch an agonizing reappraisal of its relations with Europe and the future of NATO. The alliance was crafted in 1949 as a military bulwark against the Soviet Union. Today the situation is different. Russia is opting for a belligerent attitude vis-à-vis Europe, but does not constitute a threat comparable to Soviet policy before 1991. The United States may conclude that it will be better off seeking its own accommodation with Russia and leaving the Europeans to defend themselves. In fact, noises to that effect have come out of Washington for some time. Brexit may be the event that turns such a reorientation of policy into reality. It might have happened anyway, but now could be the moment of truth, with the United States facing China, Russia, problems in the Middle East and terrorism, and not seeing why it should bail out the Europeans shooting themselves in the foot.
The United States made its position clear when President Obama visited the UK: it does not want Britain to leave. The Leave camp talks about revitalizing Britain’s ties to the Commonwealth, but no member of the Commonwealth has spoken in favor of this. Most have been cautious, but those who have let it be known what they think take a view similar to the United States. China has not said anything and will not do so, but it is hard to see why China should wish a weaker EU, as it seems to be in favor of some kind of multipolarity—at least for now. Russia is also holding back. Those saying that Russia and President Putin would rejoice if Britain leaves cannot produce any evidence. Russian diplomacy is normally cautious and Moscow can be expected to weigh pros and cons. Like China, Russia favors multipolarity; a weaker EU does not fit into that picture even if it gives Russia the chance to play individual European nation-states against each other
5. The initial reaction among EU member states depends on what happens in Britain after the vote.
A clear majority for Remain would not turn Britain into a genuine and committed member of the EU, becoming “at the very heart of Europe,” as Prime Minister John Major stated in 1991 and repeated in 1993. An indecisive outcome—a slim majority for Leave or Remain—would threaten to overshadow all other items on the EU’s agenda, of which there are many calling for action. It would be most unwelcome, as nobody would know what to do and would be forced to wait for London to sort out the political mess and sketch a course for what it wants. A victory for Leave would at least indicate the road chosen, but not necessarily what Britain or England wants.
Irrespective of the outcome, two scenarios are most likely.
If Brexit proves to be a success, with everything running smoothly, the economy humming along, the British quick to sort out political problems and Scotland not breaking up the UK, some countries may be tempted either to contemplate a new deal or to follow Britain out. That would start disintegration with regard to common policies as well as the number of member states. How deep and how fast it would go is uncertain.
If, however, as is more likely, Britain slides into political chaos and infighting followed by economic hardships—maybe even recession—no member state would be tempted to follow in its footsteps.
The core of the EU, Germany and France plus a few other member states, may draw the conclusion that enough is enough. Enlargement might have seemed to be the right thing to do when its took place, but the verdict in 2016 is that the EU should have been more cautious. A much stronger core will emerge. In all member states, there are political forces advocating withdrawal, but they are unlikely to get into power or influence European policies. France knows it cannot do without links to the German economy, and Germany knows that it is strong, but not strong enough to do without France. That will keep these two member states together. It is a common destiny—and they know it.
It is rarely said, but with uncertainty, at best, surrounding the British nuclear deterrent the French force de frappe is the only nuclear deterrent available to the Europeans. The French know it. The Germans know it. With Russia rattling the saber, Germany quietly dreads being left with only the U.S. nuclear umbrella while hearing the noise from Washington about declining commitment to Europe.
The core of Europe will act as just that: the core. It will be built around the euro, the single currency. Those who want to come along can do so, but special rulers and exceptions will not be offered. Those who are in the core will exercise leadership plus full commitment. Those who do not do wish to do so can stay out. This does not mean a breakup of the EU, or a collapse, as some observers expect, but a different European Union from what we know.
We will see a multispeed and multilayered EU. The Treaty of Lisbon of December 1, 2009, foresaw this and explicitly allowed some member states to forge ahead through what is called “enhanced cooperation.”
This picture may look unpleasant for many observers and voters, but for Europe and the core of Europe it is a question of survival. Around the EU, from the northeast to the southwest, we find close to one billion people, many of whom look to Europe as the place where they want to live. Russia has turned its back on the rest of Europe. Ukraine is close to being in tatters. Turkey has gone into reverse gear and rejects European values. The Middle East is in turmoil. North Africa is a potential powder keg. Sub-Saharan Africa promises to be an economic heavyweight some decades in the future, but is currently home to poor people who dream of getting into Europe. China and India are fast taking over as the economic powerhouse of the future, eating into Europe’s share. The United States no longer sees the Atlantic Alliance as the cornerstone of its foreign and security policy. The bonds forged over several centuries in the wake of the European migration to America are becoming thinner.
How on earth can anybody imagine that any European nation-state can navigate on its own without running aground? How can anybody expect those who spot all these dangers and challenges to be held back from responding by those who do not see them or disregard them?
Joergen Oerstroem Moeller is a former state secretary in the Royal Danish Foreign Ministry. He is a visiting senior fellow at the ISEAS Yusof Ishak Institute, Singapore. He is an adjunct professor at Singapore Management University and Copenhagen Business School.
Image: Flickr/Lloyd Morgan