The Long Slog Ahead: Britain and Brussels Negotiate the Divorce

The Long Slog Ahead: Britain and Brussels Negotiate the Divorce

The future, smaller EU could look very different from the one that has evolved over the past twenty years.

Germany, Denmark, Sweden and some central and eastern European countries are concerned about finding a way to limit the economic damage. The UK is Germany’s largest single auto market, while German companies employ nearly four hundred thousand people in the country. Germany’s business lobby has already begun pushing for a compromise to grant the UK continued access to the common market, as it fears the country’s economic performance could drop by as much as 3 percent as a result of Brexit. German companies sell wares and services to the UK valued at around 120 billion euros a year. Chancellor Merkel finds herself in a predicament: Britain is one of Germany’s most important trading partners, but granting the Brits too many concessions would go down badly in such a Europhile country and would be sending the wrong political message to other would-be “leavers.” As a result, Chancellor Merkel has been walking a tightrope, supportive of Cameron in recognizing the UK’s right to decide on when to trigger Article 50, but at the same time standing firm in stating that Article 50 is the only route and that informal negotiations will not occur.

The group advocating for a speedy divorce is led by France and the Netherlands, both countries having to contend with strong populist movements and wary of Brexit’s potential snowball effect. France will seek to convince other member states to undo all treaties and agreements with the UK to quickly remove European subsidies to the UK, reassess trade relations sector by sector, and to establish new migration rules. Without being punitive, the approach has to set the British case as an example: a member state cannot leave the EU and still retain the benefits of its former membership. France will not impose visa restrictions but will likely instead argue for limiting “financial passports” and the nonrecognition of the British supervisory authorities in the financial sector. This would force non-EU businesses established in the UK with the purpose of having an access to the single market to relocate to the continent. Similarly, France might not recognize clearing houses established in the UK, forcing them to resettle on European territory under the authority of the European Central Bank. Regarding trade, the French hope to see the UK seek a Norwegian-like solution, accepting EU regulations, including free movement of workers, in exchange for access to the single market.

Despite what may have been reported in the media, the French are not out to “punish” the UK, even if Paris will certainly compete with Frankfurt and Dublin to attract any financial services that might leave the City of London. France is losing its closest partner on defense matters (even if the 2010 Lancaster House agreements shouldn’t be immediately affected by Brexit) and fear Britain may downsize its military ambitions once outside the European Union, leaving France as the bloc’s sole significant military power as well as its sole nuclear power. In an EU without the UK, only France, as a permanent member of the UN Security Council, would have a truly global outlook. The French are worried about a strategic withdrawal by the UK and fear that, as a result, the EU might become less active on the world scene. An EU at twenty-seven may take a more mercantilist approach to foreign policy and be less likely to use sanctions as an instrument of pressure on countries like Russia without the UK in the room to argue for them.

Indeed, Brexit will profoundly disrupt the EU’s internal equilibrium. The withdrawal of the UK will mathematically reinforce the political influence of the EU’s large member states (Germany, France and Italy), with the requirement to reach a blocking minority within the council of a least four member states representing more than 35 percent of the EU population more difficult to achieve. Furthermore, for all practical purposes, with Britain out, the eurozone becomes the EU, profoundly changing the relationship between eurozone countries and those not having adopted the euro, primarily to the detriment of the latter. Without the UK, the group of eight non-euro countries will only account for 15 percent of the EU’s GDP, and may strain to get their voices heard, seeing the emergence of a two-tiered Europe and risking political and economic marginalization within the EU.

Brexit will increase Germany’s economic and political dominance on the continent, a prospect that neither Berlin nor its partners necessarily welcomes. Germany remains reluctant to adopt a unilateral leadership role within the EU. For one thing, its lack of experience in international security and its ongoing reluctance to lead in this area undermines its external credibility, making France the only remaining member state with a claim to be a global security actor. However, while many speak of a Franco-German engine for the EU, France’s current economic weakness and inability to implement long-overdue labor market and competitiveness reforms make Paris very much the junior partner to Berlin in a lopsided relationship that was to some extent balanced by Britain.

Germany’s leaders will, however, most certainly continue to exercise restraint. They are fully aware that they are operating at the limits of their authority, as the backlash from the EU’s German-led austerity program or on refugees have clearly demonstrated. It will therefore continue to work with and through its traditional alliance with the French, hoping that 2017 finally brings a reformist government to power in Paris.

Without the British and their advocacy for free trade, the influence of more interventionist European countries, led by France and to some extent Germany, will probably become greater. The UK’s departure is likely to make the bloc less liberal and more protectionist. However, this fear shouldn’t be overplayed as there has been a broad consensus across the Union in favor of moves to liberalize markets for goods, services and labor over the last few years. Much of this has been driven by Eurozone countries’ attempt to improve their competitiveness, a drive that has been happening without particularly active UK engagement.

The final tangible and direct economic or financial impact from a Brexit on the rest of the EU would be the contributions to the EU budget. As the UK is one of the net contributors to the EU budget, all other countries would have to shoulder the missing money. The biggest burden would be on the biggest countries, with Germany having to pay in over 2 billion euros and France over 1 billion euros on top of their current contributions to the EU budget.

Meanwhile, senior officials in Berlin and Paris have started talking about a “Franco-German initiative” for EU political reforms “that would give some powers back to national capitals in an effort to contain possible contagion of the UK's Brexit vote across Europe.” The idea behind this initiative is to focus cooperation on areas such as security, foreign policy, border control, the digital agenda, energy, transportation and eurozone governance, but to shift decisionmaking on other issues back to national capitals. The plan is to be unveiled in September, but should focus on safeguarding the EU’s two biggest achievements since the establishment of the single market: the euro and border-free travel.

Preventing the demise of both Schengen and the euro is not impossible. Better control of external borders and more robust intelligence sharing would make border-free travel safer and more defensible from a security perspective. But, crucially, there will also have to be a downward revision of the benefits available to those who have not contributed to the system, possibly the only way to hold on to Europe’s welfare model without creating an irrepressible appeal for poor migrants. Removing the euro's vulnerabilities ultimately requires the kind of fiscal policy-sharing that EU countries have resisted. France and Germany feel the EU would not survive an unraveling of the monetary union, and they are working hard to show that they’re intent on shoring up the single currency and implementing reforms that have long been on the table. However, while Brexit could give a new impetus to eurozone integration along the lines of the 2015 “Five Presidents’ Report,” any substantive progress in that direction is unlikely before the French and German elections in 2017. The snag here has nothing to do with the UK, but rather with the deep divisions between France and Germany—between the stubborn German-led focus on austerity and southern Europeans’ need for increased spending to restore growth and boost competitiveness—and their inability to reach a new compromise, which is preventing progress.

Impact on the United States: Whither the Special Relationship?

Brexit will affect transatlantic relations by the United States losing its most like-minded ally within the bloc and a critical link between Washington and Brussels at a time when EU-U.S. relations are strained. Without the UK, Brussels may well become a more difficult foreign policy partner, resulting in the revival of key bilateral relationships as a result to offer Washington alternative channels for influencing European policymaking.

The EU at twenty-seven will remain an important regional partner for the United States, but it will, at least at first, be less capable, more inward-looking and even more dependent on the United States for its security interests. Europe post-Brexit may be seen in Washington as an economically laggard and politically dysfunctional region, less stable, less secure and less capable militarily and diplomatically.