On Brexit

06/01/2015 09:42 am ET | Updated Jun 01, 2016

Behind the smokescreen of speeches and declarations, the re-elected Conservative government in Britain has set a course that is more likely than not to engineer an exit from the European Union (EU) -- Brexit. In the slipstream, a second referendum in Scotland will break up the union with England. Not very many favor such an outcome, but the momentum will be too strong. Leading politicians are too weak and do not invest political capital to ensure the by far best outcome in the eyes of most people: Britain in Europe and Scotland in the UK.

Prime Minister David Cameron opts for some kind of renegotiation to kill several birds with one stone, and to keep the Tory party united to campaign actively for continued EU-membership. From his point of view that would be wonderful, opening the door to the hall of fame; unfortunately, there is a lot of wishful thinking mixed with flawed analyses embedded in his policy.

The other EU members do not want Britain to leave, but widening or deepening Britain's exceptions goes against the whole idea of European integration: solidarity, common interests, no discrimination based on nationality. If Britain gets a la carte membership, politicians in other member states will be in the mire when confronted with the question, Why not "us"? The next question will be, Why should "we" negotiate in the EU, seeking compromises and consensus, when threatening to leave is apparently the way to get our will? The core of the European idea, the interests of the rest of the EU and their domestic politics cannot be brushed aside just like that.

Concessions may be forthcoming, but steered by the above mentioned political imperatives they will resemble something like the lowest common denominator.

Unless and until they are convinced that the British government musters sufficient support to win a referendum, the other member states, bearing in mind the political costs for themselves, will be reluctant to accommodate Britain. If treaty changes become necessary, ratification in all member states will expose a result to public debate. The more committed the British government is and the more it demonstrates willingness to invest political capital, the more it can get. There is the rub.

A hard core of the Tory party has ensconced themselves in the belief that the "right" thing is a "free society, a free country." Having got rid of shackles and regulations deriving from EU membership, the work to create such a society can start. They are convinced not only of their righteousness, but also that, seeing the results, the rest of Europe will follow.

The pertinacity of hard core anti-European Tories impugning any result will force the prime minister to look for allies in other parties; maybe he will be surprised encountering the unpleasant argument: If you cannot deliver your own party why should we help? The Labour Party has acquiesced to a referendum and let it be known that the party supports continued membership, but its support may turn out to be lukewarm.

The exceptions or special rules sought will aim at social provisions in the treaties and consequently take Britain further away from policies pursued by the Labour Party. Why should Labour bail out David Cameron at the risk of aggravating the economic and social gap between the Tories and Labour? A template is available in John Major's exceptions in 1991 over the Maastricht Treaty -- they focused mainly on the social dimension. He promised but failed to keep Britain "at the very heart of Europe" and unite the Tory party behind that course. The debate in the House of Commons will disclose these divisions and highlight short sighted party interest. A baffled electorate will be left to draw its own conclusions of no confidence in a political system that has abandoned any attempt to lead.

Much depends on whether unilateral rights to reduce social benefits paid to EU citizens in Britain can be crafted without violating the free movement of people -- access to other member states' labor market. Wizardry has been seen before, so maybe a scheme can be cooked that is palatable, concomitantly upholding the principle of non-discrimination between national citizens and EU citizens. A number of member states, primarily from Central and Eastern Europe, will scrutinize a deal to make sure that they are not discriminated against. If a rabbit can be pulled out of the hat, the next question is what about British citizens living in the EU, of which the number normally referred to is two million? Should they continue to reap full benefits of the free labor market and the right to social welfare if citizens from the country where they stay are discriminated against in Britain? The decision that British citizens who have lived in another EU member state for more than 15 years are not eligible to vote is not a good omen; the overwhelming majority could be expected to support continued British membership.

One surmise is that the Prime Minister, sowing uncertainty by dithering and vacillating for a number of years, suddenly steps forward, counting on his authority to turn anti-European sentiment around, eradicate skepticism, and spread confidence about Britain's European future under new provisions. "Trust me," he will say. But his authority has been irreparably harmed during the process leading up to this stage. "Prime Minister, we ARE in the EU, so the only reason you ask us to vote is that you want us to leave; otherwise why should you call the vote?" This is logic and rational in the eyes of the voter, albeit not in the mindset of the Prime Minister, who will be unable to refute it.

The establishment will campaign for a yes. But it will not work out according to the script. The media is not interested in the views of Ministers, leading politicians, Confederation of British Industry and the City, plus mainstream economists. Instead focus will be on the dissidents inside the establishment. Already, mass media brings stories about firms saying that they don't think it really matters -- "we will continue to work as usual" is a phrase frequently registered. Ten economists may explain the economic consequences and let's say nine conclude it is advantageous to stay, while one takes the opposite view. The view that Brexit does not matter or even is a good thing will get the press coverage. The electorate will be utterly confused and gradually the sentiment -- right or wrong -- that they are beguiled into voting yes and the establishment dishonest will gain ground.

The only way to avoid this trap is total commitment by the prime minister saying that the future of Britain inside the EU is so important that if his policy is not endorsed there is no alternative to resigning and calling an election. It is highly unlikely that he will do so -- stake his political life on keeping Britain in. In his eyes it is best for Britain -- and him -- to stay inside the EU, but it is not indispensable. The electorate will smell this and reason that if it is not more important than that, it does not matter much whether they vote yes or no. The no vote will prevail because people will fall back on instinct, intuition and emotions.

The Scottish National Party (SNP) will spot the window of opportunity and crave a second referendum. It is not a foregone conclusion that there will be a majority to accommodate SNP, but considering the circumstances, it is difficult to imagine any other outcome than yes, Scotland can vote again. The Scots will rightly interpret the course outlined by the Tories as not only taking Britain out of Europe, but also steering England toward a political and social system not like the one preferred by Scotland. This time they will vote for leaving Britain; then negotiations for Scotland to join the EU will start -- simultaneously with negotiations to take England (not the UK anymore) out of the EU.

That being so, three questions arise: What will happen to England out of the EU? What kind of European Union will we see without Britain? And as a post scriptum, suppose a yes vote nevertheless prevail?

In the case Britain leaves, those who support a renegotiation are convinced that some kind of agreement like the one EU has with Switzerland and Norway can easily be attained. This is, however, by no means certain. Switzerland and Norway are, in the EU context, potential members. Both have been on their way in. So the political setting is completely different from the British case.

The anti-EU wing tends to see membership of the single market with separate arrangements for most other economic sectors as the perfect solution. This is not in the interest of the rest of the EU. Why grant Britain this privilege after secession? Even if emotions will not be governed by revenge, the posture will certainly be that Britain has asked to leave so leave it must. Many industries in the remaining 27 member states stand ready to profit from Brexit. It is hilarious to hear voices from Britain talking about guarantees for the City of London, not realizing the nightmare scenario that will happen with Brexit: Dublin, Frankfurt, Amsterdam and possibly Paris launching a foray to take lucrative business away from London.

It is also put forward that free of restrictions, rules, and regulations Britain can export more to the booming emerging markets and developing economies (EMDE). Wage costs can be suppressed even more than already seen -- recall that from 2008 to 2013 the real wage fell 8.5 percent in Britain while going up in the Eurozone. The social price of this would be horrendous deepening ravines inside Britain undermining social coherence in what will then be England. Any prospect of booming exports to EMDE is a fata morgana. Germany, which can hardly be classified as a country out of the EU or being held back by EU rules and regulations, exports five times more to China than Britain. France also outperforms Britain.

Britain has for many years accumulated large deficits on the balance of payments and the government budget -- both deficits currently run between 4 and 4.5 percent of gross domestic product (GDP) with no prospect of rebalancing. Add to this that foreign investors will feel less attracted -- obviously the British market is smaller than the EU market -- and it does not take much imagination to see England approaching an economic reality far more somber than generally perceived.

The economic costs of Brexit for England may be small in the short term, but substantial in the long term. Indisputably, England can survive outside the EU, but at a price, and it is legitimate to ask for what? Norway has managed well outside the EU because of oil, but England's oil is not comparable with Norway's, although there seems to be shale oil and gas. Switzerland is managing outside the EU with a strong industrial base in pharmaceuticals and several other industries, but listening to the voice of Swiss industrialists it is not a free lunch, and the barriers for immigration risk undermining competitiveness in the long run.

The English people obviously expect a "better" life after having gone through the trauma of tortuous negotiations for new terms of membership -- a campaign for yes or no that may divide the nation, the referendum itself, and finally deliver the consequences of the result of mapping out a new course and implementing it. The scars will inflict wounds that may not be mortal, but sow animosities and enmity for decades. Brexit is not just a referendum. It is a momentous decision gambling with Britain's, England's, and Scotland's future. The question will linger for a long time: Was it worth it -- were the nation and the people best served by this course of action?

Instead of a reinvigorated England full of energy and self-confidence, we may see an exhausted and baffled nation. Scotland's farewell to the union after more than 300 years will further stir things up. The astonishment around the world watching the remarkable experiment of parting ways with friends and allies to cut its own furrow may come as a surprise -- an unwelcome one at that.

Looking at the remaining 27 member states it is unlikely that any other country will follow England. In some countries a debate about a referendum or political decision on continued membership could hijack the agenda for a short while, but few countries, if any, see their future linked to England or feel that British membership was a condition for joining, consequently turning British exit into "new and changed circumstances" requiring reconsideration. Economic turmoil together with a chorus of investors predicting an agonizing reappraisal of their investment will stifle any run-up in other member states to emulate Britain. A flaw in the British position -- maybe deliberate, recalling domestic politics -- is to present the case as a British problem instead of seeking allies in presenting it as an EU problem, with Britain spearheading amendments to existing rules in the interest of EU as a whole.

The economic consequences will be negative, but small. The more difficult access to the English market is a surmountable obstacle and the putative enhanced English competitiveness will be a nuisance, but not much more.

Politically, things are different. Two options look likely.

The first one is that Brexit starts a wave of disintegration. There are arguments for this. Recently the ardor pushing the EU forward has faded. Several member states have adopted a more or less recalcitrant attitude. The visions are not so visionary anymore. But the daily work goes on with the institutions turning out legislation every day. There is a considerable jump from seeing the slow-down in grand designs to expecting disintegration as a new trajectory for the European Union.

The second option seems more likely though, and that is a stronger core emerging around Germany and France stretching out to those who want it and reserving a role in the periphery for those who do not want it. This will amount to a two-speed, or maybe a multi-speed, Europe where most decisions will be taken by the core, subsequently to be formally approved in the still functioning institutional machinery of the EU. Indeed, simultaneous with the launch of the campaign for new terms of Britain's EU membership aiming at less integration, Germany and France chose to propose stronger integration among the 19 members of the Eurozone in the following sectors: Economic policy, economic convergence, fiscal and social matters, financial stability and investment plus governance of the monetary union. It goes without saying that those who prefer to be in the periphery are still member of the European Union, but with less influence -- that is the price to pay and some member states (Britain?) may willingly do so; others may feel that full membership (joining the Eurozone) is preferable.

The uncertainty about Russia, the Ukraine crisis, Turkey on the doorstep of Europe but not anymore on the doorstep of the EU, the Middle East casting away the political architecture imposed by the victors of World War I, and a wave of migrants (refugees) from Africa in the scale of several millions are all factors sufficiently strong to convince the Europeans that the time is not exactly ripe for running away from each other. All the more so as the US seems to glide slowly but surely away from the Atlantic alliance, posing strategic (military) uncertainty, and China and India solidify their position as major economic powers.

Observers normally assume that the EU without Britain will be more inward looking plus more protectionist. This cannot, however, be taken for granted. Britain does not define the EU's outlook and engagement outside Europe. If anything it can be said that the EU's biggest challenge lies east and southeast of its present border plus in Northern Africa. These are areas traditionally out of the British looking glass. It was Germany and France who played a pivotal role -- for good or ill -- in negotiations about Ukraine. Britain has not done much to turn Europe's attention toward Asia. The US has come to the conclusion over the last decade or so that Britain is not any longer enjoying a special relationship with Washington. In fact both the Asian giants and the US are gradually turning their attention toward Germany and France. Trade policy is steered, as everything else, by interests. The liberalization of global trade is almost complete and there is little evidence to support the view that Brexit will augur a change in the EU's common trade policy. In fact the conclusion after a brief look at interests indicates very little change. The EU has for a number of years tended to be less outward oriented, but that is due to internal challenges, which persist with or without Britain as a member.

Militarily, the EU will suffer. The British nuclear deterrent may mean something, but just how much is difficult to gauge; the British armed forces, equipped, trained and operationally experienced overseas, will be missed if or when the EU might undertake such operations. Having built up a reputable role through launching 33 military and civilian missions under the Common Security and Defence Policy (CDSP) over the last decade, the diminished future capability may undermine the EU's effort -- maybe the only player trying to do so -- to coalesce hard and soft power into a single power vector.

There will be a political price to pay as it will be the first time a member -- a large and influential one at that -- leaves after having weighed pros and cons after 45 years as a member.

The analysis points to a weakened EU, but not fundamentally so; it would still be capable of pursuing the goal of "an ever closer union among the peoples of Europe." European citizens do not devote the same attention as the political elite to Britain in or out. They are primarily interested in the EU's ability to solve daily problems that are beyond member states' reach in a globalized world, or finding better solutions for citizens than if member states tried to do so alone. If the EU can "deliver" in that way, the wounds can be healed and the EU can continue without a majority of citizens questioning its raison d'être.

Post scriptum: A yes vote is expected by most observers, analysts and opinion polls, so what will such an outcome bring about? It depends very much on the figures. A large turnout giving a robust yes vote will settle the question of British membership for a long time and offer time and room of maneuver -- to move on.

Unfortunately it is not the most likely outcome. Presuming a yes vote, the most likely outcome is a moderate turn out and a majority for yes that is clear, but not decisive. This will be better than a no vote, but not good enough -- neither for Britain nor for the EU.

Political forces in Britain wishing to cut the links with the EU will not give up; they will feel justified, maybe even encouraged, to pursue efforts to call another referendum. The government will be aware that the yes majority was not decisive, which will influence its European policy, pushing it toward a more skeptical attitude and putting the handbrake on new initiatives not to its liking. There will be many who recall the ideas of Germany and France. Firmly and squarely, Britain ends up in the periphery sowing the feeling of second-rate membership and giving the skeptical Europeans wind in their sails. With the British economy caught by deficits on the budget and the balance of payments entering heavy seas, the blame can easily be put on the EU membership.

The other member states will note that Britain stays as a member after negotiations where they may have given more than they wanted to, steered by the wish to keep Britain as a member. It will consequently not be status quo. If the result is a sullen and grudging partner, they may feel that they bought a pig in the poke. This will unquestionably further the course toward a two-speed or multi-speed European Union; it is hard to judge how exactly it will play out except for the obvious conclusion that no one will be happy -- especially not after having used so much political capital and good will to secure a result.

Overall conclusion: Unless we are very lucky the world had better brace itself for a self-tortured Britain, not like the country the world had got used to, and for an EU searching for a way forward with less global influence, connoting a lower profile in areas of soft power -- climate change, global trade, human rights, peace keeping operations to name a few examples -- where the member states, through determined efforts, did carve out a respectable role. It may not be fashionable nowadays, but nonetheless this stance may have been helpful to the US by enlarging its room to maneuver. The geopolitical balance may tilt more not only toward instability, but also toward the hard power favored by certain disturbing forces, primarily around EU's borders.