THE BLOG
09/29/2016 10:29 am ET Updated Dec 06, 2017

Why Brexit Could Break Up the EU

What happened in Great Britain is in danger of happening in other parts of Europe. The double whammy of the Great Recession and misplaced economic austerity policies have triggered a backlash of right wing nationalists that want to leave the EU, because their workers have lost so many jobs.

Brexit, the British vote to exit the European Union, was precipitated by many factors, including Brit's fear of loss of sovereignty due to the Schengen requirement that it open its borders to citizens of other EU countries. This has led to the possibility of a breakup of the Eurozone, and maybe even the European Union.

It was a fear that eastern Europeans would deprive Britons of jobs by migrating from countries where wages were lower. Great Britain's minimum wage is more than double that of countries such as Poland, Czech Republic, and Romania, for instance, which has meant that some 1 million immigrants from other EU countries have migrated to Great Britain seeking better paying jobs, and pushing out many blue collar Brits in the process.

So there is good reason for their fear. Great Britain's unemployment rate only came down to 5 percent in 2016, after hovering at 6-8 percent since 2008, the end of the Great Recession, largely due to misguided economic policies.

Britain's Prime Minister David Cameron was hoisted on his own petard when he called for the referendum that precipitated Brexit, in other words. For he was a strong supporter of German austerity policies that led to two recessions in most of the EU, policies that advocated cuts in government programs combined with higher taxes for Eurozone countries.

Poor job prospects in many of those countries hardest hit by the Great Recession prompted the flight to countries least affected, such as Great Britain, even though Great Britain was still suffering from job losses. The Guardian has been trumpeting this truth since Cameron's austerity policies were instituted in the Conservative Party's 2010 ascent to power.

"Austerity - which has affected the living standards of many working people - was not imposed by the EU, but was a choice by the current government. When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain's contribution to the EU - at £8bn, just 1.2 percent of public expenditure and outweighed by our economic gains from membership - to take on disproportionate significance."

Many major economists have written about the failure of austerity policies since the end of the Great Recession, including Nobelist Paul Krugman.

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"Since the global turn to austerity in 2010, said Krugman in the Guardian, "every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF's chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy."

Maybe we should also mention it is the reason why the Eurozone is in danger of breaking up, all because of not knowing how to deal with the huge amount of debt incurred during and by the Great Recession. All countries suffered, as they did after WWII. But the western world had visionary leaders then, willing to rebuild those European countries in particular with something called the Marshall Plan--some $17 billion in loans and grants--one quarter of which went to Great Britain.

It was also a time when 50 percent of German debt was forgiven--that's right, it was cancelled outright. But are there any such leaders today that might help at least Greece and Portugal? Unfortunately, we are instead harking back to WWI history, and the punitive demands made on Germany for war reparations that precipitated Hitler and WWII.

London School of Economics Professor of Economic History Albrecht Ritschl conducted research into how Germany was able to pay off its debts after the two World Wars. Ritschl looked in detail at the financial assistance that was paid to Germany after the war under the Marshall Plan, in which the US gave that $17 billion - around $160 billion in today's values - in economic support to help rebuild European economies. He showed that while the transfers were tiny, the cancellation of debts was worth as much as four times the country's entire economic output in 1950 and laid the foundation for Germany's fast post-war recovery.

It doesn't seem possible that members of the EU can't find the most obvious solution to their debt problems with a situation scarily similar to post-WWII. The Marshall Plan was created in part as a response to the threat of Russia and communism. Today, we have another Russian dictator threatening European unity with a nuclear war.

It's in such times that Europe needs great leadership. Otherwise, the possible breakup of the Eurozone--and maybe the European Union, is inevitable.

Harlan Green © 2016

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