Does Europe Need Brexit?

The shocks of Brexit could galvanize a smaller EU toward integration, common institutions and direct elections

Published on YaleGlobal, 9 June 2016

By Alan Stoga

NEW YORK: The conventional wisdom is that the British exit from the European Union — Brexit — would be bad for everyone: the British people, the United Kingdom, the European Union and even the United States. While that may be true, in the age of Trump — the unconventional presumptive Republican nominee for US president — every bit of such received wisdom needs to be examined carefully to determine if, as with American politics, the stars might have realigned.

Arguably, Brexit needs to be judged against — and may well turn out to be a referendum on — the state and prospects of the European Union. Unfortunately, by almost any measure, the state of Europe is forlorn and the prospects grim. Perhaps, the shock of Britain leaving the Union could be exactly what’s needed to jumpstart Europe out of its near catatonic state.

From an economic perspective, Europe is stuck in a slow-growth, deflationary scenario; the EU’s total GDP only recovered to its 2008 level during the first quarter of 2016. Even that sad performance conceals dramatic differences: From 2008 to 2014, disposable income for the average household — essentially, take-home pay — shrank 6 percent in Ireland, 4 percent in Italy and 1percent in Spain, while Greek households lost almost one-quarter of their income.

Across much of Europe unemployment remains high: Spain (20.4 percent), Italy (11.2 percent) and France (10.2 percent) explain most of Europe’s overall unemployment rate in excess of 10 percent. The combination of stagnation and weak labor markets has resulted in a sustained increase in income inequality in these countries and others.

On the other hand, German household income grew 15 percent. Unemployment is 4.3 percent and dropping, with accelerating wages and improving equality. No wonder that they remain enthusiastic Europeans!

From a financial perspective, the euro has survived as a single currency and certainly has contributed to export competitiveness, particularly for northern manufacturers who otherwise might be suffering from supersized currencies. However, the euro has failed to realize its potential to become a rallying point for continued European integration and, hence, a true global reserve currency.

This reflects the lack of an appropriate European institutional underpinning including a common fiscal policy, common banking and regulatory frameworks and a popularly elected European governance structure that would help make the European Central Bank, and the euro, legitimate.

Last year’s “Five President’s Report” by the leaders of key EU institutions recognized that the European construct is incomplete.1 Arguably, it’s worse than that: the EU is increasingly illegitimate for many whom it’s supposed to serve.

In all but a few European countries, fiscal policy is hamstrung by the spendthrift residue of past policies. As in the United States, that leaves most of the burden of macroeconomic management on monetary policy, which is “independent,” controlled by European technocrats out of the reach of national politicians. The practical result is that voters in France or Spain, say, have little input in the decisions that determine whether their economies grow or contract, and no possibility of persuading the Germans and other European creditor countries to share their wealth.

The solution is not to politicize monetary policy, but to recognize that the failure to evolve political structures — to give voters an effective voice in their own futures — is contributing to the hollowing out of the political center and growing populism.

This is only part of the political problem. Europe is also riven by north/south and east/west divides. On the one hand, countries like Germany, Sweden, Finland, Austria and the Netherlands are fiscally conservative and growing, albeit slowly, while the countries of southern Europe are economically stagnant and burdened with uncompetitive labor and regulatory policies. On the other hand, the countries in Europe’s east are much less committed to the multicultural, socially liberal model that typifies western Europe and, in cultural terms, defines “European” to much of the rest of the world.

Indeed, when the EU expanded after the collapse of the Soviet Union, there was no reengineering to take into account the dramatically different postwar histories of western and eastern Europe. Those differences have become increasingly evident under the twin pressures of recent Russian aggressiveness and mass migration from the Middle East and Africa; in general, the eastern countries are less interested in compromising with Russia as well as less interested in accepting refugees than their western neighbors.

Finally, from an ethical perspective, Europe’s failure to deal humanely with the migration onslaught has destroyed its claims for the moral superiority of its “soft power” approach to foreign policy. European leaders have found it easier to outsource border control than to agree on shared responsibilities for caring for migrants within the EU. Payments, in fact or in prospect, to Turkey, Morocco, Libya, Nigeria and other countries may be practical ways to stop migrants, but certainly do not rise to the standards of human rights and democracy that characterized European diplomacy for decades.

In short, the European Union is on trajectory to bounce from crisis to crisis, with ever-rising economic and social costs. Governments are supposed to create well-being for their people, and the EU is clearly not doing much of that. What might happen if the British voters, in their wisdom, decide that exit might be less scary than hoping to prosper amidst all that bouncing?

In the spirit of Winston Churchill’s dictum, “Never let a good crisis go to waste,” perhaps the Brexit vote could become the catalyst for reinventing the EU in ways that would make its institutions more democratic, more resilient and more effective — at least for some.

A new EU would almost certainly be smaller, built around a core of countries willing to integrate, create common institutions and directly elect European-level leaders. This would entail surrendering considerable sovereignty, particularly with respect to the control of what today are national economies, regulatory structures and banking systems. It would also require a common commitment to defense — embedded in NATO — a common foreign policy and effective border controls.

Germany and countries like the Netherlands, Luxembourg, Finland, Austria, Belgium and even Sweden are potential core members, while countries like Italy, Spain and Poland are surely not. The key question is whether France could overcome its increasingly divided politics and choose a European instead of a French future; the corollary is whether a new European project without France would make any sense.

It’s conceivable that a strong core could anchor a free trade area open to countries unwilling to participate in a unified European state. This would not as much mean creating fast and slow-track Europes, as it would mean recognizing that the current track is demonstrably failing.

Of course, Brexit would not necessarily mean that what’s left of the EU would break up. Over the last several years — through the Great Recession, the Greek debt crisis and the migration crisis — Europe has demonstrated enormous capacity to muddle through, if with increasingly unsatisfactory outcomes.

However, if British voters on June 23 choose to leave the EU, they would certainly provoke an “emperor has no clothes” moment. If the rest of Europe is lucky, that could be an opportunity to construct something that is actually equal to the challenges of the 21st century.

1″Five Presidents’ Report” sets out plan for strengthening Europe’s Economic and Monetary Union as of 1 July 2015. Press release, Brussels, 22 June 2015.