Possible Brexit: How Did The EU Get To This Point?

By Vincent J. Truglia

Most of the discussion regarding whether the UK should Stay or Leave centers around the impact on the economy. However, economics is not the basis of the problem. As a result, I will handle this issue in two parts. First, I will discuss the key economic issues. Second, I will discuss the more fundamental problem facing UK voters and the EU.

Economics of Brexit

If anyone tells you they know what the effect would be of a Leave vote, they are fooling you. No one knows for sure. The best we can do is to approximate the overall impact.

Trade

On the trade side, we hear that UK businesses would suddenly be outside the free trade zone. I have trouble believing that would happen. The most significant reason for trade issues to be quickly resolved is that the UK imports more from the other EU countries than it exports to them. The latest data indicates exports to the EU at about $330 billion; imports from the EU at about $415 billion. I assume that if a Leave vote wins, that EU firms based in those other EU countries will make a beeline to Brussels demanding that their exports to the UK be protected. Anyway, the EU already has non-EU states with such free trade agreements, including Norway and Switzerland.

Labor Mobility

Another argument we hear from the Stay side is that labor mobility will be reduced. Yes, about an estimated 1.4 million British live in other EU countries, many of them retirees. On the other side, about 3 million EU citizens live in the UK. We need to ask ourselves, would countries, which host UK citizens suddenly want to deport them? It’s extraordinarily unlikely. It’s not as if these UK citizens are moving abroad to find a job because they can’t find a job at home. Retirees are a boon to any economy, which hosts them. Other workers are likely skilled, or trying to improve their foreign language skills, much as Tony Blair, among countless others did, when he lived and worked in Paris as a bartender in his youth.

Looking in the other direction, EU citizens living in the UK are probably slightly more at risk. However, it is my view that the UK has little interest in deporting EU citizens simply for the purposes of deporting them. Many are highly educated professionals. An estimated one-half million French live in the UK. Most live there because they want to live in a less regulated economy. These are just the kind of people the UK would want to stay. I would expect the only people who might want to leave are those who are in the UK solely for its welfare state system. I doubt that even if these immigrants lost their welfare benefits that they would suddenly return home. The UK has so many advantages. It is a tolerant society. It is more unregulated than other economies. It is already quite common for immigrants living in the UK to have reached the pinnacles of economic power. That is not likely in most Continental European countries. At the same time, it must be admitted that cutting all welfare benefits to immigrants will not save the British taxpayer very much money.

The free movement of EU residents is simply not a major negative for the Leave camp. At the same time, economically, it is not a big positive. All in all, it seems pretty much a wash.

Regulation

Another issue often discussed is the heavy hand of regulation imposed by the faceless  Brussels bureaucracy. Here again, I believe the benefits of leaving or for staying are exaggerated. Yes, the UK would no longer have to live by many of the absurd rules emanating from Brussels, such as what kind of pasta is real pasta, or what can be called an apple, and what can’t. It’s these absurdities, which annoy people, but really don’t seriously affect their day-to-day lives. On the other side, those who want to stay argue that suddenly the UK will lose the benefit of maintaining the same rules as EU countries, which they argue helps the UK’s ability to export to other EU countries. This is another red herring. China and Japan are not EU members, yet their exporters do quite well. It is actually an insult to British intelligence to think that British firms can’t cope with harmonizing their products to meet EU standards.

Fiscal

The other big issue is whether the UK will finally lose the burden of paying more into the EU than the country receives. Here, the Leave supporters are right. The UK would save some money, but quite frankly, according to most estimates, the net savings would be small. The UK is a net contributor to the EU by about $12 billion annually. In the end, even budgetary costs of EU membership are not really the reason behind the desire to leave.

The City

The one huge concern is the effect on London as the financial center for Europe if it is outside the EU. Here the problems become important.

We have already seen that the pound weakened after the announcement of the referendum, and especially after the widely popular mayor of London, Boris Johnson decided to support the Leave camp. These kinds of FX swings are to be expected. However, once a final decision is made, FX markets will adjust. The more important point is whether London would lose out to Frankfurt or Paris. Such a development is highly unlikely. Continental European countries have a strong tendency to over-regulate. The one thing financial markets hate is too much regulation. London will still win on that count.

Next the British legal system is well developed, known to be completely impartial, and free from governmental interference. I am not saying that France and Germany don’t have developed and impartial legal systems. It is just that those systems are far more cumbersome to navigate. Also, those systems have a more political tone. London and the UK win on another count.

In addition, the fact that London shares the same language, as well as a very similar legal framework as the other great Western financial center, New York, is of significant consequence. This symbiotic relationship cannot be replicated with any Continental financial center.

One could come up with a long list of other economic issues, which will be debated prior to the June 23rd referendum. However, after looking at the costs and benefits of either side makes me conclude that  economic issues are simply not enough to drive the UK out of the EU, nor adequate to keep the UK in.

If economics is not at the core of the debate, what is?

You may notice in the title that I didn’t ask why the UK got to this point, but rather put the onus on the EU. To understand the present state of affairs, a bit of history is important.

The monolithic European Union began quite simply when after World War II, Robert Schumann, then France’s Foreign Minister, asked the German government to cooperate on jointly managing their coal and steel industries. This was recognized as the cornerstone of reducing traditional Franco-German hostility. This call for cooperation, known as the Schumann Declaration, was issued on May 9, 1950. That date soon became celebrated as Europe Day. From that clarion call developed the European Coal and Steel Community (ECSC), which soon morphed into the European Economic Community (EEC).

Shared Worldview

What is essential to know is that the Founding Fathers of the EU shared the same worldview. The three most important people were Robert Schumann, Konrad Adenauer, the German Chancellor, and Alcide De Gaspari, a senior Italian statesman (founder of the Christian Democratic Party and long-time Prime Minister). Their vision of Europe was based on their strong Roman Catholic beliefs. In fact, before preparing the Treaty of Paris (the treaty establishing the ECSC), the three men went off together to a Benedictine monastery on the Rhine for prayer and meditation. Imagine that occurring today?

The vision of these Founding Fathers was built on the idea of European Roman Catholic solidarity across Europe. It is important to note that the earliest days of the EEC occurred before Vatican II, the council of the Roman Catholic Church (1962-1965), which dramatically changed Catholic thought. In this case, the Council’s call for ecumenism, or the idea of cross-denominational cooperation, quickly transformed the idea of European Roman Catholic solidarity into a new idea, European Christian solidarity. Many in today’s world may try to deny that religion played any role in forming the EU, but they are simply rewriting history.

Why is any of this relevant? The EEC and later the European Union was deliberately designed to be a monolithic and genuinely Christian union, where national sovereignty would be subsumed by pan-European sovereignty. The idea of pan-European solidarity is the heart of the problem facing the UK and a number of other countries.

Political Stability

Besides economic solidarity, the six founding members of the EEC wanted to guarantee political stability. Why? In the 1950s, Germany was still divided. Its former capital, Berlin, had only recently been rescued by the US when it carried out the Berlin Airlift to supply food and other supplies to the surrounded former capital. France was still recovering from the chaos caused by the decline of the Fourth Republic. The Fifth Republic, which began in 1958, was still in its infancy. Italy’s politics were as divided as ever. It was worrisome to many that the Italian Communist Party held a large proportion of the electorate. Thus, it was believed by the EEC’s intelligentsia that in unity there would be strength. Most commentators today seem to take for granted that economics lay at the center of the European project. Yes, economic considerations were important, but the creation of a peaceful Europe was far more important. Since nation states had caused so many problems for Europe over the centuries, neutralizing nation states was/is viewed as a means of avoiding nation state warfare.

The UK and the EEC

In the early 1950s, the UK was in a very different position from France, Germany and Italy. First, although the UK economy was in serious trouble, the country still had important Commonwealth and imperial interests. Trade with the European continent was relatively small. Also, unlike Continental Europe, the UK had an uninterrupted political tradition. Its parliamentary and judicial systems were old and solidly based. The UK at that time didn’t need the EEC. In addition, the early 1950s were a time when Roman Catholic and Anglican prejudices still remained on both sides.

When the UK finally decided that it was in its best interests to join the EEC, the French rejected its initial application in 1961 and again in 1969.

The UK eventually was allowed to join the EEC in January 1973, nearly four years after French President Charles De Gaulle resigned. UK voters confirmed the decision to join the EEC in 1975 by a more than two-to-one majority. Although the UK was now a full-fledged member of the EEC, it only needed the EEC for economic reasons. It never needed nor wanted political integration.

The Dilemma

The dilemma facing EU member states as the EEC expanded into the present-day 28-member union was how to unify such disparate nation states. Today the EU is a far cry from the homogenous club of six nations created by the original EU Founding Fathers. Unfortunately, the central tenet about creating an evermore-unified European state, able to override national sovereignty, remains a cornerstone of the European project. The EU is now so diverse that if the original founding principle of European solidarity is maintained, the EU will be at great risk of disintegration.

Since most core Western European EU states still prefer greater political unity, it seems the only solution is to hope that the UK, which doesn’t want more unity, departs the EU. Although Continental European commentators want the UK to remain within the EU, frankly, it is not in EU member states’ long-term interest for the UK to remain inside.

When discussing staying or leaving, as noted in the earlier section on economics, there is too much hyperbole. Yes, it would be a shock if the UK leaves, but it will be worse if it stays. If the UK succeeds in obtaining special status, other countries will likely also want similar exceptional status relatively soon. Denmark would probably ask for more autonomy. The Visegrad group of countries, which includes Poland, the Czech Republic, Slovakia and Hungary are already demanding less interference from Brussels regarding migration, border controls, etc.

Summary

It seems ironic that most Western commentators dismiss the Visegrad complaint that these nations want to preserve the Christian nature of their societies, when we know that this is exactly what the Founding Fathers wanted in the first place. Unless the EU, as presently configured, ends the lofty goal of a pan-European government, the EU is doomed to failure. A British exit will slow the overall disintegration, but not prevent it. Things are not always as they seem.

 

As always, Clear and Candid.