Brexit Snowballs Across Europe

Even if it comes to nothing, the Brexit show has produced a remarkable chain of unintended consequences. David Cameron started the ball rolling in 2013.  With his eye firmly focused on domestic politics, he decided to steal a march on his Labour opposition and disarm the anti-Europe UK Independence Party (UKIP) by calling for a national referendum on British membership in the European Union (EU).  It worked.  He returned to power as prime minister in 2015.  But having promised a referendum, he had to call one.  He did for June 23.  And having scheduled a referendum, he then had to try to re-negotiate the terms of British membership.  As that effort brought fundamental issues to light, other EU members looked to change their EU arrangements.  Now it seems as though Cameron’s cynical domestic political calculation has launched a general reform movement within the EU, one that may well go on however Britain votes later this month.

For other EU members, Britain’s moves have provided less a guide than a prompt.  Their needs differ markedly from Britain’s and are much more nuanced than London’s straightforward demands for freedom from EU constraints, assurances that it will keep its own currency and have the latitude to set its own monetary policy, pursue more pro-growth fiscal policies, set its own labor rules, and control migration both of EU citizens and especially of refugees.  In contrast to this, others in the EU seem to want a strange mix of changes, some of which would give freedom from EU rules, such as Britain wants, while others would seek greater integration, largely aimed at getting support from the union.

Italy, most vocal thus far, is illustrative.  On migration, it, unlike Britain, has all but given up on closing its national borders.  Instead of room to set its own course, it wants greater EU integration, specifically a European-wide asylum system to help it cope with the 300,000 North African and Syrian migrants it has already taken in at a cost to Rome of €3.0 billion a year.  On fiscal policy, Italy, in this case like Britain, seeks greater latitude to pursue pro-growth policies, in particular an ability to run larger budget deficits than EU rules currently allow, mostly to meet the expenses of migrants, anti-terrorism, and also to support pro-growth investments in its economy.  But at the same time, Rome wants greater integration, in particular a Euro-zone budget and a Euro-zone finance minister, presumably to get help from zone-wide, read German, resources.

Rome has similarly pressed for a mix of greater distance and greater integration in financial matters.  Prime Minister Matteo Renzi is deeply concerned that the huge overhang of questionable loans at Italian banks could undermine depositors’ confidence, prompt a flight of deposits to other Euro-zone banks, a loss of liquidity in Italian finance, and so an end to the country’s nescient economic recovery. He wants freedom from Euro-zone rules that prevent him using public monies to restore confidence.  Because of these rules he has had to create an odd financial vehicle that marshals private money to the task.  This so-called Atlante Fund may work, but Renzi would clearly prefer the greater assurances that would come with an application of public funds.  Even as Rome agitates for freedom from such EU rules, it also looks for greater integration, proposing a capital markets union to parallel the currency union.  Presumably, such an arrangement would put zone-wide resources, again read German, at the disposal of troubled members, as Italy is now.  French Prime Minister Manuel Valls, no doubt aware of his own country’s financial weaknesses, has endorsed such a plan.

If Italy and by implication other beleaguered Euro-zone members seem to want freedom and integration both and on their own particular terms, they are far from alone.  Germany, after all, has enjoyed just such a mix for some time now. Berlin, for instance, has insisted on sustaining the euro as originally established.  It has billed this insistence as a commitment to the ideal of unity.  But it also clearly benefits the German economy in particular.  A loosening in the currency arrangements would see a German currency leap in value, so much so that it would likely price German exports off world markets.  But while insisting in this respect that the union support German exports, and incidentally that the periphery economies make all their financial adjustments through severe austerity measures, Berlin has refused to put its own finances at risk for the sake of the greater union’s stability.  In recognition of how Germany has positioned itself, Italy has proposed an adjustment of trade imbalances through some zone-wide mechanism. Berlin has all but ignored the proposal.

To be sure, needs for reform have long festered in Europe without much action. The proposals surfacing now may ultimately bog down in Brussels’ bureaucratic morass, as others have in the past.  But this time the threat of Brexit and Cameron’s negotiations may have provided enough of a shock to create lasting reform momentum.  They certainly have provided Rome with a boldness it has lacked in the past.  Given that the Italian economy accounts for as much as 17 percent of the Euro-zone gross domestic product (GDP), the leadership in Brussels will have more difficulty quashing Italian demands than it did Greek demands not too long ago.  Even if Britain exits and can no longer provide leadership for an EU reform movement, the departure of such important economy may give Italy and others a club with which to beat the EU leadership.  Either way, these unintended circumstances will give substance to a recent statement by former French President Nicolas Sarkozy and candidate in the upcoming presidential election.  “Brexit or not,” he said, “we’ll need, in all scenarios, to deeply re-launch the European project.”


One response to “Brexit Snowballs Across Europe

  1. Mr. Ezrati, I enjoyed your insights in “Thirty Tomorrows.” Since the Brexit vote was to leave the EU, I have a couple questions.
    1. I have read that Polish, Hungarian, Mexican and South African currencies dropped down somewhere between 2-4% against the dollar. Why did we see so many countries currencies (outside of the UK and Euro) drop in value to the dollar?
    2. I have heard from the media that the Brexit vote to leave is a step backwards to globalization. Do you think the Brexit vote to leave will have an impact on globalization?
    Thanks for your time, and all your insights over the years.


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