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How Brexit is Undermining the Stability of the Western World

Paul Welfens, author of the forthcoming An Accidental Brexit, writes about the impact of Brexit on Western stability.

The historical British EU referendum is characterized by an information disaster on the part of the Cameron government, namely not including the Treasury Report’s main finding of a 10% income loss due to Brexit in the 16-page referendum information brochure sent to all households. An orderly referendum would arguably have resulted in a 52% majority for Remain. The policy announcements of the May government with respect to a global UK are largely illusory and co-operation with the Trump administration is doubtful.


The UK experienced a surprising pro-Brexit majority in the British referendum of June 23rd, 2016. Following an initial announcement by Prime Minister Cameron that he intended to hold a national referendum on EU membership in the near future, the winner of the UK’s 2015 General Election decided to engage in quick negotiations with the European Commission and EU partner countries respectively, in early 2016. With the outcome from these talks being hailed as a victory for Britain, Mr. Cameron launched the referendum. His recommendation was for a vote in favor of Remain and his government indeed carefully looked into key aspects of British EU membership advantages – a 200-page report by the Treasury was published on this topic in mid-April 2016. That report came up with a table that clearly suggested rather high long-term costs, namely a loss of 10% of income, associated with leaving the EU. However, this information was not contained in the 16-page government referendum brochure sent to all households in the UK. This in in sharp contrast to the Scottish referendum of 2014 when relevant economic information was indeed provided to households by government.


Furthermore, the Cameron government, through massive cuts in financial transfers from central government to local authorities, had created the under provision of public services locally and huge deficits in the National Health Service, a situation which many voters falsely ascribed to a convenient scapegoat – immigrants: Cameron’s cuts took an enormous 3.5% of Gross Domestic Product away from local government in just five years, while Cameron and May – as a minister in his cabinet – repeatedly complained about levels of migration from other EU countries being too high. At its height, EU immigration amounted to just 0.2% of the population and, according to research by the IMF, EU immigrants are net contributors to the UK budget. The government’s 2017 White Paper ignores these findings completely and its argumentation is very inconsistent.


A few months later, US voters went to the polls in presidential elections, which resulted in a rather surprise victory by Donald Trump, who had endorsed the pro-Brexit majority of the British referendum and, shortly after the election day in the US, Mr. Trump presented a protectionist, anti-multilateral agenda. It is contradictory to witness the UK with its new free trade agenda also seeking increased cooperation with the protectionist Trump administration.


The promises made by the May government, namely to reinforce economic growth in a post-Brexit UK through a series of new free trade agreements, is unconvincing as with the notable exceptions of a free trade agreement with the US and Japan, no other prospects for significant bilateral free trade relations of significant size are visible. Concluding free trade agreements with China and India would be a rather complex challenge and the economic logic suggests that even this would be not be an adequate compensation for the UK’s expected loss of full access to the EU single market to which about 45 percent of British exports are destined.


Moreover, the flawed and negligent information policy of the Cameron government could be grounds for the EU27 to offer the UK, in regard to conditions for future access to the single market, a minimal diplomatic solution that is not much better than WTO conditions. As an EU member, the UK has rights and responsibilities in the community, including a political duty to appropriately inform its own citizens; in the second national EU-referendum, the Cameron government, due to organizational failures of the government itself, did not fulfil this duty.

 

With the statement of the Constitution Committee of the House of Lords of September 13th arguing that to invoke Article 50 of the EU, and thus to officially declare that the UK intends to leave the European Union, government needed a positive vote from Parliament, raising new questions as to whether or not Brexit would in fact become reality. The UK is witnessing new political infighting resulting from a deeply flawed referendum that is undermining political stability across Europe – not least since right-wing populist parties on the European Continent feel encouraged by the Brexit vote. At the bottom line, inconsistent British politics and policy is undermining the stability of the Western world.


Nevertheless, the Brexit decision represents a call on the EU to vigorously undertake new institutional reforms – i.e. steps towards a better functioning Neo-EU. Less regulation, more transparency and the better implementation of democratic principles are pressing matters to be addressed in the medium term, in the longer term the establishment of a political union in the Eurozone, which would represent 5-6% of GDP in terms of expenditure by Brussels; through the transfer of, above all, infrastructure projects and spending, defence expenditure and the introduction of an EU unemployment insurance scheme for the first six months of unemployment. Political competition in terms of European Parliament elections would intensify in such a new EU and the voting shares of small, radical parties would decrease significantly: Europe would be more stable. Germany and France, in particular, are encouraged to undertake national reforms and EU initiatives that should indeed be accelerated given the drastic changes in the UK and the US.


The combination of Brexit and Trump’s election in the US could bring about the demise of Western dominance in the world economy – and regional disintegration in many parts of the globe which will lead to less trade, weaker international investment networks and new conflicts. It would have been fair and adequate to organize a second EU referendum in the UK while making sure that government gave broad economic information to all households in a timely manner.


Paul J.J. Welfens is Jean Monnet Professor for European Economic Integration, Chair for Macroeconomics at the Schumpeter School of Business and Economics, and President of the European Institute for International Economic Relations at the University of Wuppertal, Germany. He is Research Fellow at IZA, Germany, and Non-Resident Senior Research Fellow at AICGS/John Hopkins University, USA.

NB: All opinions expressed here are the author’s own and do not represent the views of Palgrave Macmillan.