Global Affairs

Europe yet to realise how badly Brexit will hurt

The last thing Europe needs is to be dragged down by a hard landing in Britain

LONDON • European Union leaders - apart from British Prime Minister Theresa May - are gathering later this week in Bratislava, the capital of the central European state of Slovakia, to decide what they should do with their continent once Britain leaves.

As always in Europe, plenty of schemes for greater integration are on the table of the Bratislava summit, from the idea of raising a new "European Army" to more mundane proposals for the creation of new EU agencies to promote financial regulation and economic growth. But most of what will be discussed remains of the "never mind the facts, just feel the vision" variety, for there is as yet little consensus about what needs to be done, and little understanding of how profoundly Europe will be changed by Britain's departure.

Since June, when the British shocked the world - and themselves - by voting to leave the EU, much of the discussion has centred on the scope of the "divorce deal" the British will get, and on the damage this process will inflict on Britain's economy and international standing. But the time has now come to shed some light on the other side of the same coin, on the impact of Brexit on Europe itself. And sadly, the picture there is far from pretty either.

DON'T ASK THE PEOPLE

European officials tend to dismiss the British referendum as an oddity, a peculiar result from a peculiar British nation which, for one reason or another, proved itself incapable of integrating in the EU, notwithstanding all the efforts other European governments made over almost half a century. The idea that the British experience should serve as a warning for other Europeans or that the British rejection of Europe is at least partly related to the obscure and often unresponsive ways by which the EU itself operates is seldom explored. As far as EU officials are concerned, the real lesson is that the British government carries blame for the outcome simply because it foolishly decided to call for a referendum.

However, this blinkered view is a grievous error which could yet have catastrophic effects. For there is a reason why, for example, the residents of a region like Cornwall, one of the poorest parts of Britain, voted massively against the EU despite the fact that they receive huge financial subsidies from Europe, or why no amount of logic, facts or figures during the British referendum debate could persuade millions of Brits that they are better off inside Europe: the EU comes across to many as a bureaucratic monster capable of almost every chicanery, an institution whose actions are poorly understood and seldom appreciated.


ST ILLUSTRATION: MANNY FRANCISCO

Until recently, the EU accepted that it had to address this so-called "democratic deficit", this gap between perceptions and reality. But one perverse outcome of Brexit is that such efforts have now stopped: just about the only consensus which prevails among EU leaders now is that they must never ask their people what they want, since they risk not getting the answer they want. Less, rather than more, public consultation is now the EU idea, and that does not bode well for the future.

There is also a strong desire to make an example out of Britain, to punish the British and "make them pay" for their departure from the EU. To some extent, the sentiment is understandable: successive generations of British leaders treated Europe abominably, never bothering to explain the EU to the British public, always eager to draw any advantage from Europe while blaming EU officials for any mishap. So it is natural that the mood in Europe is vengeful, with nations determined that the Brits should pay the price for their departure.

But this may yet turn out to be a classic case of cutting off one's nose to spite one's face. For the last thing Europe needs is a trade dispute with Britain, or a British economic "hard landing" which drags the rest of Europe's economies downwards with it. The idea that Britain, which has the world's fifth-largest economy, could suffer a serious blow which somehow doesn't touch the rest of Europe is nonsense, pure and simple.

NEW COMPETITOR

Furthermore, how will the EU cope with a Britain which is outside its single market, free to compete on lower taxes and more flexible labour legislation? Or how easy would it be to maintain the current EU budget when Britain, which accounts for about 12 per cent of overall contributions, disappears from the EU accounts? Would other countries like to increase their contributions after Brexit, or would everyone accept a cut in spending? In short, threatening Britain with a trade war may please some EU leaders, but remains a fool's paradise.

The biggest damage which Europe will sustain as a result of Brexit is psychological... The EU is no longer automatically associated with economic progress and good governance; instead, it is increasingly seen as an ossified structure run by ham-fisted bureaucrats. And Europe can no longer pretend to have a serious security and military policy when Britain, one of its key military partners, is preparing to leave.

And similar flights of fancy are now seen in the debate about depriving London of its status as Europe's biggest capital centre. Again, the fury of the Europeans at the capital of a country which refused to accept the euro as its currency but benefited most from the rise of Europe's single currency is understandable. But, yet again, the answer which the Europeans offer makes no sense.

Financial institutions come to London because of the British legal system which offers impartial protection to investors and creditors, a complete ecosystem of good schools, universities, consultancies and various other services, the use of the English language and favourable tax and employment legislation.

If EU countries such as Germany and France want to offer Frankfurt or Paris as an alternative to London they'd have to work really hard to compete with the British capital: the World Bank ranks the UK fourth in the world in shareholder protection (behind only Hong Kong, New Zealand and Singapore) while France is in 29th place, and Germany is 49th. The same applies to the World Bank's ranking on paying taxes, which puts the UK 15th in the world, well ahead of Germany (ranked 72nd) and France in the 87th place.

But, true to their traditional instincts, EU leaders are not proposing to compete with London; they are proposing to regulate away London's predominance by simply restricting EU financial transactions or imposing financial penalties on banks which trade with Europe but continue to keep their headquarters in London. In short, the strategy is not to compete with the best, but punish the best. How this would benefit European economies is, of course, never explained.

PSYCHOLOGICAL BLOW

However, the biggest damage which Europe will sustain as a result of Brexit is psychological. For the first time ever, European integration, a process which almost everyone assumed was irreversible, became eminently reversible. The EU is no longer automatically associated with economic progress and good governance; instead, it is increasingly seen as an ossified structure run by ham-fisted bureaucrats. And Europe can no longer pretend to have a serious security and military policy when Britain, one of its key military partners, is preparing to leave.

Of course, this is a generalisation, even a caricature of realities. But caricatures sting because they often become reality, and that has consequences. As a result of Brexit, EU leaders are losing confidence in themselves, and growing increasingly fearful of promoting free trade and economic liberalisation.

As Mr Mark Leonard who runs the European Council on Foreign Relations, a think-tank, ably put it in a recent study: "The EU proved over the last few decades that it could be a force for globalisation, tearing down barriers between peoples and nations, but today its survival depends on showing that it can protect its own citizens from the very forces it has promoted."

None of this damage is inevitable, provided all the European leaders at their summit this week accept that Britain's departure is a tragedy for the entire continent, and that the best contribution which all governments can contemplate is to make this separation as smooth as possible, and with the least possible consequences.

Not because the British don't deserve to be "punished", but because all Europeans deserve a better fate.

A version of this article appeared in the print edition of The Straits Times on September 12, 2016, with the headline 'Europe yet to realise how badly Brexit will hurt'. Print Edition | Subscribe