Monday, July 4, 2016

Will the UK Really Leave the EU?

The British Exit from the European Union (EU), widely known as Brexit is perhaps the most compelling story to come out of Europe since the falling of the Berlin Wall. It is like a soap opera with its unpredictable twists and turns. It is a story about an impending divorce where one partner announces to the other that they have 'just grown apart'. One where the rejected partner angrily says in effect 'Go ahead and leave – but I’ll make you pay!!
The idea and purposes behind the EU are certainly solid ones. There is strength in numbers. A small country in Europe wouldn’t have much power to negotiate favorable trade deals with the rest of the world, especially the giant players. But with the combined EU being the world’s largest economy, its influence on the world’s stage is undeniable.
And avoiding the unwieldiness of each country having its own currency, customs and immigration regulations is certainly desirable. Traveling, working, and living throughout Europe is seamless between its member nations.
But alas, there are some downsides to such an arrangement. Instead of individual countries having a free hand to run their economies as they see fit, there are requirements to administer their economies within certain agreed to guidelines. And with the common currency in the form of the euro, countries lose access to the printing press to expand their money supply during recessions to try and reduce unemployment. The extreme difficulties Greece recently had to go through was a result of this. While normal fiscal management would suggest an expansion in the money supply to help pull them out of a badly depressed economy, orders from headquarters (the EU) were for austerity measures in the form of cutting government spending to try and balance the budget – which only made matters worse and may eventually lead Greece to abandon the EU and the euro.
So why does the EU favor these austerity measures when they seem clearly at odds with countries struggling through recessions? Although EU decisions are made by a consensus of their members, Germany exerts a lot of influence on its economic policies being one the dominant countries on the continent. And Germany has much more of a fear of inflation than anything else having lived through the hyperinflation of the Weimar Republic between World Wars I and II with its vivid images of money in wheelbarrows.
For whatever its motivations, the one size fits all economic policies are to many EU observers a very serious and perhaps an even fatal flaw. This has led to even strong supporters of the Remain movement to have mixed feelings about the EU.
But the UK was able to sidestep the currency issues by being able to join the EU but keep the pound instead of the euro. To supporters of the Remain side, such an agreement made leaving the EU even harder to justify.
With the far right in the UK grumbling for some time about leaving the EU, Prime Minister David Cameron thought he could finally settle this issue by putting the question to a vote in a national referendum. Big mistake. While this form of pure democracy may sound appealing, the economic ramifications of leaving the EU are far too complicated for the average citizen to make an informed decision. And what’s more, it presented an opportunity for a charismatic politician in the form of Boris Johnson, a former mayor of London, to demagogue the issue. Although a number of UK politicians supported the Leave movement, Johnson was its most prominent spokesperson. In the style of Donald Trump, he convinced enough mostly older people disgruntled with issues like immigration and globalization that he could lead the UK away from the EU and to the promised land, presumably as the next prime minister.
The polls said the vote would be close but predicted until the very end that the Remain side would likely win. Johnson probably thought so too!
Then the upset happened. The Leave side won. The financial markets around the world went into a tailspin, as did the value of the pound. When Johnson declared victory with all of the anxious UK watching, he seemed strangely subdued. Perhaps after this unexpected victory, it dawned on him that the actual disengagement from the EU would be a most formidable task. And with Prime Minister Cameron immediately announcing his upcoming resignation to leave this to his successor, Johnson was asked about his plan to actually execute the separation process. He had to admit that he hadn’t thought of one. He looked like the dog who had frantically chased a car and then upon unexpectedly catching it didn’t know what to do next.
Then some of the Leave politicians were forced to admit that some of the claims they made to persuade voters were either exaggerated or simply not true. And to top things off, Johnson then made a surprise announcement that he was no longer in the running to become the next prime minister. Many of the voters were livid. He broke it and wasn’t going to stay around to fix it. There was clearly a lot of buyer’s remorse.  And Johnson’s colorful and controversial political career may well have come to an end.
So what now? The Leave side says they won fair and square. But did they? And unlike an election this was a non-binding referendum. But is there any going back? It is fair to say that if many had to do it over again knowing what they know now, they may well have voted differently.
But going forward isn’t going to be a walk in the park either. There are a number of political obstacles that must be dealt with. Does Parliament have to provide the final approval to start the Leave process? What about Scotland and Northern Ireland? They voted solidly to Remain and may well leave the UK to stay in the EU.
And then there is the actual negotiation over the ‘divorce’. Essentially, all of the terms that are part of being in the EU are now subject to renegotiation. The actual procedure has a designated legal name – article 50. Once the intention is officially announced to the EU to leave, the clock starts on a 2 year deadline to get all of the terms negotiated. The fact that some of the Leave contingent wants to wait awhile before starting the clock may be a sign of some cold feet about going through with all of this. Please check out this informative link and video to learn more.
How this will all turn out is anybody’s guess. In the most optimistic scenario, the EU may decide it’s in their interest to make some concessions to the UK in exchange for a reconciliation. But if or when this finally gets to the negotiation stage, it may turn into a nasty tug of war. Divorces are often like that. But in addition, there may be an incentive by members of the EU to drive a hard bargain to make an example of the UK. After all, there are far right parties in a number of other European nations which if they come to power will be itching to also leave the EU with its own unforeseen worldwide consequences. This is truly a lighted powder keg that the world will be watching!