Bursting the Bubble

The Dire Straits of Brexit: Potential implications for the EU, UK and the V4

19 February 2016 | by

This article was co-written by Dr Christian Schweiger, Frank Markovic & Tomas A. Nagy.

Towards the ´inevitable´ referendum

As the third largest member state in terms of population, the UK has in principle a substantial political weight inside the EU. Since the UK joined the European Economic Community (EEC) in 1973, reluctantly and only after two failed attempts due to France’s veto, the country’s leaders have frequently chosen to play an obstructive rather than a constructive role in European affairs.

Britain’s potentially strong influence on the EU’s policy agenda therefore remained sporadic and was strongest during the first two terms of Tony Blair as prime minister (1997-2005). This was also the period during which it seemed that the EU’s traditional leadership duo France and Germany, which had drifted apart since German reunification, would increasingly depend on the UK as a third pragmatic partner who would be able to help reconcile the growing variety of national interests in the enlarging EU. Under the condition of the EU’s new variable leadership geometry Blair’s New Labour government became a leading player in pushing forward the reform of the Single Market agenda and the deepening of the EU’s defence and security capabilities. Since the onset of the war in Iraq in 2003 and even more so after the global financial crisis, the UK has gradually returned to the position of splendid isolation in Europe.

Under the Conservative Prime Minister David Cameron, the British engagement in the EU has been predominantly reactive and orientated towards defending the red lines of the UK’s perceived national interests. The UK’s potential role as a leading player in the EU has been undermined by the decision of David Cameron to once again reposition the country to the sidelines of the EU. Haunted by growing euroscepticism within the Conservative Party and amongst the wider public, reflected in the growing electoral popularity of the UK Independence Party (UKIP), Cameron promised a public referendum when he became prime minister in May 2010. Ever since Cameron has concentrated on defending the supposed UK’s ‘red lines’, predominantly legal safeguards against deeper political integration and what is perceived as internal EU welfare migration, as part of his attempts to renegotiate the terms of the British membership. Under his leadership Britain has consequently shown very little engagement in any of the EU’s major policy areas, including foreign and security affairs. The UK under Cameron has therefore once again became as reactive as it was under Cameron’s Conservative predecessor John Major in the 1990s. The dynamism and the pragmatism that was shown during the early years of the Blair government and in part even before under Margaret Thatcher has disappeared. Cameron’s position is backed up by the growing eurosceptic mood of the British public who show little appetite for engaging in EU affairs beyond trade liberalisation in the Single European Market.

Brexit –  a (no)way out of perpetual crisis in Europe

If one can believe the opinion polls to be credible at all, recent Barometer figures suggest that the EU is in a perpetual political crisis. Trust in EU institutions, national parliaments and governments is at one of the lowest points since the financial crisis, and currently stands at 32%, 28% and 27% respectively. Europeans have lost faith in their political establishment. The fact that the European Union seems to be more trustworthy than the national institutions is a small consolation prize. Especially if we read this in the context of an increasing number of Europeans feeling cornered into casting a vote for a fringe party of one sort or the other. And it is against the backdrop of this radicalisation of Europe’s electorate that the potential Brexit and its consequences for the EU have to be analysed. The European project as we have come to know is not currently in good shape, and Brexit may indeed prove to be the final nail into the coffin. The argument is very simple; the only political force that is to benefit from Brexit and the political and constitutional unravelling that would follow are the anti-EU political parties currently making inroads in countries such as France, Greece or Hungary.

Indeed, the most far-reaching challenge of Brexit for the EU lies with its political ramifications. The UK departing from the EU would set a precedence that would send shock-waves through the party headquarters across Europe. The imminent danger of 27 other member states leaving the EU remains, at this moment, rather low for as long as the majority of the mainstream parties continue toeing the largely pro-EU line. However, the UK leaving the EU would upset this balance and the dynamics within countries and parties would change significantly.

As a result, Europe will become hostage to more isolationist ideas, not less because anti-EU parties would use Brexit as a stick to beat their political adversaries with. Europe à la carte would become a norm not the exception. Worse still, Britain voting to exit the EU will usher in a great level of uncertainty; an uncertainty over what would happen next. The balance of power with the post-Brexit EU will have to be re-adjusted. The EU will lose a free-market reform advocate with a significant global foreign policy and security clout and the intra-EU balance of power would shift in many directions, namely away from the North to South or East, from bigger to smaller Member States, as well as from more liberal to interventionist economies. As there exists no blueprint for how these changes will translate into the constitutional arrangements within the EU institutions, Europe would have to go back to the drawing board and re-shape its structures. An exercise that cannot be undertaken overnight and one that will inject insecurity into the EU for the time being.

It is often argued at this point that once the dust settles after the UK leaves, the EU will in effect become more functional. It is surely a matter of logic that having got rid of its most dissenting, awkward and often trouble-making member, it can only lead to a more coherent Union. Except that the EU may not survive long enough to see the day. That is because the uncertainty that will result from the shocking news of Brexit will plunge Europe into an even deeper state of crisis than it is in today – not least because the EU is completely unprepared for this alternative. Consumed by the efforts for its own survival and by re-drawing the constitutional borders, it will turn into an even less action-worthy global player than it is today. Faced with the current and future existential crises – be it Russia or refugees – it will start to crumble before it can be reborn again.

However, even if the EU can manage to bridge itself over this interim period it will be faced with a rather hefty economic cost that will come not only in the shape and form of the loss of a chunk of its budget contributions but also in more indirect ways. The United Kingdom is still the world’s fifth largest economy and the third (soon to be second) biggest economy in the EU. Depending on the conditions under which the EU-UK trade relations would be established following Britain’s departure from the EU, some Member States could be severely impacted. According to the Global Council, countries expected to be most exposed to Brexit are Ireland, the Netherlands and Belgium. Beyond that point, the current trade levels between the EU and the UK account for about 2 million jobs in the Eurozone, jobs that could be potentially endangered. Furthermore, curbing the freedom of movement of labour in and out of the UK and the EU will impact not only the countries’ economies but also millions of citizens, especially those currently living, working and studying in the UK, as well as the Britons residing elsewhere in the EU. Other than having a heavy price tag, Brexit would also have a human dimension that is often overlooked.

No business as usual – with or without Britain

Moreover, Britain’s exit from the EU would create a substantial leadership void in the EU as neither of the other four larger member states would be able to counterbalance the growing German semi-hegemony. The economically ailing France has retreated into the position of Germany’s junior partner since the onset of the financial crisis. Italy and Spain continue to be preoccupied with their domestic economic and political problems. Poland, which had started to become an increasingly confident and constructive player under the Tusk government, is in danger of retreating into nationalist isolationism under the new Law and Justice government led by Prime Minister Beata Szydlo.  Brexit is therefore likely to result in strengthening of Germany’s role as the EU’s semi-hegemonial leader.

Without the UK as the leading defender of subsidiarity, the concerns of those members who remain sceptical about transferring further powers to the EU level are less likely to be taken into account by Germany. As a result, sceptical euro outsiders – such as Denmark, the Czech Republic, Hungary, Poland and Sweden – may became increasingly detached with the EU’s division between the euro core and the outsiders deepening further. Without Britain as the leading voice in favour of the acceleration of Single Market liberalisation and economic reform, there is also a risk that the EU could start to become increasingly inward-looking. Efforts to accelerate the deepening of the Single Market could therefore stall. Efforts to promote trade liberalisation with global partners, such as with the United States under the controversial TTIP agreement, could be scrapped as the remaining members adopt a more protectionist attitude. The sheer British presence continues to boost the EU’s weight as a regional and global economic actor and a security player.

The UK is not only a major contributor to the EU budget with an estimated €10 billion in 2015. It is a major importer of goods from within the EU, with a total annual import value of around €370 billion. Moreover, the British economy is forecast to continue growing at around two percent per year this year and next year, which is both above the EU-28 and the Eurozone average growth which is predicted to remain at less than two per cent. The UK also remains one of the few EU countries (besides Estonia, Greece and Poland) that spends more than the two per cent of its GDP on defence required by NATO statutes and has crucial military capabilities to effectively strengthen NATO’s European pillar in military crisis resolution.

Even if Cameron manages to convince the majority of the British people to back a ‘yes’ vote to remain in the EU, Britain engagement in the EU is likely to remain half-hearted and selectively focused on enhancing trade liberalisation and economic reform. Remaining in the EU on the basis of legal safeguards against deeper political integration towards ‘ever closer union’ and essentially opt out from the Single Market freedom of movement principle will inevitably weaken Britain’s influence. As a half-hearted member who chooses to permanently detach itself from the Eurozone and from deeper policy integration in major areas the UK is unlikely to ever again be able to adopt a leading role in the EU. Instead the future of the EU’s variable leadership geometry will be centred around Germany, France and Poland, no matter if Britain decides to remain or leave the Union.

Brexit and the V4: An alternative with clearly no benefits

The United Kingdom has historically played a significant role in Central Europe´s endeavour to reclaim its place in the integrated Europe. Given Britain´s consistent support to the concept of a Europe whole and free, the UK has essentially been one of the most eloquent advocates of both NATO and EU eastern enlargement. Today, a quarter of a century has passed since the fall of the Berlin Wall and the political position of Britain, both in Europe and in the Visegrad area, has undergone a rather profound change. Today, Britain is advocating a significantly tougher position on labour migration than it did a decade ago and its commitment and sympathy to Europe´s eastern part is less and less visible and self-evident. Naturally, the winds of change have not affected only Britain. Central European countries are in a substantially different comparative position to the old Europe than they had been two decades ago. Yet still, it is not possible to credibly argue that the fates of Britain and of the V4 countries have been totally detached from each other.

On today´s political chessboard of the European Union, Great Britain is a strong partner (if not even an internal ally) of Central Europe in a number of relevant policy areas. Whether it is the agenda of enhancing (i.e. completing) the single market in all economic sectors, further liberalization of global trade, or accentuating the sheer importance of the transatlantic bond, Britain and Central Europe normally come to terms naturally. Quite symbolically and importantly, from all major European labour markets, it was the UK that has adopted a decision to open its labour market to new Europeans simultaneously with the 2004 EU enlargement wave – providing thus a prospect of enhanced economic prosperity for over hundreds of thousands of Central Europeans. On the economic front, UK and V4 have largely shared the philosophical worldview based on enhancing the single market in the name of greater openness to trade and investment. And while each government in Central Europe has brought its own political agenda on the stage, the V4 has historically been considered a general proponent of modern liberal economic order – built on the principles of openness and competitiveness.

On the strategic and security front, Britain played an important role in articulating the EU’s eastern policy (today part of the European Neighbourhood Policy) and sided with Central Europe in tackling a number of ultimate security challenges the West has faced over the course of the previous decades – be it Kosovo, Afghanistan or Iraq. Moreover, in the current security climate, few countries in the West share the understanding of Russia´s renewed imperialism in such a concurrence that Britain, Poland and a rather significant part of Europe´s east.

Admittedly, the V4 itself is not politically homogeneous and thus one can observe a number of different layers in Britain´s relations to the region. The most obvious example of this is the difference of attitude towards the membership in the European monetary union – from which UK has a permanent opt-out, while Poland, Hungary a Czech Republic are obliged to adopt the common currency, but all have so far proved to be relatively cautious regarding the timing of such an adoption. With Slovakia being a full-fledged member, the politics of the Euro and its place within the framework of the EU puts each country in a slightly differing (yet not hostile) position vis-à-vis each other. As it seems largely feasible, most of the (short to mid-term) future EU integration might predominantly take place within the Euro area itself. Because of this eventuality, Britain, Hungary, Poland and partially also the Czechs share the sense of uncertainty over their voice (and thus interests) in economic matters being represented within the Union on an equal footing with the Eurozone. A Brexit would only leave Poland and Hungary in greater isolation and with a considerably more complicated prospect for the effective counter-balancing against the Eurozone.

On the political level, the understanding between the V4 and the UK has been portraying itself in two basic layers. While the current governments in Prague and Bratislava (given their formal affiliation to the mainstream European political centre-left) have been successful in maintaining positive and balanced working relations between the power centres in London, Paris, Berlin and Brussels. The governments of Hungary and Poland have shown that their political sympathies vis-à-vis the mentioned power centres differ largely and both have a rather critical stance on the current European political mainstream – be it centre-left or centre-right. Just like the Conservative government in London, the Fidesz and PiS parliamentary majority based governments in Budapest and Warsaw have adopted a vocal and critical opposition to future enhancement European Parliament´s powers at the expense of the European Council based principles of national representation. Not surprisingly, David Cameron’s articulated disgust towards the notion of an even closer union resonates relatively positively with the anti-federalist vision of EU – being cultivated in Hungary and Poland.

While the date for promised EU referendum has not been set yet, the indications dictate that the British government would prefer having the referendum as soon as possible – most likely during the summer of 2016. In an even increased relevance to the V4 region, Slovakia’s will take the rotating EU Council Presidency during the second half of 2016. Under certain circumstances, the Slovak Presidency could be the last presidency before the referendum takes place – creating the space for the Presidency to act as an honest broker (of last resort) between London and Europe and positively contribute to the atmosphere during the vote. In the worst case, the Slovak presidency could be the first one to deal with the consequences of an eventual leave vote.

Brexit would be a net loss for everyone

A potential Brexit would almost certainly challenge the region´s position within the EU as the influence of countries advocating liberal economic values could continuously deteriorate within the Union. With Britain leaving the EU, the redistribution of voting powers within the EU would change significantly. Additionally, hundreds of thousands of V4 citizens migrated to the UK for economic reasons over the course of the previous decade. While this trend has produced a significant burden on British infrastructure, social benefits system, labour and housing market – which has largely contributed to the Brexit leaning atmosphere in the country – Britain still benefits from this trend via the supply of labour, tax revenues and reducing the effect of population ageing problem. A Brexit could not only weaken this trend but could also produce a rather significant legal barrier between V4 economic emigrants in the UK and their home country with direct impacts on everyday lives of European citizens.

The existence of serious concerns about the impact of Brexit amongst the other 27 member states (including the V4) is reflected by their principal willingness to support David Cameron in his ambition to renegotiate the terms of British membership. These concerns about the prospect of Brexit concentrate on the decisively harmful impact on the EU´s long-term standing – be it its internal power balance, its policy agenda or its overall external influence. Keeping Britain in the EU shall thus be considered as a strategic interest of both Europe and the V4 as long as a stronger and workable European Union remains to be at the epicentre of European interests.

What do you think?