Could Brexit heal the world?

Brexit was a hugely foolish move by British politicians who lied to convince citizens that it would open up a brave new British world. As it is unfolding, it is becoming clear that the friction on trade—52% of all UK imports and 43% of all UK exports were from/to Europe—will increase costs and the inefficiency of the UK economy substantially. Of course, this will cut both ways, but given that the UK makes up only about 15-18% of the EU’s trade basket, the impact will be considerably less on the EU.

A far more significant impact is that Brexit will remove what has been an extremely constraining thorn in the side of the European project. While the UK was an early proponent—during the Second World War Winston Churchill had spoken of the post-war creation of a “Council of Europe”—things started to change when Thatcher became prime minister in 1979; she was, unsurprisingly, uncomfortable with what she saw as the excessive power of Brussels as a threat to British sovereignty.

Since she was a very strong leader and the UK was one of the larger economies in the EU, this active discomfort considerably unbalanced the project and slowed down progress towards the larger goal.

With the UK out of the picture now, Europe can move more rapidly towards complete union. To be sure, there are still several issues to be addressed/resolved—demographics and how to sustain growth; immigration and assimilation of political and economic refugees (which, incidentally, would help fix the first issue); divergence from the liberal democratic ideals of the project, particularly by some of the newer entrants (Hungary and Poland, for example); and, of course, building a sounder financial structure.

The good news is that as part of the fiscal support after the pandemic, the European Council agreed (in July 2020) on the Next Generation EU (NGEU), which establishes a joint funding model to support government spending and reform in the EU; clearly, Germany, which had been unequivocally against this, has come around. This is the linchpin to forge a sounder financial structure necessary for a true economic union. There is (much) more to be done, but with the conceptual underpinnings in place, more operational steps could be coming quite rapidly.

This would naturally have implications for the Euro, which went through a near-death experience during the European sovereign debt crisis. Back in 2009, triggered by the 2007-08 economic crisis yields on European sovereign bonds—starting with Greece and moving quickly to Spain, Portugal and Italy—shot higher as the market did not believe the EU had the will to step in and protect the poor (and, in some cases, fraudulent) fiscal practices of some of its members.

The ECB came up with makeshift arrangements to calm things down, but the Euro’s basic credibility suffered a major blow. Now, that the joint funding model has been established, this decline of credibility has already started reversing. This would suggest that we will not see the EUR-USD lows of 1.05 of 2017 for a long time.

But what is most important is that, with the credibility of the EU as a financial structure coming good, the credibility of the European approach to social capitalism, which delivers excellent quality of life to the vast majority of citizens, will also get a boost. Further, the EU appears to be modernising its somewhat rigid and slow decision-making—it is already at the forefront of addressing the most crucial contemporary issues such as privacy in the age of social media, taxation of IT (and other) multinationals, the scourge of tax havens, and, of course, the continuing concerns about human rights.

To be sure, the European project will always be a work in progress and there will always be areas that need work. For instance, the EU has its own populist governments, whom it has been unable to censure because of the excessively collegial decision-making baked into EU rules. These hold-outs will likely start coming under pressure now with the Big Daddy of fake-news-based populism out of power and several other similar leaders seeing huge protests against their anti-citizen approach. But, in any case, the EU needs to address some of its internal processes to ensure that acceleration of the European project doesn’t become hostage to the self-serving goals of some member governments.

Again, Europe, like all other nations, has to grapple with immigration and assimilation. And while this will always be a delicate issue, the fact is that racism in Europe appears far less virulent than in most other places, perhaps because of the deeply entrenched liberal ethos in the majority of the population. In any case, the simple arithmetic of demographics argues for a much more liberal approach to immigration over the coming decades.

Taking a large view, with Brexit taking one of the most difficult hurdles out of the picture, the grand scheme of a “United States of Europe”, first mooted by Victor Hugo at the International Peace Conference in Paris in 1849, will accelerate towards fruition, and the clarion call of “Liberte, Egalite, Fraternite” will spread more rapidly not just through Europe but around the world.

www.mecklai.com
CEO, Mecklai Financial
Views are personal