The EU could struggle to survive attempting to “punish” the UK

During the Eurozone crisis, many commentators suggested that a country leaving the euro could trigger its collapse, by triggering a cascade of defaults that would bring down the Eurozone banking sector. Others of us argued that such “financial contagion” was a relatively low risk. Instead, we said, the key risk was of “political contagion”. If, say, Greece left the euro and then, eighteen months later, was growing at 4% a year with unemployment falling, then even if its economy had contracted 25% in between, there was a risk that Portuguese, Italian or Spanish voters would look on and say to themselves: “Why are we sticking in the euro and bearing the pain of austerity and high unemployment when leaving and devaluing provides a way to get unemployment down and growth to return?” To counter such political contagion, any departure from the euro would not only have to actually fail but to be seen to fail.

A number of EU leaders seem to be tempted to apply similar reasoning to Brexit. They seem to think that Britain must be punished and seen to lose from departing from the EU, pour encourager les autres. (Donald Tusk’s speech yesterday, in which he laid out his view of how negotiations should proceed, was interpreted by some as just one example.) But the analogy between Grexit and Brexit is misplaced and the desire to be seen to “punish” the UK for Brexit is more likely to destroy the EU than to save it.

First, it is a misplaced analogy because neither the UK nor any other countries which have significant anti-EU sentiments have been suffering economically, in any very concrete any demonstrable way, by being EU members. There is nothing akin to austerity and a high exchange rate that is required as a temporary “this hurts but you’ll benefit in the long run” measure in order to stay in the EU. Other EU members don’t have some temporary pain they must bear for which leaving the EU provides an “easy way out” that might be tempting in the short run even if ultimately damaging over the longer term. There is thus no similarity between the situation of anti EU sentiment in the Netherlands or France or Finland or Hungary and anti-euro sentiment in Spain or Portugal or Italy. There is no “short-run expedient” that Brexit constitutes that other countries must be deterred from taking advantage of.

Indeed, more than that, the UK’s situation has long been understood as sui generis. David Cameron liked to boast of the UK’s “unique status” within the EU. Well, other EU Member States have noticed that as well. No-one in Hungary is going to imagine that the UK’s experience on leaving the EU is a good model for what might happen in Hungary.

Second, though, and more importantly, the idea that Britain must be “punished” to deter other Member States mis-diagnoses the origins of anti-EU sentiment outside the UK and does so in a manner that makes those other states more likely to depart, not less. Voters have increasingly been supporting Eurosceptic or outright anti-EU parties in many EU states because the EU is perceived as having failed economically and in terms of control of its borders, and to be more concerned with its political ideologies than with delivering on the economy or credible border control.

If the EU gets into a fight with the UK over Brexit that might damage the UK economy, but it will certainly damage the EU economy as well. The OECD, in its pre-referendum Brexit impact analysis, assumed that there would be no deal between the UK and the EU between 2018 and 2023. It has been widely discussed that this was forecast to result in the UK losing about 3% in GDP growth. What was less widely discussed was that the OECD estimated that that same struggle would result in the EU losing around 1% in GDP growth.

Suppose you are a car worker in Spain, and you lose your job, post-Brexit, because the EU gets into a row with the UK that means Spanish cars can no longer be exported here. You ask why and the answer you hear from the EU is: “Well, we could have done a deal with the UK that would have allowed you to keep your job, but we thought it was more important that the UK should suffer, even if it means we suffer here as well.” Is that going to make you knuckle under and vote for pro-EU parties? Obviously not. It’s going to make you think that the EU doesn’t care about the economy, but instead prefers some kind of abstract thing about “protecting the integrity of the EU Project”. And that will make you more likely to vote for populist anti-EU parties.

I think that is the main potential risk to the EU from Brexit. Not that Brexit goes well, but that the EU hurts its perceived political legitimacy, internally, by being seen not to care about economic delivery. And that is not all. Just as in the case of Grexit, as well as the political risk there is risk associated with economic linkages. The EU economy and EU financial sectors are still very fragile. If they were to be cut off from access to the City, by some ill-judged political row, that could lead to many corporate bankruptcies across the EU and even to the collapse of certain EU financial institutions. In combination this political and economic damage could, if the EU plays its hand badly enough, risk the collapse of the EU project altogether.

The EU is not a prison. It does not need guards to shoot those who try to escape. It is a partnership that its members have benefitted from enormously and that they should not need fear to keep them involved in. Have its political leaders really so lost faith in the intrinsic benefits EU membership confers that they now think all that keeps folk inside is the fear of the punishment they will receive if they leave?

This article was originally published by Andrew Lilico and can be read here.