The Velvet Brexit

Perhaps the biggest commonplace in Brussels is that the EU always develops through crisis. It is repeated so often and without any proper explanation of why the various crises are occurring that listeners become complacent rather than alarmed. And Brexit is happening at a time of multiple crises.

While immigration/asylum is probably rightly seen as the top emergency issue today, it should be recognised that the EU was already unstable and frail before the 2015 wave of refugees arrived. The eurozone has come close to disintegration several times since 2009, unemployment has reached record high levels, and the political values of the EU have been undermined in several member states.

Too much hesitation about joint action and a congestion of various crises on the agenda can destabilise the EU and push it towards the abyss. Sooner rather than later, a clear vision is required for post-Brexit Europe:  relations between the EU-27 and all the other European countries and the reinforcement of the EU architecture for the 27.

Brexit, voice and loyalty

In an optimistic scenario, Brexit could be the end of a controversial membership – and the start of a beautiful friendship. There should be no big difference between an EU member UK with a large number of special opt-outs and a non-EU member UK with a large amount of special access.

Turning the drama of Brexit into an opportunity to reshape Europe has been advocated by the authors of the Continental Partnership. This transnational proposal points towards formalising a two-speed EU but also adumbrates a third ring that can comfortably consolidate the positions of the UK and Turkey over the long term.. For this outer ring, the iron rules of the single market would not fully apply.

Indeed, the continental core should have understood the UK’s concerns better. Although blessed with a vibrant labour market, the UK did not want to be an employer of last resort when some eurozone countries experience decade-long stagnation and the Eastern convergence may be neither fast enough nor well managed.

But, for a Velvet Brexit, the British people need to understand that limiting the free movement of workers is impossible as long as they want full access to the EU single market, without paying significantly more into the EU budget. The EU institutions and the core countries on the other hand should invest more in selling the benefits of the full single market, even if Brexit takes place.

Joseph Stiglitz and others often complain about the language EU leaders used after the referendum about being “tough”.. The point is not, however, about punishing the UK for voting in favour of Brexit, but ensuring that a departing member cannot enjoy more rights than the remaining ones. Cherry picking must have its limits. Especially after a campaign full of lies about and insults towards the EU, an effort has to be made to make policy evidence-based again, and this has to apply to the Brexit negotiations as well.

Brexit and single market functioning

Today the EU needs a new, unifying narrative to revitalise our debates as well as decision-making. However, better communication alone will not automatically lead to better performance. This has been highlighted by the M9M initiative, which has been calling for action in six areas (democracy, security, migration, investment, currency and youth).

Analysing Brexit helps identify priority areas. The Leave victory is largely a consequence of the democratic deficit and social divide within the UK itself. While previous Labour and Conservative governments were fairly successful in representing British interests in Brussels, they failed to ensure that all regions and all social groups in the UK felt the benefits and helping hand of the EU.

Popular anger against Westminster turned against Brussels in the referendum campaign, which exposed that many voters did not know how the EU works nor what Brexit means. Surveys and other evidence show that British people have been the least knowledgeable about the EU’s functioning.

Social scientific research into Brexit has come to pertinent conclusions regarding the connection between the negative impact of globalization and the shift to the Brexit camp, especially in the central regions and North of England. This means that the capacity of the EU to tackle such challenges needs to be reinforced.

The benefits of the single market as well as international trade can be concentrated socially and territorially. The EU must find ways to alleviate this problem instead of aggravating it. In principle, regional and social policies can be helpful, but in order to be effective more direct connection between regions and the EU institutions must be encouraged. National elites should not be allowed to block EU support for regions facing difficult economic or social situations, for example.

Promoting growth and EMU reform

Strengthening the single market’s social dimension is inadequate inside the eurozone and in the more vulnerable countries and peripheral regions in particular. Because of its incomplete nature, and despite some initial reforms (a non-community ESM, a 2-pillar banking union etc.), the EMU is bound to fall back into cycles of divergence and instability if it remains unrepaired. But, even with the Four and Five Presidents’ Reports in the drawer, the European Council (summit of the EU-27) only managed to call for an upgrade of the €315bn Juncker investment plan in its first post-Brexit reflection talks.

The EU can and should move towards a “Juncker II”, fostering innovative ideas such as the establishment of a new vehicle (beyond or alongside EFSI), once the focus on equity support for enterprises is strengthened.  On the other hand, Eurozone imbalances require a broader and more substantial EMU reconstruction, with the creation of a fiscal capacity.

Unemployment insurance is a possible counter-cyclical fiscal instrument with a potential to improve economic performance and welfare state resilience at the same time, and without requiring Treaty change. Through improving economic and social outcomes this would also help boost the EU project’s overall legitimacy.

This reform process should also clarify the future connection between the EU and the currency union. Together with Denmark, the UK has been the EU member with an opt-out from the introduction of the single currency. The Brexit process opens up the opportunity for clarification, or even unification (of EU and EMU) in this respect.

Connected crises – and solutions

The Brexit vote result sent shockwaves through Europe but, perhaps counter-intuitively, the first reaction in public opinion was a shift towards the EU, not away from it. This rise in popularity might be an outcry for stability, an expression of hope, but certainly not evidence of satisfaction with the status quo. This increase in confidence invites action from leaders, not least the European Council, that improves the economic and social situation and enhances the feeling of security in all countries in the short run but also improves the resilience of the EU economy in the long term. Otherwise, the rise of anti-EU parties will just continue to a level where they can paralyse the European Parliament post-2019.

They already gained ground in 2014 and the counter-strategy then proved wrong. Instead of focusing on better performance, it chose lightening the EU policy agenda, and especially legislation, driven by the belief that too much action at EU level irritates the citizens and fuels disaffection. This approach has been doubly wrong-headed. First, it fails to distinguish between input and output legitimacy, and secondly, it tries to address the first purely by doing less instead of involving the citizens and various stakeholders more in democratic decision-making.

Paul de Grauwe explains very well the common origins of the two main European crises: the incapacity to handle the refugee situation and the Eurozone paralysis. The Maastricht model as well as the Schengen/Dublin system date back to the early 1990s. In both cases, free movement was established between countries (for goods and money on the one hand, and for people on the other hand), but without any safety and security infrastructure or instruments for crisis response and stabilisation. Whatever concerned EMU, fiscal capacity and financial regulation remained with member states. In the area of migration and asylum, a common internal security, asylum policy and shared  border management are missing.

Conclusions

Brexit is not only an unfortunate political gamble and an unprecedented national self-harm. It also gives evidence about voters becoming impatient if leaders fail to address their key concerns over a prolonged period. It highlights the urgency to stop trends towards social disintegration stemming from uneven prosperity.

Finding solutions to the key European problems today is only possible through more cooperation. Germany cannot find solutions to the refugee crisis alone, France cannot enhance security solely in a national context, and Italy cannot revive its economy purely through domestic reforms. Given such common concerns and needs, a grand bargain can emerge that makes EU deepening a win-win game.

No doubt, Brexit is a loss for Europe, but it gives an opportunity for the EU institutions to stop appeasing those who would not back EU integration no matter what, and to rebuild confidence among constituencies that have been disappointed by the weak economic performance and alarming social trends of recent years.

This is the latest contribution to a new Social Europe Project on ‘Europe after Brexit’ organised in cooperation with the Macroeconomic Policy Institute of the Hans Böckler Stiftung and the Bertelsmann Stiftung.