Europe after brexit

06 Dec 2018

  Brexit | UK | Europe

Aviva Investors: Europe after brexit

As the Brexit deadline looms, the impending rupture between the UK and Europe threatens to become the defining political issue of a generation.

On the British side of the Channel, the debate has understandably focused on the consequences for the UK economy, Westminster politics and the peace process in Northern Ireland. But Brexit could have big implications for Europe too.

Helen Thompson is professor of political economy at the University of Cambridge and a regular commentator on geopolitics. Her research focuses on the historical origins of the post-2008 economic and political world; specifically, her recent work covers the political economy of oil, Brexit and the euro zone crisis. Her most recent book, Oil and the Western Economic Crisis, was published in 2017.

In this Q&A, Professor Thompson discusses what Brexit means for the European Union from an economic, financial and political perspective. She believes Brexit may bring to a boil tensions that have been simmering on the continent since the euro zone crisis. From the fate of the single currency to the threat of an Italian departure from the bloc; from French foreign policy to Germany’s energy pact with Russia; Brexit will force the EU to face up to long-standing challenges.

In a global climate of rising national interests, what purpose does the EU serve?

It’s about trying to find, through a shared legal and political framework, mechanisms for dealing with the collective problems Europe faces. But there’s a second level to it, which is the idea of creating, almost for its own sake, an ever-closer union. Some people in the EU share this idea, some don’t. Sometimes those objectives pull in very different directions, and sometimes the people who are pursuing the pragmatic purposes of the first use the language of the second to justify what they are doing. Sometimes those who want ever-closer union for its own sake get frustrated that pragmatism takes over. One of the issues facing the EU is the conflict between those two positions, which are often in serious tension with each other.

How does Brexit fit into that tension?

In principle, Brexit is a good thing from the perspective of those people in the EU who want to move towards an ever-closer union and reform the euro zone, because it makes those things easier. If there was going to be a new treaty and Britain was still in the EU, there would still have to be a referendum in Britain on it and it’s difficult to see how that would have been won. Britain leaving was an opportunity for the EU to say to those states that are not in the euro: “Are you in or are you out?” But since the Brexit vote, the opportunity that Emmanuel Macron identified – to engage in euro zone reform and clarify the relationship between EU states that are in and out of the euro zone – seems to have gone. It looks like this muddle the EU has got into, whereby it has a legal and political/constitutional order that is supposed to govern both euro and non-euro states, will continue.

You have described Britain as an “employer of last resort for the EU”, as well as its main financial centre. What will be the consequences for the EU of losing those things?

For the time being it is not particularly consequential. But at the point when the euro zone crisis returns in a deep way – which I think it will – it will become consequential. Because once you have rising unemployment in parts of the euro zone, particularly southern Europe, those countries are going to struggle without the possibility of relatively high levels of emigration to the UK. Germany has also acted as an employer of last resort, but it doesn’t have the language advantage Britain has: most people looking for jobs in Germany will need to learn German first. So that will play out in time, but it would need euro zone economies to go into recession again for that to have big consequences.

The financial centre question is harder to assess. People in Paris and Frankfurt who think Brexit is great because it will change London’s position as the financial centre of Europe are going to be disappointed. Paris and Frankfurt are not equipped to take over. They don’t have the infrastructure – and I mean that broadly, not having things like common law – to pose a threat to the City’s dominance as an international financial centre.

How do you expect the Brexit negotiations to pan out?

While there is a genuine risk there will not be an agreement, and the Irish border question is central to that risk, I’m still inclined to think that an agreement will be made. It’ll be unsatisfactory from everyone’s point of view but it’ll be a starting point.

The difficulty for the EU is that unless it believes the British government is going to U-turn and stay in, or leave the EU temporarily and re-enter at a later stage, it will need to have some way of working out the economic, security and political relationship with Britain. It hasn’t had to deal with another European country that is in the position as a non-member that Britain is going to be in when it leaves. 

If there is no agreement, there would be a lot of turbulence in British politics generated by the economic fallout. But it seems far from clear that there would be lots of pressure for Britain to go back into the EU in that scenario, even presuming the most powerful states in the EU want Britain to stay in. Unless those states think there is a possibility of a domestic U-turn in Britain – and that they actually want Britain in the EU, which I have my doubts about – they are going to have to reach some kind of compromise that recognises the bespoke position of Britain as a European country outside the EU. I find it hard to believe Angela Merkel isn’t aware of the distinction between the short-term advantages to the EU of telling Britain to accommodate itself to European laws, and trying to find something that works over the long term. On that basis, I still have some optimism there will be a constructive way forward.

Aside from France, the EU has little military capability. What will that mean post-Brexit?

It’s a problem whether Britain is in the EU or not. But I think France may get caught out, as it has become used to a close relationship on military matters with Britain and the US, particularly in its defence industry, and it’s at risk of becoming isolated post-Brexit. Things might be different if there was a real possibility that Germany was going to change its position on military matters, and take on a more prominent geopolitical role. Merkel has talked a bit about this but there has been little real political action.

This raises a bigger question. Europe has lots of problems that are generated beyond its borders, and obviously the migrant and refugee crisis is exhibit A. And yet it has no geopolitical capacity to formulate a strategic response to what goes on in Africa or the Middle East. So it ends up dealing with problems that come over its borders but it is not a geopolitical player in shaping the future of the Middle East in particular. The EU is just kind of irrelevant there. That can’t last. Then you have a situation with Russia. The member states are deeply divided about what kind of geopolitical relationship European states should have with Russia.

You’ve argued Germany is in a strong position within the EU but weak in its engagement with the rest of the world. How will that paradox be resolved?

In some sense Donald Trump is imposing that decision upon them, because he has been disruptive to Germany’s position on several issues. The conjunction of trying to deal with the protectionist threat from Trump; the issue of Nord Stream; the domestic political legacy of the migrant/refugee crisis; the growing influence of Austria within the EU and its ability to make alliances with states like Italy, in ways that the German government has found difficult because of how it managed the refugee crisis. All these are difficulties that German governments haven’t had to deal with in a long time and are not set up to deal with.

Merkel’s government understands these challenges, but I don’t think it knows how to change the predicament Germany finds itself in: it is a prosperous country at the centre of a less prosperous continent and a country that, in part because of its history, has no geopolitical capacity. Germany has been quite parasitic on the US for a long time, and to some extent in military matters it has been parasitic on France and Britain as well. The period where Germany has not had to take geopolitical responsibility but still benefited from the international political and economic order is coming to an end. I don’t have a clear sense what will be the trigger for reforms, but those reforms will come.

How does Russia figure in this dynamic, given German reliance on Russian energy?

If you look at what Merkel has said, and this is unlikely to change whoever takes over from her, Germany is not going to give up on Russian oil and gas. If that is the case, the relationship with the US is going to be different. It’s quite a sensible judgement on Germany’s part that it can’t escape Russian oil and gas dependency. The American position, which has become more confrontational because of the rise of the shale industry, will unravel over time because shale is a temporary phenomenon. The question is: how long does shale last, and is the US really going to try to use its position as a gas supplier to ‘break’ Russia and move countries such as Germany away from its energy supplies? Or is it going to recognise there is not enough gas globally to keep Russia out of the picture?

Could any existing fragilities or divisions within Europe be exposed by the end of QE?

A lot rests on what happens when the European Central Bank (ECB) cuts in half its monthly bond purchases. It has the potential to push Italian bonds up quite some way, to the point where the Italians are at risk of being shut out of the bond markets. Then the question would be: will the ECB U-turn and go back to bond buying?

That would be difficult in terms of German consent. The German constitutional court has not yet given a final verdict on QE and its constitutionality; it has delayed the ruling to 2019. The idea was: “Ok, we will kick it into touch, and then by the time we have to get around to dealing with this QE will be over.” But what happens if QE is not over? Germany has effectively sucked up QE – although Schäuble moaned about it quite a lot – but it has not done anything to stop it. The court would effectively have the ability to do that. And can some of these southern European countries, starting with Italy, really cope without QE? That is an immediate faultline that could play out in significant ways.

How much of a problem is Italy for the EU?

French banks have a lot of exposure to Italy. So you’d have problems in France if there was an Italian crisis; and if you had contagion elsewhere in southern Europe, you’d have problems with German banks, which have a lot of exposure to Spain. That is without even getting to the question of the conflict between the Italian government and the European Commission – and indeed some other member state governments – about migrant issues. Matteo Salvini looks like he wants a confrontation with the EU and there are many ways in which that could develop.

You have written that Europe is struggling to define itself politically and looking for a “civilizational inheritance”. Is there a risk that in looking to history for a unifying narrative, Europe risks stoking greater divisions?

It’s understandable people who want to legitimise the project of the EU would look back into history for a civilizational or political discourse that shows this is a genuine political community and being European means something. But the EU doesn’t have the fiscal capacity to do anything that costs a lot of money, certainly not a European-wide welfare state. Neither can it use foreign policy, because there is no EU foreign policy in the collective sense. Macron is keen on looking to history. But the problem is that there is not very much that’s unifying about European history. The best you can do is to say that being European is to inherit conflicting traditions, and living with the tension between them is what makes the European identity distinctive.

Is Brexit likely to have any effect on the rise of populist/nationalist politics?

There are distinctive British reasons for Brexit that go back a long way into British history. The importance of a parliament in Britain’s constitutional history; the fact Britain didn’t join the European Economic Community when it first started with the Treaty of Rome; Britain staying out of the euro; before that, staying out of the European Exchange Rate Mechanism for so long. Not being in the euro became quite destabilising for Britain’s position in the EU once the sovereign debt crisis started. That doesn’t necessarily mean Britain was inevitably going to leave the EU, but that underlying tension became more difficult to manage.

Elsewhere, there has clearly been a rise in Euroscepticism. Even five years ago, no one would have said Euroscepticism in Italy would be as high as it is now. There is clearly something going on that cannot just be explained by the singularities of recent British history. But while it is one thing for Britain to leave the EU when it never joined the euro – and that process is extremely difficult – it can be done without precipitating a huge debt problem. Whereas if Italy was to leave the EU, that’s a whole other level of difficulty. The immediate problem is that Italy's debt would no longer be serviceable, once it has been redenominated back into the lira and devalued against the euro. So despite the rise of Euroscepticism, translating that into an Italian exit is much harder to imagine. It just means the EU has ongoing problems with Italy and Italy has ongoing problems with the EU.

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