May Government

Delaying Brexit Would Be Bad, OK?

Official adjusts EU flag next to Union Jack flag in Brussels
Source: Reuters

On September 22, Prime Minister May suggested an extension of the Brexit process by up to two years. The UK would not leave the EU single market on March 29, 2019, as had been assumed. Rather, the UK would continue to be a member of the EU single market until the summer of 2021 to give the British economy more time to adjust to the changing circumstances. The UK would also pay the old contribution to the EU, which is roughly €10 billion ($11.7 billion) and thus looks like a first installment of the rather large amount wanted by the EU Commission to cover EU payments to British firms and regions in 2019/2021. At first glance, this idea sounds convincing. However, taking into account the German election calendar, this proposal is dangerous and destabilizing for the whole of Europe.

The negotiation process between the UK and EU so far looks complex but, with respect to the UK’s political basis, it is also not very convincing – because of a disorderly British EU referendum in 2016 and because the May government is not really in a position, since the snap election of June 2017, to expect a stable majority for any EU-UK Brexit treaty in 2019. According to Prime Minister May, the British government, as she explained in an interview on October 1, is preparing for the critical scenario that the UK simply walks away from the negotiating table, ushering in a default WTO situation with respect to future EU single market access.

The Treasury study of 2016 calculated a 6 percent output decline in the long-run. This scenario of the UK leaving the negotiating table without a deal is possible. If the May government anticipates in 2018 that there is no realistic chance of securing a majority in Parliament, it would be rational for the Prime Minister to call another snap election which, however, the Labour Party seems likely to win.

In such a case, the debate about Brexit will be restarted in the UK. The Brexit process has already caused a considerable pound devaluation during the period since the referendum. In the year of the actual implementation of Brexit, there could be a strong increase in financial market volatility. There could even be new impulses towards safe-haven effects as investors will reinforce the allocation of capital towards Germany, France, and the Netherlands, while Greece, Italy, Portugal, and Spain could face the problem of rising interest rate spreads.

If all this were to happen in 2021 during the run-up to the next German parliamentary election, this could further boost the right-wing nationalist AfD party, which received 4.7% of the votes in 2013 and 12.6% in 2017. This, in turn, would politically destabilize Germany and in the end the whole of the euro zone and the EU. The AfD party has thrived on a populist political program that includes both anti-EU elements and anti-euro sentiments.

Belgium Europe Brexit
David Davis, left, is the Secretary of State for Exiting the European Union. That's his title. Really! Michael Barnier, on the right, is the chief negotiator on behalf of the EU. Source: AP

Party leaders have espoused some strange views – Alexander Gauland, for example, has argued that Germans should be proud of the achievements of German soldiers in both world wars while, in a leaked email, Alice Weidel referred to members of the Merkel government as “pigs” and “puppets of the Allies”. The AfD’s leadership is also against the Transatlantic Trade and Investment Partnership, while at the same time arguing in favor of stronger cooperation with Russia.

An extension of Brexit by two years would lead to a situation in which Brexit-induced market volatility in the German election year of 2021 would reinforce the anti-EU message of the AfD, thus increasing its voting share. Therefore, it is not in the interests of Germany nor the EU to agree to a Brexit extension.

The UK has made its decision about Brexit, and it will weaken both the UK and the EU, but the British government should not expect that Berlin will support an extension that would destabilize the EU’s biggest economy; there is need for leadership in the EU in a post-Brexit situation and Germany’s capability to assume such a leadership role should not be weakened in internationally difficult times.

In any case, Brexit stands for a new deregulation risk in Europe as the US under President Trump has taken steps towards banking deregulation and the May government has signaled that the UK would also take similar steps as soon as possible in order to generate higher growth. A combined UK-US deregulation will put the EU under enormous pressure to follow suit, potentially leading to excessive deregulation in the West and the next international banking crisis. The best way to avoid this outcome is for the UK and EU to formulate a joint deregulation policy which would have to be agreed upon and adopted within the framework of the EU-UK Brexit treaty.

To contact the author: gastautor@handelsblatt.com

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