Opinion

Use the Brexit Shock to Reform the E.U.

FILE - In this April 5, 2014 file picture German chancellor Angela Merkel, and then top candidate of the European People's Party for the European Elections, Jean-Claude Juncker, wave to participants at the convention of Merkel's Christian Democratic Party in Berlin. German Chancellor Angela Merkel has offered a clear endorsement of Luxembourg's former premier Jean-Claude Juncker as the next European Commission leader after drawing criticism for appearing cool on her fellow conservative. Merkel said Friday May 30, 2014 she is holding talks "in the spirit that Jean-Claude Juncker should become European Commission president." (AP Photo/dpa, Daniel Naupold,File)
It's time to take stock of what Brexit means for the E.U.
  • Why it matters

    Why it matters

    Other member states could view the British vote as a precedent and seek to leave the E.U. if the bloc doesn’t make reforms.

  • Facts

    Facts

    • Great Britain is Germany’s third-largest trading partner and its most important ally in advocating for free trade within the E.U.
    • France and the southern European countries are pushing for a system in which euro-zone member states are liable for each other’s debt.
    • Germany will no longer be able to rely on Great Britain to oppose attempts by France to push the E.U. in a more centralized economic direction.
  • Audio

    Audio

  • Pdf

It’s remarkable how quickly Great Britain has been written off in so many of the capitals on continental Europe. The United Kingdom will remain a leading economic power even after it leaves the European Union.

There are those who now dream of imposing punitive measures against the British people, but that won’t pay off. The country will have enough problems to deal with as a result of Brexit. Politicians who talk about “cherry picking,” when they want to cut off Britain from free trade with the European Union only demonstrate their own lack of understanding. Free trade isn’t a zero-sum game and restricting it is self-destructive.

In continental Europe, Germany is the big loser. Britain is its third-largest trade partner and most important ally in Europe when it comes to advocating for free trade.

Instead, the European Union should take a hard critical look at itself. The spoils system in Brussels, which used the enthusiasm for integration as cover to distribute cushy jobs and power, is no longer functioning. Citizens don’t want to hear reassuring phrases. They want a political system they can understand and that offers them clear benefits.

Those who insist on following the old path or even speeding up, risk destroying Europe.

A quarter of a century ago, Germany sought to keep Europe’s institutions close to its citizens by anchoring the subsidiarity principle in the Maastricht Treaty, the document that gave birth to the modern European Union. But there’s no sign that officials in Brussels have taken the principle of subsidiarity seriously.

Instead, they gathered together as much power as the national governments would tolerate and became involved in escalating regulatory measures, banning certain types of light bulbs and vacuum cleaners. Citizens could only watch and shake their heads.

Meanwhile, the really important tasks – the creation of a common foreign and security policy that includes a European army – were ignored. What kind of union can’t even control its own borders?

The issue of migration, after all, played a major role in the British decision to leave.

 

01 p57 European Economy-01 EU-28 Union China United States GDP growth economic state debt unemployment

 

By enabling the migration of poverty from one member state to another, the European Union lost credibility in the eyes of the British. Then came refugees from countries that aren’t E.U. members due in part to the bloc’s inability to secure its borders. That was the straw that broke the camel’s back.

Economic chaos has also discredited Brussels. An inflationary bubble, created by the euro, has left southern Europe unable to compete. Industrial output is still 20 percent below pre-crisis levels in some important countries. Youth unemployment is causing political turmoil. Some states and many banks are on the brink of insolvency.

Generous rescue packages and the promise of unlimited liability put a lid on the problems long enough for the creditors to flee. The E.U. doctors administered drugs because they either didn’t have the competence or the courage for an operation.

Though Brits aren’t liable for what happens in the euro zone, they fear being dragged into the disaster. Yet their decision to leave the European Union will also have mixed economic consequences.

The City of London will lose its position as Europe’s financial center and experience capital flight. Deutsche Bank is already considering a partial withdrawal from the city. A merged London Stock Exchange and Deutsche Börse will also find it difficult to set up shop in the city.

Real estate prices will fall in London, financial institutions will become insolvent and the roaring growth will subside into a long stagnation. Paris, Luxembourg and Frankfurt, on the other hand, will start to blossom in London’s place.

The European Union could move toward a bicameral parliamentary system with a lower house that has proportional representation and an upper house that represents the member states.

But it’s not all bad news for the Brits. The growth of the financial sector had a dark side. Capital imports led to an appreciation of the pound that triggered de-industrialization.

As the financial sector and capital imports shrink in the aftermath of a Brexit, the value of the pound will fall and the manufacturing sector will recover. The automobile industry will also get a boost.

This doesn’t mean Britain will profit on balance from a Brexit. But people in the structurally weak former industrial regions, those who voted leave to begin with, will receive a benefit.

In Continental Europe, Germany is the big loser. Britain is its third-largest trade partner and most important ally in Europe when it comes to advocating for free trade and against the expansion of French-style dirigisme or greater state control over the economy.

France and the southern European countries would like to seize the moment and use the confusion of the Brexit negotiations to implement greater centralization and socialization of losses.

They would like to implement a European system of deposit insurance, use the European Stability Mechanism to re-capitalize failing banks, and create a common system for unemployment insurance that would ease chronic unemployment in southern Europe through financial transfers from the North.

They would also like to establish a common finance minister responsible for a euro-zone budget that’s financed through credit. This way, they won’t have to overcome taxpayer resistance to access financing.

But this kind of centralization would only cement the euro zone’s misery. A system of joint liability will keep interest rates low and allow southern Europe to continue borrowing. This, in turn, will only lead to conflict. The surest way to lose a friend is by being on the hook for his or her debts.

 

01 p57 Industrial Production-01 Germany France Spain Ireland Greece industry manufacturing

 

To prevent more states from following Britain out the door, the European Union has to use the Brexit shock to reform itself. It needs to rework the E.U. treaties and introduce the pareto principle, according to which Brussels would intervene only if some or all member states benefit and none are harmed.

Under this principle, the European Union would take on the challenges that member states truly face in common but cannot solve alone while generally avoiding redistribution in the guise of “risk sharing.”

To prevent contentious redistribution, E.U. citizens should only receive tax-payer funded social benefits from their home countries, which they should be able to take with them when they move. In their adopted country, they should only receive benefits financed through their own contributions.

The currency union should also be reformed to reduce liability risk and protect members from getting sucked into the debt quagmire. Unfortunately, the German Constitutional Court has given the European Central Bank a free hand to buy sovereign debt and basically conduct fiscal policy under the guise of monetary policy.

But the ECB shouldn’t be allowed to buy sovereign bonds from the euro-zone members anymore. And it’s a scandal that members can basically take out as much credit as they want through the ECB’s various assistance programs without having to service certain debt targets.

These practices should end and the euro zone should become a breathing currency union in which there’s a path for members to leave in an orderly fashion.

Under this reformed system, countries that are serious about the euro would remain, but those who joined just to gain access to financing and foreign assets would leave and that’s a good thing. Countries that exit the euro zone would have the opportunity to recover and then return at a new exchange rate.

 

01 p57 National Central Banks-01 Bundesbank Germany Southern Europe Greece Ireland Portugal Spain Italy Cyprus

 

In terms of the areas where the European Union should have greater authority, foreign and security policy is the most important. The European Union needs to establish a European army. It’s an anachronism that the 28 E.U. member states have 25 separate armies with 25 separate command structures, even if some of them are linked through NATO.

If a common security and foreign policy is too ambitious, the European Union should at least have an effective border force that wields sovereign authority and can stop mass economic migration from third countries before it’s too late.

It’s unacceptable that criminal organizations decide who comes to Europe and who doesn’t. Migrants who arrive illegally should be sent back immediately. They can apply for asylum from abroad or they can seek entry through a points system similar to the ones in Australia and Canada.

The European Union should also have responsibility over trans-national infrastructure that moves people, energy, goods and data. Brussels clearly has an uncontested competency over environmental policy as well, since pollution and environmental damage don’t stop for borders.

Following on the suggestions from former German foreign minister, Joschka Fischer, the European Union could move toward a bicameral parliamentary system with a lower house that has proportional representation and an upper house that represents the member states.

So long as this parliament doesn’t engage in redistributing resources among member states, the current system of E.U. summits could be done away with.

Most importantly, the European Union needs new and serious political figures who have vision – people like Konrad Adenauer, Alcide De Gasperi and Robert Schuman who helped launch the integration process in the 1950s.

After all, there is no alternative to Europe.

 

Hans-Werner Sinn is a leading economist in Germany. To contact: gastautor@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!