GIS Dossier: Brexit – how we got here

Brexit supporters hold a demonstration outside the Houses of Parliament in London, 2016
The EU’s unwillingness to implement reforms led to the Brexit vote. A lack of pragmatism may result in a “hard Brexit” and huge damage to the bloc’s economy (source: dpa)

GIS Dossiers aim to give our subscribers a quick overview of key topics, regions or conflicts based on a selection of our experts’ reports since 2011. This survey is devoted to the United Kingdom’s decision to exit the European Union – the factors behind it, and its fallout thus far.

In January 2013, under pressure from euroskeptics in his party, British Prime Minister David Cameron (2005-2016) promised that if his Conservative government was reelected in 2015, it would hold an in-or-out referendum on the United Kingdom’s European Union membership. The vote took place on June 23, 2016; with the “leave” side overcoming the “remain” campaign, 52 percent to 48 percent.

The result was largely unexpected and reverberated across the globe. It was most acutely felt, of course, in Britain and in the EU. Prime Minister Cameron – who had campaigned for the UK to maintain its membership – immediately resigned, and euroskeptic parties in Europe gained more traction.

Since then, London and Brussels have worked through the painful process for Britain’s exit from the EU, or “Brexit.” Negotiations on how exactly the split will take place and what the post-Brexit relationship will look like are ongoing. As GIS experts have said from the beginning, whether the arrangement ends up being beneficial or disastrous for both sides depends on whether the leaders on either side take a pragmatic or dogmatic approach. This survey reviews GIS analysis of the Brexit progress, and the predictions our experts have made for its potential impact.

The stakes: Britain

A year before the Brexit vote was held, GIS expert Dr. Michael Wohlgemuth pointed to the potential for the referendum to be a catalyst for change. In purely economic terms, the UK leaving the EU “would not be the end of the world if reasonable post-Brexit arrangements can be found,” with Brexit increasing British gross domestic product (GDP) by 1.6 percent by 2030, according to one study. For that to happen however, the UK would need to implement big reforms.

With Brexit, EU countries that favor free and open markets will lose a key ally

“The British government would have to adopt a radically liberal policy to prosper outside the EU. A decrease in economic growth could only be avoided with completely open free trade, even less regulation and a very liberal immigration policy for workers,” wrote Dr. Wohlgemuth. “But this is exactly what many Conservative-nationalist supporters of a Brexit would reject.”

The political consequences were starker, with the huge potential that Scotland could vote to leave the UK to pursue EU membership on its own. “The UK risks not only being isolated from the EU but also being reduced to ‘little England’ – arguably the worst-case scenario.” The best case for the UK would be for it to remain in a “seriously reformed EU,” he said.

The stakes: Europe

The risks for the European Union were even higher, wrote Dr. Wohlgemuth in a follow-up report on imagining the EU without the UK. Europe was then focused on Greece possibly leaving the EU, or “Grexit.” The GIS expert argued that the results of Brexit would be far more “dramatic and negative.”

The danger of ‘Brexit’ is not just real; its consequences massively outweigh those of a ‘Grexit.’ The UK accounts for 15 percent of the EU’s economic output, putting it well clear of France as the bloc’s second-largest economy. Within 30 years, if favorable demographic trends hold, the UK could actually overtake Germany as Europe’s biggest economy.

He cited a report that estimated the EU’s GDP per capita would shrink between 0.1 percent and 0.36 percent in the event of Brexit. That may not sound like much, but Dr. Wohlgemuth pointed out that losing the UK would mean less innovation, less competition and a less efficient division of labor within the EU. And that is not to mention the lost revenue that EU citizens would have to find elsewhere – the UK puts an estimated 10.8 billion euros more into the bloc’s budget than it receives.

Combined with financial crises in other parts of the bloc, Brexit could become one ingredient in a toxic mix that might wreak havoc on the European economy and cause yet another euro crisis, Dr. Wohlgemuth wrote in March 2016.

Most troublingly, however, countries that favor free and open markets, like Germany, Ireland, the Netherlands and the Baltic states, would lose a key ally, as well as their veto power under qualified majority voting. He concluded that if Brexit came to pass:

The EU will have shown that it is incapable of reform. The inevitable sequel will be further degeneration of the trading bloc into a centralized transfer-and-regulation machine, whose ‘harmonized’ tax and welfare systems will continue to undermine Europe’s competitiveness and democratic accountability.

Opportunities for reform

Throughout the Brexit saga, GIS analysis has pointed out that aside from the potential negative outcomes, the situation also gave the EU a chance to reform. In April 2016, GIS expert Henrique Schneider argued that the Brexit debate showed member countries that they have a clear choice, potentially forcing the EU to “relax its all-encompassing bureaucratic grip,” to try and convince them to stay. “If all EU members enjoy the opportunity to exit at any time, the EU will have to work harder at making itself attractive to member states,” he wrote.

British Prime Minister David Cameron speaks to reporters at a European Council meeting in February 2016
In 2016, then-Prime Minister David Cameron tried to convince the EU to reform. The bloc did not go far enough to convince British voters their country should remain in the fold (source: dpa)

Among the reforms London wanted was more state sovereignty over government handouts to immigrants. If the EU had made access to the welfare state more selective, argued GIS expert Enrico Colombatto in January of 2016, it could have allayed “the widespread fear that immigrants are flocking to Europe in order to enjoy unlimited free lunches at the expense of the local taxpayers.”

Don’t panic

As GIS founder Prince Michael of Liechtenstein wrote in two comment pieces, just before and just after the vote, Brexit should not be viewed with panic, but with coolheaded analysis of both the negatives and the potential positives. In the first, he advised not to blow Brexit out of proportion. “Should a Brexit occur … it is likely to be damaging, but it will not be the downfall of either the EU or the UK. Nor will it cripple the global economy or financial markets.”

Presciently warning EU institutions that taking revenge against the UK for voting to leave would be “harmful,” he added that “if they analyze the situation dispassionately, other EU members are likely to realize the necessity of, and implement, reforms that would take the bloc in the direction of more decentralization and subsidiarity.”

In the second comment, the Prince explained how both sides could make lemonade out of Brexit lemons. Since the UK and the EU are crucial trading partners, it is “in the interest of both sides to reach free trade and other agreements over the next two years,” he explained, adding, “This should be feasible, assuming both sides go about the negotiations pragmatically.”

Contagion vs. closer union

Europe’s strategy of making Brexit as hard on the UK as possible is not only based on a desire for “revenge,” but worry that an easy exit with plenty of perks could convince other member states to follow Britain’s example. As he contemplated life after Brexit, Dr. Wohlgemuth wrote, “The main reason EU officials and many member states are unlikely to grant the UK almost unchanged access to the single market is fear of contagion. Such a sweet deal on top of nearly unfettered sovereignty could tempt other EU members to explore alternatives to plain-vanilla membership.” He added: “The more convenient the new setup is for the UK, the riskier it becomes for the EU.”

Moreover, some EU leaders reason that with the British brake removed, “the eurozone and the EU as a whole could finally take a huge leap forward toward political, social and fiscal integration. The vision of the United States of Europe would be brought closer.”

Aftermath

It is precisely such visions that made the EU seem so domineering and led to Brexit in the first place, argued GIS expert Charles Millon in the aftermath of the vote. Instead, the bloc needs to get back to its basics of subsidiarity and working from the bottom up, he wrote.

The EU has no strategy to address the fundamental call for democratic control and subsidiarity

Indeed, GIS expert Stefan Hedlund said the vote revealed a grim outlook for the EU. “The bitter truth, which is now becoming all too obvious, is that the EU project had so many structural flaws in its design that crisis – and perhaps collapse – was all but inevitable.”

In the first of a two-part series on the aftermath of Brexit, Dr. Wohlgemuth pointed out that the EU had no new plan to reform itself. It was likely to continue to hurtle toward “more Europe” without any strategy “to address the fundamental call for democratic control and subsidiarity; and there is little the EU can do to overcome the economic stagnation and malaise in large parts of the continent.”

In the second part, Dr. Wohlgemuth gave his baseline scenario for Europe: a “Continental Partnership” that would allow for a soft Brexit and give the UK “much less than full EU membership but also much more than a simple free trade agreement.” But achieving it would require overcoming the hardliners on both sides of Brexit.

The German view

Germany is one of those hardliners. As the de facto leader of the European Union, it plays a crucial role in how Brexit proceeds. As negotiations got under way, Dr. Wohlgemuth explained that while many expected Germany to support an amicable divorce, especially on trade matters, Berlin was unlikely to be the friend London was hoping for. The German position during the Brexit negotiations, he said, would be shaped by “two ‘typically German’ attitudes: stickling for principles and prioritizing European unity.”

British Prime Minister Theresa May and German Chancellor Angela Merkel make a press statement after a meeting in Berlin in July 2018
British Prime Minister Theresa May (L) has to negotiate Brexit with German Chancellor Angela Merkel, whose electorate wants the EU to be uncompromising (source: dpa)

Professor Colombatto even explored the possibility of a Brexit “war” between the UK and Germany in May 2017. He theorized that Berlin’s tough stance was intended to help move European businesses based in the UK to Europe, and specifically financial firms from London to Frankfurt. However, “too much hostility could backfire,” he wrote. “The world of finance does not like confrontational leaders who consider markets potential battlefields, not even when elections are due and easy populism is hard to resist.”

One year later, however, it was clear that Germans still wanted the EU to be uncompromising. Germans were more worried about crises in other parts of the world than about Brexit, believing it would not have a big negative effect on the economy.

Will the EU survive?

With Germany unwilling to back down and EU leaders continuing to push forward toward an ever-closer union, many began to ask if Brexit was the beginning of the end of the European project. In March 2017, Professor Hedlund wrote that “a growing number of prominent European leaders have begun voicing concern that a collapse of the EU is now a distinct possibility.”

GIS expert Dr. Michael Leigh asked whether the EU could survive until 2025, and offered three scenarios. In the first, “disintegration,” Britain’s withdrawal would “shift the balance of opinion in the EU from free trade to protectionism. This, and cumbersome ratification mechanisms, will prevent the conclusion of free trade agreements and the strengthening of the single market.” The hit to the EU budget would force the termination of programs and huge staff cuts. The European Commission would be reduced to a regulatory body under the supervision of the member states. Dr. Leigh gave this scenario a 25 percent probability.

The second scenario, “regeneration,” assumes that the UK’s departure would remove a key obstacle to integration. The EU would have an easier time using trade instruments against lower-cost exporters, satisfying anti-globalist sentiment and weakening populist movements. The EU would also pursue more dialogue and engagement with Russia. Due to high levels of euroskepticism and divides in the bloc over these issues, Dr. Leigh gave this scenario only a 15 percent chance of occurring.

Many reject the assumption that the EU must progress toward an ever-closer union to survive

The third scenario he called “consolidation,” in which the EU would still be working in 2025, but its activities would be concentrated on a narrower range of issues. “This scenario denies that the EU must progress toward an ever-closer union in order to survive,” he wrote. It would call for a pause in European integration for the next decade.

There will be no further enlargement, no move of the EU into security and defense, and no “grand bargain” to strengthen the eurozone. Instead, the priority will be to maintain existing EU activities that deliver real benefits to the population and to prevent outright collapse, which would cause widespread damage.

Dr. Leigh put the probability of this scenario at 60 percent, “with considerable downside risks.”

European defense transformed

GIS experts also foresaw some of the profound effects that Brexit would have on European defense and the main guarantor of transatlantic security, NATO. In a June 2016 report, Professor Mikkel Vedby Rasmussen rightly predicted that the UK’s exit from the EU would allow the bloc to move forward faster in strengthening its own security apparatus, separate from American and Canadian cooperation – something London had long worked to prevent.

On the other hand, GIS expert Dr. Uwe Nerlich wrote that Brexit could pull the EU apart as the security interests of its member states diverge. “This especially applies to some of the EU’s eastern members, whose dependence on the United States will likely strengthen the trend toward sub-regionalization and the emergence of new fault lines,” he wrote.

Optimistic scenarios

Despite the brinksmanship and risk of disaster, GIS analysts have found some reason for optimism. In July 2017, Dr. Nerlich pointed out that the UK was leaving the EU, but not Europe – a geographic truism, but not a political one. Both Brussels and London would remain cornerstones of Europe’s political order, he wrote, and after Brexit would have an easier time entering informal arrangements to deal with continental and global problems. This was especially true since British Prime Minister Theresa May’s Conservative party had been weakened in snap elections and was unlikely to push for a “hard Brexit.”

In November 2017, Dr. Leigh agreed, writing that it was unlikely that the EU and UK would reach a “cliff edge” scenario in which a conclusion to negotiations was not reached by March 2019, when the UK is slated to leave. The risks are simply too high. Instead, he argued that a “smooth, sensible Brexit” was still possible. This would include a “transitional standstill” in which there would be broad agreements on the most crucial issues, allowing the UK to leave as scheduled, but with the finer details worked out over a period of two to three years. “This will be an across-the-board standstill, not an ad hoc, ‘bespoke’ arrangement, as the British government would prefer,” since EU opposition to British “cherry-picking” was too strong.

EU trade agreements that the UK will have to replace after Brexit
During any Brexit transition period, the UK is unlikely to be able to negotiate new trade agreements to replace all the relationships established through the EU (source: macpixxel for GIS)

Toward the endgame

In July 2018, as the Brexit endgame neared, Dr. Leigh revisited these scenarios and added another: “kicking the can.” According to this scenario, Prime Minister May would request that the EU prolong negotiations beyond March 2019, consequently delaying Brexit. EU leaders have said this is preferable to the “cliff edge” scenario, but thorny issues like the UK’s contribution to the EU budget and its voting rights would arise. Ms. May would also likely be overthrown by her party. While it would not fully restore business confidence, it would avoid the worst disruptions of a disorganized Brexit – a risk that “remains significant,” he wrote.

On the other side, Europe is being held back by shortsightedness and stubbornness, wrote Prince Michael in August 2018. The EU, led by France and Germany, was still headed down the path of greater centralization, which had brought Brexit about in the first place and has begun to irk other members. “Both parties – but especially the EU – have, to everybody’s detriment, remained wedded to unrealistic principles instead of being pragmatic,” he said. “A ‘hard Brexit’ may become a reality due to this lack of a practical strategy.”

In September 2018, as a key summit of UK and EU leaders loomed, Prince Michael held out hope for pragmatism on Brexit. He called on the decision-makers to think logically and dispassionately in the interest of European economies. “So far, businesses have believed that a mutually acceptable solution to Brexit would be found. Expecting businesses to invest huge sums to prepare for the bizarre alternative is asking a lot. Some will be caught unprepared,” he wrote.

EU leaders had given themselves just four weeks to resolve all of the impasses – precious little time. “A miracle could still happen,” concluded Prince Michael, “although by definition, miracles are rare.”

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