Long before the June 2016 referendum in the United Kingdom on whether the country should withdraw from the European Union, economic and political leaders declared Brexit one of the great dangers to the global economy. The breakup is certainly damaging but not a disaster per se – unless unyielding positions are taken by all sides in the negotiations. The British economy is very important. A sensible, friendly parting arrangement is as desirable for continental Europe as it is for the UK.
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From the end of World War II up to the time of Prime Minister Margaret Thatcher (1979-1990), Britain’s economy was steadily declining due to socialist politics, nationalization and expropriation by the government, and powerful trade unions. Compared with the rest of Europe, the country became quite backward. Mrs. Thatcher instituted a radical turnaround with her free-market policies, privatization push and resolute taming of the trade unions. As a result, living standards improved for all segments of British society.
This experience appears to be forgotten as the Labour Party, led by Jeremy Corbyn, gains popularity in the post-Brexit era. Labour’s program mirrors ideas applied between the 1940s and 1960s that brought economic misery upon the UK. If reintroduced, this set of policies will again bring one of the world’s largest economies to its knees. It has all the ingredients needed, from fiscalism to tight control of economic activity all the way to lunatic energy policies, to push the country into rapid decline.
Decline will follow
This sort of socialism presents the real danger, not only in the UK. Several major economies in continental Europe are following the same road. Their governments lack fiscal discipline, are falling into the planned-economy trap through overregulation, and embrace harebrained energy schemes that do not even attempt to balance ecological and economic factors.
Such socialist projects ignore the backbone principles for strong economies and healthy societies: private enterprise, free markets and property rights. As a matter of fact, these principles are negated these days in highly emotional debates on inequality, presented as the central problem of our societies. In GIS reports, our experts highlighted the glaring shortcomings of this narrative.
French President Emmanuel Macron is pushing to “centralize” the debt of member governments on the EU level, true to the Keynesian and socialist view that fiscal discipline does not matter. This can only increase Europe’s sovereign debt problem drastically. Mr. Macron also proposes – and this seems to have already been accepted behind closed doors in Brussels – the creation of a European Ministry of Economy and Finance. This could become the nucleus for a “harmonized” (read: planned) European economy. Such harmonization would significantly stunt economic performance and living standards, as the former Soviet bloc countries amply demonstrated.
A reading of the German coalition agreement between the CDU/CSU and the SPD reveals a similar Keynesian, socialist and planned-economy mindset. This could be Germany’s fate regardless of whether the two sides form a coalition or Chancellor Angela Merkel ends up leading a minority government supported by the SPD.
Economic decline will follow fast in the UK if Labour wins, creating a heavy drag on growth in Europe. In a less obvious way, however, continental Europe appears to be moving toward the same folly. This threat is larger than Brexit.