The Truth About Brexit

I admit I am an ardent Britisher. I was flabbergasted that a Scottish vote for independence even took place. And the fact that the result was as close as it was was jarring. But my mind is clearly out of alignment with wider trends. Everywhere you look, since about the 1970s, we all are breaking up.  

It matters not if you look to Eastern Europe (Greece; Russian Federation, Albania/Check Republic), Middle East (Iran, Iraq, ISIS, Syria, Arab Spring), Spain (Catalonia) Britain (Scotland), even Canada (periodic Quebecois), wherever. All kinds of partnerships are under strain. Our very Nuclear family and principle of marriage is even under attack too, since around the 1960s, and all in the name of equality and progress. If we can neutralize marriage, why not everything else?

Even the US has its own ‘split’ in terms of its amazingly polarized presidential nominations Trump and Sanders. While the country is not physically splitting up its political model is strained not between left and right but between trust and distrusted, and establishment and antiestablishment. Brexit is just the latest In series of questions we seem eager to ask of ourselves, all in the name of progress.

Automatically my mind was dead against Brexit, the U.K. leaving the European Union. I assumed that the synergy is greater together than the sum of the individual parts. The U.K. offers much to Europe that makes no sense outside: foreign policy expertise, sizable military and defense spending, economic value, contribution to a more stable region through cooperative diversity. The U.K. also houses the main European financial center, and now the largest trading hub for the Chinese yuan outside of China. At the same time trade with mainland Europe is the largest segment of the UK’s global trade footprint.

But after hearing one local (I have not lived in England for over 20 years) explain to me his views, I am shifting my position. The arguments now are a little clearer, if not all agreed. So let’s look at a few. Firstly you have to realize a few things related to why this European experiment was set up in the first place.

The Formation of Modern Europe

The roots of the European Union are founded in the idea that closer union between what had hitherto been waring states might slow or prevent a potentially dangerous rise of a future Germany. The Napoleonic wars led to a deep mistrust between the nations we recognize today. Two World Wars, a botched global economic experiment with a return to gold, and poor global understanding and collaboration related to global trade and debt dependencies, brought the world to its knees.  

Germany, twice blamed for World War, had to be tamed and integrated into a ‘United States of Europe’. But that name, so often associated with Churchill, is misleading. And that misleading misconception goes to the root of the understanding of Europe. The economies of Europe were not equal and what started out as a free trade and more open market ended up being circumvented by politicians for other purpose.

At the end of World War II France and Britain’s economies were in great difficulty. They suffered from the winners curse in that economic renewal was not easily forced on the infrastructure of the U.K. and France but was easy in Germany (and Japan, for that matter). Reparations, a natural result of war for many years up until that point, were part of the cause of WWII and so they could not be adopted to rebalance Europe after 1945. Something new and different was needed.  

Britain was always a trading nation and of course had great sinews of empire to connect its trade around the globe. For Britain an integrated Germany meant free trade and integrated economic relationships. France had less of a global empire to trade with and it looked to deeper ties to Germany. It needed to ensure Germany could not race ahead economically or politically. Even Germany was keen to play along, not knowing the likely outcome.

The result was 40 years of experimentation through various economic and trade associations, several cure cry legs and collaborations, coupled with two vetoes by France for ever closer involvement of Britain at a time when real change could have been enacted. Such small decisions at the time have today massive implications. Hindsight and 2020 are alive and well.

The State of Play Today

As it stands today the Euro experiment is moribund. The root causes of the Greek crisis of a few years ago are not resolved. Germany is still an export led nation and the southern peripheral states are consumption driven economies. Germany needs to be more like Greece, so the saying goes. But that won’t work.

Interest rates are set primarily to support the larger nations of the Euro. In other words, Germany. This puts massive pressure on the Greek economy as well as regions like Spain and Italy. Exchange rates are a little more relaxed but really no different. In years past trading nations would have deflated or devalued their currency to smooth over their inability to lower wages and costs in order to compete with Germany or balance their books. Now this cannot happen within the Euro zone and so pressure cooker politics just keep reforming every few years. Greece’s debts continue at unprecedented levels and it’s economy shows little sign of creating the growth needed to pay its debts. Even the setting of negative interest rates, to favor growth in the periphery, now drives up bullies in Germany. One rate cannot solve the problems caused by divergent economies.

The there is regulation. If the 21st century is known for all things breaking up it will also be known as the century of regulation. Of one didn’t know we would think that Rome is burning. Our politicians are clearly not doing enough real work that they can spend our money and their time on coming up with yet more ludicrous things to regulate. The political center of the euro zone is the hottest room in the middle of Rome.   

So Europe is a half-birthed, half-aborted child of political and economic abuse. There is partial political integration and partial economic integration. It’s a mess whichever way you look at. Compared to how the US works with disparate regional economic differences with one shared national interest rate, Europe is a complete hodge podge of disparate cultures holding on to each other without any ability to tie the not completely or let go of each other.  

A Vote against the “Leave” Camp

If you read some of the contemporary newspaper articles in April, you get the feeling that those who would vote for Brexit are in search of a lost empire. As if those that seek extraction from Europe cannot justify an economic future outside of Europe. That is scaremongering.

There was even an article in this last weekends FT that suggested that Obama, giving is weight to the ‘stay’ camp, suggested that any British trade agreement post a Brexit would ‘go to the back of the line’. That too is hogwash. As the world’s fifth largest economy, yes Britain would lay behind China, Japan and Europe, and maybe Canada due to proximity, but it’s a short list. Trade would continue and deals would be done.

British can walk alone. It has done so before many times, and at times far ‘worse’ than what we see today. The inherent pull of this current and next generation is to pull apart. We can hardly stop it. Maybe we should not try, lest we fall pray to the weight of history.

London’s pivotal role in the center of the financial system will continue. Will Europe slap a tax in trading in London? It may. And if it does, more European capitals would find ways to move their business to cheaper and more forward looking London.

Would NATO collapse? According to Trump the allies all need to chip in. This makes sense. If Brexit happened, NATO would become more important. And Britain’s relationship to it more so.

What about Britain’s economy? Britain already has the pound so it does not need to devalue against the Euro. But it would be more free to set its own monetary and fiscal policy without too much concern for its European neighbors.

What a about security? The UK would likely increase its border security with mainland Europe. Freed from meddling Brussels, the U.K. would be freed to set its own rules and regulations. It might slow down travel between the two regions, but so what?
Society as a whole might also be freed from the socialist overly regulated and unelected concerns of Brussels. This might enliven debate in the UK.

The U.K. will be financially better off as it will no longer be a net contributor to the coffers of Europe. It can set its own trade barriers, or remove them, as it sees fit. This will help temper global economic head winds that come its way.  

It will have to beef up its global foreign secretariat and relations. But this is a discipline for which the UK is well known. This will have a positive result around the world. That is, until the UK and Europe’s amateur foreign policy are seen to diverge. The US may then have to decide how to play with its newly liberated but closer partner (UK) and the more likely petulant and more inexperienced but larger colleague (Europe).

The English language will not die out as the global business language with Brexit. Indeed there will likely be a resurgence and increased interest in common law, English law, and capitalist spirit. Freedom is preferred to consternation. Let Germany fight the periphery alone and see how France fares. Brexit it needs to be. With it, the end possibly of the euro experiment. What comes next?

Conclusion

The euro experiment was always flawed. Greece nearly wrecked it. Brexit won’t kill it but it will suffer a major confidence challenge. Germany would of course do better itself if it left but that won’t happen for political reasons. France won’t go either. Spain and Italy are the next wobblies since their economies would be boosted if they had their own sovereign currency to devalue this freeing up their costly and overpaid population.

All in all Brexit will be a small blip in a very long journey and experiment. But the euro’s days are numbered. Brexit will help nudge it along towards its natural state (i.e. death). The U.K. will do just fine.

But if the euro does go the way of the Dodo, what then of Germany and France’s containment policy of the last 50+ years?