The EU needs the U.K. much more than the U.K. needs the EU.
With the U.K. exiting the EU, with nationalist forces in other countries threatening exits of their own, and with endless banking crises on the horizon, many wonder if the EU can survive.
If it does survive, its saviour may ultimately be seen to be the U.K. Brexit is exposing the rot beneath the EU’s facade of stability, giving the EU an opportunity to reform before the rot becomes irreversible and giving the lie to the assumption that the EU holds the whip hand in its relationship with the U.K. In fact, the EU needs the U.K. much more than the U.K. needs the EU.
The EU’s need for the U.K. can best be seen by the quandary now facing Germany, the EU’s largest economy by far. “Subject to economic developments in the United Kingdom in particular, uncertainty after the vote could have negative effects on the economic situation in Germany,” Germany’s Economy Ministry acknowledged in a report this week that highlighted how Brexit adversely affects Germany’s economic growth.
The U.K., Germany’s third-most important export destination, accounts for more than one-eighth of Germany’s car exports, more than one-tenth of its pharmaceutical exports, and 7.5 per cent of its entire goods exports, making Germany highly reliant on U.K. trade and fearful of a trade war. Germany’s reliance runs deeper still: German companies operating in the U.K. employ some 500,000 workers, and German direct and indirect investment in the U.K. exceeds $150 billion a year.
The reliance on trade with the U.K. affects other EU countries, too. Overall, the EU exports far more to the U.K. than vice versa — a record $100 billion more in 2015, a surplus that has been growing each year and has almost doubled since 2010 — making it imperative for the EU to stay in the U.K.’s good books.
What would the U.K. want in a post-Brexit trade deal with the EU? Mostly to continue the status quo in trade with the EU, meaning that Germany and the EU would continue to run whopping trade surpluses with the U.K. Why would the EU refuse so sweet a deal, so clearly to its economic benefit? Because the EU is first and foremost a PU — a political union, which insists that its trading partners surrender sovereignty for the privilege of trading with it. Bizarrely, the EU treats the U.K. desire to control immigration — to decide who is and who is not welcome to reside within the U.K.’s own borders — as a deal breaker.
But the PU can’t last. Its newest challenge comes from Italy, the eurozone’s third-largest economy, which has had almost no productivity growth since it joined the eurozone in 1999, which is in the midst of “two lost decades” of growth according to an IMF report this week, which is heavily indebted, and whose banks are on the brink of collapse. Unlike Brexit, a populist sovereignty-seeking revolt by the right, the Italian challenge is a populist sovereignty-seeking revolt from the left in the form of M5S, the Five Star Movement (the five stars being public water, sustainable transport, sustainable development, a right to Internet access, and environmentalism).
The EU’s need to make a deal with the U.K. is seen in the quandary Germany now faces
Under the banner of “Ditch euro, defend Italy’s sovereignty,” this social media upstart, started just seven years ago by a well-known comedian, has been a phenomenon, sweeping 23 of 24 mayoralty contests last month. It is leading all political parties at the national level and is expected by many to form the next government. Other EU countries — Austria, France, the Netherlands, Portugal, Spain and Sweden among them — also pose potentially existential threats to the EU status quo. With the EU besieged on all sides, the centre cannot hold.
All besiegers want the benefits of trade that the EU offers. What they don’t want is to lose freedoms, institutions, cultures or traditions they hold dear when the EU infringes on their sovereignty. The EU’s choice then becomes clear: fight a rearguard action to maintain itself as a sovereignty-swallowing political union or welcome a diversity of political views by becoming more of an economic union that focuses on fostering free trade.
The rearguard action is certain to lead to acrimony and is unlikely to lead to success. At best, the EU, to its economic harm, will lose lucrative trading partners like the U.K.; at worst the EU will implode. A more open, politically diverse EU, on the other hand, will look more like trade associations such as the North American Free Trade Agreement, which has seen an explosion of trade among its members without requiring that Mexicans have free rights to emigrate to Canada, or Canadians to the U.S.
The U.K., to be true to the Brexit verdict of its citizens, cannot negotiate a trade agreement with the EU that lets the EU control immigration policy. Brexit is the EU’s wake up call. Whether the EU decides to become less political but otherwise whole is now its call.