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What Future for the EU After Brexit?

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What Future for the EU After Brexit? A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics De Grauwe, Paul Article — Published Version What Future for the EU After Brexit? Intereconomics Suggested Citation: De Grauwe, Paul (2016) : What Future for the EU After Brexit?, Intereconomics, ISSN 1613-964X, Springer, Heidelberg, Vol. 51, Iss. 5, pp. 249-251, http://dx.doi.org/10.1007/s10272-016-0612-0 This Version is available at: http://hdl.handle.net/10419/156709 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu DOI: 10.1007/s10272-016-0612-0 Forum Paul De Grauwe What Future for the EU After Brexit? How should the European Union react to the decision of deed, it is precisely this argument that persuades most the UK to withdraw from the union? This is the question economists to defend globalisation. However, the political that has been at the centre of the political debate in Europe obstacles to organising redistribution towards the losers since Brexit became a reality. In this article, I will fi rst dis- of globalisation are large. This is a problem in most indus- cuss the nature of the reforms that are called for as a result trialised countries, but it is made even more intense in the of the Brexit vote. I will then turn to the issue of the nego- EU. tiating strategy that the EU should adopt towards the UK. The European institutions have become major promoters The starting point in trying to answer the question of how of globalisation. The single market and the trade agree- the EU should be reformed is the observation that the Eu- ments reached by the European Commission have widely ropean Union has a very negative image today, not only in opened the European gates to globalisation. There is noth- the UK but also in other parts of the EU. According to many ing wrong with that per se. Unfortunately, there has been analysts, this has to do with a democratic defi cit of the EU. a complete failure to organise the necessary compensa- tion for the losers of these policies. The European institu- There is certainly a lack of democracy in the decision-mak- tions have no power over social policy, which has remained ing at the European level. But is the democratic defi cit at fi rmly in the hands of the national authorities. However, the the EU level worse than at the national level? Legislation hands of these authorities have been shackled by the same in the European Union is made by the Council of Ministers European institutions’ fi scal rules. and the European Parliament. The ministers are sent by their national governments, which hold power as a result The EU’s fi scal rules not only make it extremely diffi cult to of democratic elections in each country. Members of the compensate the losers from globalisation, but they have European Parliament are elected directly. Thus, the deci- actually amplifi ed their hardship. For at least the last fi ve sion-making bodies in the European Union have the same years, the European Commission has pushed all eurozone democratic legitimacy as national governments and parlia- member states into an austerity straightjacket that has ments. If there is a democratic defi cit, it is the same at the produced economic stagnation and rising unemployment national and European levels, and both national and Euro- – particularly in those countries which had already been hit pean institutions should be examined and reformed. badly by globalisation. It should thus not come as a sur- prise that many citizens have turned their backs on the Eu- I see a deeper cause of the dissatisfaction with the Euro- ropean institutions that are seen as cold and ready to pun- pean Union. I argue that this dissatisfaction has to do with ish when millions live in hardship. the inability of the European Union to set up a mechanism that protects the losers of globalisation. Worse, the EU has In addition to the strict fi scal rules, the structural reforms reduced the capacity of national governments to take on that have been imposed by the same European institu- the role of protector, while nothing has been done to create tions are also to blame for the rejection of the European such a mechanism at the EU level. Union by millions of people. European policymakers have adopted the neo-liberal discourse, according to which Free trade creates an incredible dynamic of innovation and workers must be fl exible (read: they should be happy when material prosperity. This prosperity, however, does not their wages fall, when they can be dismissed quickly and benefi t everyone. While many are better off thanks to glo- when they receive reduced unemployment benefi ts). The balisation, many others are not. Some even see their wel- neo-liberal policymakers that now dominate the Europe- fare decline because they lose their jobs or because their an Union preach that social security is unproductive and incomes fall. should be downsized. These policies are euphemistically called structural reforms, and they are imposed on millions As globalisation creates material welfare, it is in principle of people, mostly the losers of globalisation, by European possible to compensate the losers from globalisation. In- institutions and national governments alike. Thus, the problem of the European Union today is that, in- Paul De Grauwe, London School of Economics stead of helping those who suffer from globalisation, it has and Political Science, UK. implemented policies that hurt these people even more. It is no surprise that the losers revolt. If the EU continues with ZBW – Leibniz Information Centre for Economics 249 Forum its prescription of austerity and structural reforms, revolt governments managed to invest in productive assets that will spread and will take the form of attempts in further had returns higher than zero, our children would inherit countries to exit the Union. It is time for the EU to take the assets that created revenues exceeding the cost of bor- side of the losers of globalisation instead of pushing for rowing. Future generations will not understand why we policies that mainly benefi t the winners. have not done so when borrowing was so cheap. This can be done in two ways. The fi rst one is to stop While I am a proponent of more political integration in Eu- imposing structural reforms on the member states. The rope, grand schemes for “more Europe” should be put on rationale for these structural reforms has been that they the back burner for now. As long as European politicians promote economic growth and should therefore benefi t continue to follow ill-conceived economic policies, one everybody. The empirical evidence of a positive link be- cannot ask people to follow them blindly for more of the tween structural reforms and economic growth, howev- same. er, is very weak. In a recent econometric analysis of the OECD countries, we could not fi nd evidence that reforms That being said, in response to the United Kingdom’s re- in the labour markets and in the product markets boost cent Brexit vote, it is evident that the EU must adopt a economic growth.1 This is also confi rmed in a recent clear negotiating strategy. Here is the choice that must be study by the IMF.2 We do fi nd, however, that investment, presented to the UK: either the UK government embrac- both private and public, has a strong positive effect on es (a close version of) the Norwegian model or it stands economic growth. alone and negotiates new trade agreements with the EU and about 50 other countries (or group of countries) within The latter result points the way to the second change in the framework of the rules of the World Trade Organiza- economic policies that European policymakers should tion (WTO). The EU must make it clear that there is no initiate: boosting public investment. The severe drops middle ground between these two choices. There can be in such investments were collateral damage from the ill- no “special deal” with the United Kingdom in the sense of conceived austerity programmes imposed by the Euro- trading off some migration restrictions for improved mar- pean institutions. ket access. A boost in public investment can only be achieved by If the UK accepts the Norwegian model, it retains full ac- changing the fi scal compact that imposes structural cess to the single market. In that case, there are no obsta- budget balance on the eurozone member states. This cles for British goods and services in the EU and for EU compact has the unfortunate implication that public in- goods and services in the UK. However, as is well known, vestment can only be fi nanced by current revenues.
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