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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

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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

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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. A the price the UK must pay in this model is to guarantee rule more destructive to economic growth has rarely been the free movement of EU citizens in and out of the UK. imposed. When politicians are told that the cost of pub- Without the free movement of people, there can be no lic investment should be fully borne by present taxpayers free movement of services. This is the core of the single (voters), while the benefi ts of this investment will accrue market. Moreover, the Brits will have to accept two other to future taxpayers (voters), it comes as no surprise that components of the Norwegian model. First, they will have the political incentives to engage in public investment will to abide by the rules on standards, health and safety that be weak. This is the situation today. Thanks to an ill-con- are decided in Brussels – without being involved in the ceived and ideologically based rule, public investment in decision-making process. Secondly, they will have to the eurozone is at a historically low level. contribute to the European budget.

It is often argued that allowing public debt to increase will Although the acceptance of this model would probably be saddle our children with an unbearable debt burden. This in the best interest of both the UK and the EU, it is very criticism confuses gross and net debt. When productive unlikely that the UK government will accept it. The Brexit public investments are undertaken by issuing government camp considers both free migration and the primacy of bonds, our children will inherit both productive assets and Brussels legislation as nonstarters, and its members will government bonds. Today, the cost of issuing govern- revolt if the UK government accepts these conditions. ment bonds is close to zero in many eurozone countries. If True, there is an important faction in the new government that is attached to maintaining full access to the single 1 See P. De Grauwe, Y. Ji: Crisis Management and Economic Growth market and that sees few problems in accepting both the in the Eurozone, in: F. Caselli, M. Centeno, J. Tavares (eds.): Af- free movement of people and regulations from Brussels. ter the Crisis. Reform, Recovery, and Growth in Europe, Oxford 2016, Oxford University Press, pp. 46-72. However, this faction is probably too weak to counter the 2 International Monetary Fund: World Economic Outlook, 2015. demands of the hard-line Brexit supporters.

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I assume, therefore, that the British government will re- for all involved. There is no point in grouping together with ject the Norwegian model and will try to obtain conces- people who intensely dislike each other. However, it is in sions from the EU that reduce migration fl ows while en- the interest of both parties that the terms of the divorce suring access to the single market. Here, the EU must should be made clear in advance. make it clear that a special deal with the UK allowing such cherry-picking is unattainable. The EU must insist That is why the EU should make it clear to other poten- that the only other option for the UK is to stand on its own tial exiters what they can expect should they opt to follow feet and start negotiating new trade deals with the EU the UK’s lead. It will be either (some close version of) the and other countries in the framework of the WTO rules Norwegian model or a “stand-alone model”, in which the after Brexit is completed. In other words, the UK must newly sovereign nation will face the diffi cult task of estab- be treated like the US, China or Brazil, i.e. as a sovereign lishing new trade agreements on its own. Clarity is essen- nation that insists on maintaining full sovereignty over its tial for those countries considering leaving the EU. Such trade agreements. The trade negotiations between the clarity can only be achieved by excluding a privileged UK and the rest of the world will take years, if not dec- trade agreement with the United Kingdom. ades, and their outcome is uncertain. It is not clear, for example, whether the UK will be able to maintain free When the UK joined the EU in 1973, arguably its main movement of services with the EU, as this freedom is in- strategy was to prevent the union from becoming too timately linked to the free movement of people. However, strong. The UK political elite decided that this could best that is a problem for the Brits, should they choose to em- be achieved from inside the union. Now that the UK is brace full sovereignty. departing, the century-old British strategy remains the same, i.e. to weaken the forces that aim to make Europe There are a number of reasons why the EU should not stronger. The UK can achieve this by insisting on a spe- allow itself to be dragged down into negotiations over a cial deal with the EU whereby it maintains the benefi ts of special cherry-picking deal with the UK. There are other the union while not sharing in the costs. Such a deal, if EU member states that are currently tempted to organise it comes about, would signal to other member countries similar referenda. I have no problem in principle with such that by exiting they, too, could continue to enjoy the ben- referenda. If citizens of a country dislike being members efi ts of the union without contributing to the costs. Such a of a club, they should be able to leave. This will be better prospect would fatally weaken the European Union.

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