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Opinion

Saving Europe By Reversing Brexit

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LONDON – “Never let a crisis go to waste” has always been one of the European Union’s guiding principles.But what about five simultaneous crises? Today, the EU faces what FransTimmermans, European Commission Vice President, describes as a “multi-crisis”: Brexit,refugee flows,fiscal austerity,geopolitical threats from East and South, and “illiberal democracy” in central Europe.Rather than wasting its crises,the EUcould be laid to waste by them.

If so, Brexitwill bethe detonator for that demolition.By legitimizing the concept of an EU breakup, and thus turning a fantasy among political extremists into a realistic option of mainstream politics throughout Europe, Brexit threatensto trigger an irresistible disintegration process. It will also transform economics, by paralyzing the European Central Bank in the next euro crisis: while the ECB can always defeat market speculation, it is powerless against breakup pressures from voters.

The EU therefore urgently needs to putthe genie of disintegration back in its bottle. That means persuading Britain to change its mind about Europe, which, according to conventional wisdom on both sides of the English Channel, is impossible.But many “impossible” things are happening in politics nowadays.

The referendum majority on June 23 was much narrower than that in Scotland’s 2014 independencereferendum,or the negative votes on EU treaties in Ireland, Denmark, and the Netherlands, all of which were subsequently reversed. More important, the 52%who voted for Brexitwere sharply divided in their aims,with some prepared to accept economic sacrifice for a “hard Brexit” (total separation from Europe), and others hoping for a “soft Brexit” that would minimize the impact on the UK economy.

According to post-referendum polling, three-quarters of “Leave” voters expect Britain’s economy either to strengthen or to be unaffected by Brexit, and 80% believe the government will have more money to spend on public services as a result of their vote. Brexit voters are so optimistic because they were told (most prominently by current Foreign Secretary Boris Johnson) that Britain could “have our cake and eat it” – a new deal that would preserve all of the economic benefits of EU membership with none of the obligations or costs.

When these expectations are disappointed, public opinion will change. Already, 66% of voters saymaintaining market access is more important than restricting immigration, if Britain cannot have both. This directly contradictsPrime Minister Theresa May’s stated priorities– and probably explains why she refuses to talk about her Brexit strategy.

Because public expectations of an economically innocuoussoft Brexitwill be impossible to reconcile with the rejection of all EU obligations demanded by the Conservative Party’s “hard Brexit” faction, May cannot win. Whichever course she chooses, shewill antagonize half her party and a large proportion of Brexit supporters, not to mention the 48% of voters who want to stay in the EU.

Once this backlash starts, plenty of ambitious Conservative politicians whom May purged from government will be eager to exploit it. Already, George Osborne, immediately sacked as Chancellor of the Exchequer whenMay took office, has thrown down the gauntlet, challenging her democratic mandate: “Brexit won a majority. Hard Brexit did not.” Even the weakness of Britain’s oppositionparties works against May, allowing opponents to plot against her, secure in the knowledge that they cannot lose power.

All this implies that British politics will become very fluid as economic conditions deteriorate and voters start to change their minds. The EU shouldencourage such second thoughts, which means that itmust stop treating Brexitas inevitable and insteadoffer the possibility of a compromise that would meet British voters’ concerns, but only on the condition that Britain remains inthe EU.

The obvious way to accomplish this would be to conclude an EU-wide agreement on greater national controlover immigration and other symbolic issues related to national sovereignty. Such an agreement need not be seen as a concession to British blackmail if it were extended to all EU countries and presented as a response to public opinion throughout the Union.

By making a virtue of its response to democratic pressures,the EU could regain Europe-wide support. But to send a positive message to voters, European leaders will have to rediscover the knack for pragmatic compromise and inter-governmental bargaining that used to be the hallmark of EU diplomacy.

For starters, defusing both Brexit and the refugee crisis will requiresome modest changes in immigration and welfare rules. Such reforms, which would be popular in almost all member countries, need not conflict with the EU’s founding principles if they preserve the right to work throughout Europe, but return some control over non-economic migration and welfare payments to national governments.

Second, the interaction of the refugee and euro crises demands new fiscal rules. Dealing with immigrants is expensive and should ideally be funded by mutuallyguaranteed EU bonds. Alternatively, Mediterranean countries must be offered budgetary leeway,in exchange for assuming front-line responsibility for immigration controls.

Third, the need for immigration reform, combinedwith “illiberal democracy” in Central Europe, calls forchanges in EU spending priorities and foreign policy. Poland and other countries will accept restrictions on their citizens’ mobilityonly if offered additional structural funds and stronger security cooperation.Such incentives, in turn, couldprovide more levers to ensure respect for human rights.

Finally, restoring the EU’s democratic legitimacy means ending the institutional tensions between the eurozone and the broader EU. The EUauthorities must acknowledge that many member countries will never join the euro, which means abandoning their rhetoric about a “two-speed Europe,” with all heading – whether at high or low speed – toward the “ever closer union” that a single currency implies. Instead, the EU must reshape itself into two concentric circles: an inner core committed to deeperintegration,and an outer ring whose voters have no interest in a single currency and a shared fiscal space.

Such reforms may seem impossible, but EU disintegration seemed impossible before the Brexit vote. In revolutionary periods, the impossible can become inevitable in a matter of months. This week, former French President Nicolas Sarkozy called unexpectedlyfor a new European treaty and a second British referendum on its EU membership. In Europe, a revolutionary period has begun.

Anatole Kaletsky is Chief Economist and Co-Chairman of GavekalDragonomics and the author of Capitalism 4.0, The Birth of a New Economy. 

By Anatole Kaletsky

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