Politics and Governance in the UK

by Michael Moran

Update 55: July 2016 - Brexit: don't panic, don't panic?

Older readers (and younger ones who saw the 2016 remake) will recall that in the comedy Dad’s Army moments of stress usually resulted in Corporal Jones running round in circles shouting ‘don’t panic, don’t panic.’ At the risk of sounding like Corporal Jones I’d like to suggest that the immediate reaction to the vote to leave the European Union in the June 23 referendum has produced an overly panicky reaction. The vote has indeed already had serious consequences, and will continue to have serious consequences. But descriptions like ‘greatest crisis since World War II’ overstate the magnitude of what has happened.

Let us first deal with the grounds for, if not panic, real concern. The immediate economic aftermath – the falls in stock and currency markets – may be short lived but they undoubtedly have negative consequences for the economy. The uncertainty surrounding the future while the UK and the EU negotiate the terms of exit will also undoubtedly affect more fundamental decisions, like the investment choices that businesses make. A little less certainly, the UK economy may be damaged long term by exclusion from trading opportunities in the European Single Market, and may be damaged by decisions by enterprises to locate new investment (or shift existing investment) to within the EU. The result has also of course caused huge turmoil within the main Westminster parties, as I documented in Update 51. Much more significant, ‘Brexit’ will almost certainly trigger a second independence referendum in Scotland, since the Scots voted by a significant majority (62 per cent against 38 per cent) to remain in the EU. This is likely to be the single most important consequence of the 23 June result, and whether it is thought a good or a bad thing obviously depends on what one thinks of the desirability of maintaining the unity of the United Kingdom.

Political and constitutional consequences of the Brexit vote are therefore already significant, and will become more so. But there are nevertheless two grounds for believing that the decision may not be so consequential for the UK as ‘morning after’ verdicts suggest: one concerns the relations between the UK and the European Union; the other concerns the future of the Union itself.

The Brexit vote will disentangle the UK from the European Union but it does not disentangle a fully integrated state from membership. The UK has long been an ‘awkward partner’ in the Union, to use Stephen George’s phrase. As a result it had become over time an increasingly semi-detached member, opting out of important integration policies. There are four key areas where the UK has formally negotiated ‘derogations’ in Euro jargon, exemptions in English: the Schengen Agreement for passport free movement across internal borders; Economic and Monetary Union; the Charter of Fundamental Rights of the European Union; and the area of freedom, security and justice. All these, with the possible exception of the Charter of Fundamental Rights, are of great substantive, rather than symbolic, importance. In addition, it is worth recalling what precisely was at issue in the June 23 referendum: whether or not to ‘remain’ under the new terms of membership negotiated by the Prime Minister with the Union. One of the fundamental weaknesses of the ‘remain’ campaign was that these new terms were either largely symbolic (recognising the right of the UK not to participate in the goal of ‘ever closer union’) or of only modest substantive importance (some limitations on benefits for EU migrants to the UK.) But they nevertheless strengthened the exceptional position of the UK as a semi-detached member of the Union. In other words, had ‘remain’ won, UK exceptionalism would have been even more marked. The UK is also unique in another way: some of its ‘opt outs’ are shared with some other Union members, but it is the only state to have negotiated opt-outs in all the identified areas. The Republic of Ireland has joined it in opting out of Schengen; Denmark has joined it in opting out of monetary union; Poland shares the opt out from the Charter of Fundamental Rights; Ireland and Denmark have also opted out of freedom, security and justice; and of course the ‘Cameron opt outs’ would have been uniquely British.

There is one other opt out which is perhaps most significant of all: the UK of course declined to enter the currency union, the Eurozone. In this it has been joined by eight other members of the Union (though in some of the smaller of these the Euro circulates as a transaction currency.) The opt out from the Euro is perhaps the single most important derogation, and for this reason: a state that is not in the Eurozone will never be a substantially integrated member of a unified federation, for in the absence of participation in the currency union fiscal integration – the key to full federal integration – cannot take place. While it stayed outside the Eurozone – and support for entry even before the referendum was practically zero – the UK was never going to be a full participant in the integration process.

In short, as far as integration is concerned there have long been inner and outer circles, and the UK has plainly long been in the outer circle. Nobody believes that the result of Brexit means that the UK will no longer trade with Europe, or have trade pacts with Europe. So the effect of the vote is a bit less dramatic than ‘morning after’ headlines suggests: it shifts the UK further out on the outer circle which it already occupies. This is a significant change, but it is not as significant as some of the immediate reactions to the Brexit vote suggest.

The effects in the Union itself are potentially profound, but they will also have the consequence of making the British decision less unique. We know that hostility to the Union is not confined to Britain: ‘Eurosceptic’ parties are on the rise across the continent. The British result has further emboldened those on the continent in their demands for a British style referendum: Marine Le Pen in France already favours ‘Frexit’; and in Sweden, Denmark and the Netherlands there is widespread electoral support for Eurosceptic movements. In practice it is most difficult for a country which is in the Eurozone to disentangle itself, which is why the member state whose economy has been most comprehensively wrecked by the Union – Greece – is unlikely to leave. But Sweden and Denmark are a different matter: neither is in the Eurozone; culturally they are closer to the UK than to Francophile EU; in Norway they have a Scandinavian model of non-membership; and Denmark, we may recall, only joined the original Common Market because of British accession in 1973. Much of the morning after apocalyptic mood in the UK was based on the vision of a Britain alone. She may not be alone for much longer. That realisation tempers another ‘morning after’ expectation: that Scotland will exchange membership of the United Kingdom for membership of the European Union. At the height of the pre-2008 boom the then leader of the SNP liked to predict a Scottish future modelled on the Scandinavian economies. What Scotland would feel about being in a European Union where the Scandinavians were breaking away is interesting to contemplate.

Within the Union it is plain that there is one immediate benefit in shedding the UK: it makes the EU more cohesive and will undoubtedly reinforce the hand of those arguing for movement to ‘ever closer union’ – especially to fiscal union as a prelude to the creation of a comprehensive federal state. That is indeed an urgent task, for it is the only way to remedy the single greatest policy catastrophe in the Union’s history – the introduction of the Euro. The Euro has damaged the economy of every member of the Eurozone - even of Germany, the single apparent ‘winner’. It lies at the heart of the great crisis of unemployment, especially youth unemployment, in France and across southern Europe. It lies at the heart of the stagnation which has afflicted the whole of the European economy, but especially the southern European economies, for nearly two decades. Yet plainly the creation of fiscal union is a herculean task. Even to attempt it in the original highly integrated six member states of the Common Market is proving impossible: the increasingly powerful Front National in France wants out of the Union even on the present terms. Yet failure to confront the ‘Euro problem’ will undoubtedly strengthen further the hands of those, like Marine Le Pen, leader of Front National, who in effect want to break up the European Union as presently organised.

At this point readers may recall Corporal Jones again: his call ‘don’t panic’ was usually itself a sign of panic. And in contemplating the future of the Union panic may indeed be a rational response, but not quite for the reasons expressed in morning after analyses of the UK Brexit vote.