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Brexit: Fear, Loathing and Anger on Both Sides of the Channel

Europe’s fault lines will be open to fractures due to European leaders’ refusal to abandon the neoliberal policies that sowed the seeds of this revolt.

The UK’s and Europe’s leaders have shifted into the crisis mode of urgent, high-stakes weekend meetings. But rather than making progress, these officials have instead exposed gaping differences among the Continental powers and chaos at the top Britain’s Conservative and Labour parties.

The UK’s political class is reeling from the Brexit vote. The major players in both parties now face having to manage a process that will prove to be difficult and stressful, where numerous details that will have profound long-term implications need to be sorted out. Even in a best case scenario, the results will make a lot of citizens less well off, and it won’t be just people working in the City who can arguably afford it (for instance, a recession is pretty much a given). This is not an attractive project for a career politician.

Labour leader Jeremy Corbyn, who had a weak hold on his position even before the Brexit vote, beat back an insurrection by Hilary Benn, the shadow foreign minister and son of the Socialist icon Tony Benn. Corbyn removed Benn from the shadow cabinet. However, given that many Labour MPs want to hold Corbyn accountable for the Leave vote by virtue of making a lackluster case for Remain, he’s only fought off an immediate threat.*

The Conservatives are also in disarray. One of the unintended side effects of Cameron’s 90 day caretaker government is that the jockeying for leadership and backstabbing may continue for longer than if he had resigned immediately. From the Telegraph story Tories at War:

The Tory civil war over the EU referendum escalated after friends of David Cameron accused Boris Johnson and Michael Gove of leading a “mendacious” campaign and “corroding” trust in politics.

The Prime Minister’s allies claimed his “project fear” warnings that Brexit would bring economic disaster were proving to be a “reality” as the bitter feuding from the referendum campaign reached new heights…

Anna Soubry, a pro-EU business minister, told Channel 4 News: “A lot of people suddenly realised that project fear is turning into project reality. We are doing everything we can as a Government but the reality is starting to dawn. Now we have got to get a plan in place, and of course we have got to get the right leader in place…

Another senior source close to Mr Cameron and Mr Osborne said: “It is painfully obvious that Boris and Gove have no plan, no idea what they are doing, and never expected to win.”

However eurosceptics said that the concerns of an economic shock were exaggerated. They pointed to the fact that the pound rallied on Friday after falling to a 30 year low and markets recovered.

As our Richard Smith observed:

Corbyn thinks politics is all about committee resolutions and not sharing platforms, and his soft-left intra party opposition just say “tut” when snarled at by working class white men who are furious about immigration and austerity. Right now, Labour has no program to tackle this immigration issue *at all*, neither socialist, or social-democratic. Non-austerity economics has no traction either.

Not only is there no immediate plan, but as the Financial Times stressed on yesterday, in Brexiters’ very different visions of post-EU Britain, the Leave side is not united. For instance, while the Brexit camp wanted to implement an Australian-type scoring system for immigrations, various factions disagree markedly on how many in total should come in every year. Similarly:

New trade arrangements need to be drawn up with all countries. As well as changing its trading relationship with other EU members, leaving the bloc means the UK loses access to the EU’s trade treaties with about 50 other countries…

Trade agreements will be needed for services as well as goods. A key question is whether the UK retains passporting rights into the EU for financial services. At present only members of the European Economic Area have such rights, which allows them to market products throughout the region. Without such rights, providers of financial services based in the UK may be forced to move some of their operations to another European centre.

Some proponents of Brexit, such as Daniel Hannan MEP and the Adam Smith Institute, a think-tank, have advocated joining the EEA or agreeing bilateral trade deals similar to the one Switzerland has struck with the EU. However, the prominence in the campaign of pledges to “take back control of our borders” seems to rule out such options: continued membership of the single market would mean accepting free movement of people..

Mr Johnson has favoured a Canadian approach. Canada has agreed a trade deal with the EU that removes virtually all tariffs on goods but crucially excludes most services. Since services make up 80 per cent of the UK’s economy, and two-thirds of the UK’s exports to the EU, any agreement reached on services will be particularly important..

But Mr Johnson’s position contrasts with the suggestion from some Leave supporters, such as Lord Lawson, the former chancellor, and Patrick Minford, the economist, that all tariffs should be removed unilaterally, even if the EU and other countries do not reciprocate.

A unilateral approach poses two difficulties. By removing all tariffs without requiring similar concessions from other countries, the UK would reduce its bargaining power in future negotiations. Even if politicians are happy to give this up, “no [World Trade Organisation] member can unilaterally decide what its rights and obligations are,” said Robert Azevêdo, the WTO’s director-general. In other words, unilaterally falling back on WTO rules is not as quick and simple as some have suggested and would still require agreement from the other 161 member countries.

The Tory and Labour party have no enthusiasm for the enormous task that lies before them. And the wiser rats are jumping ship. For instance, Jonathan Hill, the UK’s man at the European Commission, announced he was resigning. His explanation? “I don’t believe it is right that I should carry on as the British commissioner as though nothing had happened.” Yet the post can’t go vacant, particularly since negotiations will begin at some point. So Cameron now has to find a replacement.

Some hope the Brexit genie can be put back in the bottle. But that seems unlikely. Even though a petition for a do-over vote has garnered 2.6 million votes so far, which means it must be considered for debate by Parliament, my understanding is that few see this as a viable option. Despite media reports of Leave voters saying that they were lodging a protest vote they now regret, the plural of anecdote is not data. Given the profound effects a Brext will have on the financial services industry, its employees and their family members who presumably voted Remain in the first place would easily provide millions of keen supporters of another go.

While other failed EU measures have been turned into wins on a second ballot, in every other case, the EU gave concessions to appease voters. That is not happening this time. And while there are clearly voters who would reverse themselves given the chance, the idea that the Government was trying to bulldoze a well-publicized initiative that won by a respectable margin would also generate a backlash. It would also drain more legitimacy from a ruling class that has suddenly discovered simmering anger in large swathes of the country it thought it could safely neglect.

Another complicating factor is that the Scots have jumped on the opportunity to seek independence and strike their own deal with the EU. It’s not clear how that can work, since the entry process is lengthy, and a Scotland outside the UK but not in the EU would be a terrible outcome.** But if Scottish voters believe, correctly or not, that they can stay in the EU if they vote for independence, they could see a second referendum as intended at least in part to throw a spanner in their independence vote.

Thus the level of internal political disorder alone prevents the British leaders from engaging with the complex practicalities of figuring out what sort of post-Brexit regime they want, and how to conduct exit negotiations and put new trade pacts in place. And another wrinkle is that divorce is faster than a second marriage. EU president Donald Tusk has said that a British departure is not all that hard and could be completed in the two years stipulated in Article 50. But entering new trade agreements routinely takes at least five years, and trade deals don’t always get done.

The Brits thus have no incentive to rush to pull the Article 50 trigger. Even after the major parties sort out their considerable internal discord, they still have many choices to make and a great deal of prep work after that. And they may use some of that time to start negotiating replacement trade pacts. But Cameron is under pressure to get moving. The Telegraph points out: “The Prime Minister will tomorrow hold a Cabinet in which he will be pushed by eurosceptic ministers to appoint a team to begin preparations for a Brexit.”

Cameron and other Remain supporters may also hope that economic cost of the impending Brexit may start to bite and give them the leeway to do things that now would be explosive politically, like negotiate a half-way house where the UK has reduced rights of various sorts for continued trade access. Even if the bloody-minded EU members were to soften their stance, the problem with that is that it would almost certainly entail the UK paying into the EU coffers in full, when one of the promises of the Leave campaign was to use the EU budget for national priorities, like the NHS.

The Remain camp may also hope that the economic damage will cause enough in the way of regret that the pols will be forgiven for letting the matter slide altogether. That seems unlikely. The voters that have been hit already are asset-owners and financial institutions, few of which saw the vote coming and thus took trading losses. Bank managers and employees will continue to have uncertainty over what comes next weigh on them. By contrast, the depressed and barely-muddling-along parts of the country that voted for Brexit won’t feel the impact of the weaker sterling (which had been sliding all year) and reduced investment and spending for a while, probably months. And even then, the decay is likely to be gradual.

By contrast, the toll of uncertainty and unhappy markets will tax European leaders. They could barely contain their ire over the Brexit vote in a hastily-convened weekend summit of founding EU foreign ministers. All save the Germans are fuming for Britain to move quickly. Interestingly, since the UK is completely in control of when to invoke Article 50, once it gets its ducks in a row, it could use this anxiety to better its negotiating position. If the Europeans perceive delay as costly, as opposed to just inconvenient and offensive, they need to concede something to induce the UK to hurry up.

One role reversal is that Germany is acting as the moderating force. It’s not hard to see why: Germany loses most from a Brexit. For instance, the UK is a big market for its auto industry and the car-makers also have some operations located there. It’s not just that a leaving the EU means more border costs. The UK will also be poorer by virtue of sterling being weaker. That means Britain will wind up importing less. Cars are big-ticket discretionary purchases and are likely to suffer a lot. Consumers will keep their current cars longer and many will buy cheaper models when they do get a new vehicle.

Even though Merkel is the public face of the “don’t push the British to hurry along” campaign, her views are reportedly shared by Finance Minister Wolfgang Schauble.***

The Financial Times account gives a clear picture of the sour mood:

Angela Merkel, the German chancellor, has attempted to rein in pressure from within Europe to force Britain quickly to trigger divorce proceedings with the EU, saying that while “it shouldn’t take forever,” rushing into an exit was unwarranted.

Ms Merkel’s cautious words, coming during a day-long gathering of her CDU/CSU bloc, came in stark contrast to those from other EU leaders, including European Commission president Jean-Claude Juncker and even some within her own government, pushing for immediate Brexit.

Mr Juncker told German media that he would like Brexit proceedings “to get started immediately”…
Similarly, foreign ministers of the founding six EU states, who held a hastily arranged meeting in Berlin on Saturday, also urged quick action…

The hardline stance from many within the EU’s Franco-German axis sets up the first of what is expected to be months, and potentially years, of contentious disputes with London over Brexit…

The diplomatic dust-up was only part of the growing reverberations over the UK’s historic Brexit vote…French president François Hollande met far-right National Front leader Marine Le Pen on Saturday as one of a series of meetings he held with opposition leaders, a clear sign of the populist leader’s elevated stature following the Brexit vote…

The difference in tone between Ms Merkel and Frank-Walter Steinmeier, the German foreign minister, was reflective of tension within Germany…Martin Schulz, a German Social Democrat and the European Parliament chief, said it was “scandalous” that British prime minister David Cameron may stay in office until October, so holding up talks. Speaking on German television late on Friday, he said Mr Cameron had “taken a whole continent hostage for the internal party considerations” of the Tories.

The German media still hopes that Britain will be able to play the game with voters that Penelope did with her suitors: stringing them along for years (in her case, decades). But the threat of the possible dissolution of the UK makes that even harder to achieve without a voter backlash. And a politician’s prime objective is his personal survival.

George Soros, who despite making successful bets against the pound, is a believer in EU, is more willing to say what is at stake than the vengeful EU leaders. His Project Syndicate piece is worth reading in full. Key sections:

Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible. Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term….

But the implications for Europe could be far worse. Tensions among member states have reached a breaking point, not only over refugees, but also as a result of exceptional strains between creditor and debtor countries within the eurozone. At the same time, weakened leaders in France and Germany are now squarely focused on domestic problems. In Italy, a 10% fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis — which could well bring the populist Five Star Movement, which has just won the mayoralty in Rome, to power as early as next year.

None of this bodes well for a serious program of eurozone reform, which would have to include a genuine banking union, a limited fiscal union, and much stronger mechanisms of democratic accountability….

That is where we are today. All of Europe, including Britain, would suffer from the loss of the common market and the loss of common values that the EU was designed to protect. Yet the EU truly has broken down and ceased to satisfy its citizens’ needs and aspirations. It is heading for a disorderly disintegration that will leave Europe worse off than where it would have been had the EU not been brought into existence.

But we must not give up. Admittedly, the EU is a flawed construction. After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us.

It would be for the best if Soros were right, that the European leaders could recognize why and how the EU and Eurozone went off the track. But one of its underlying principles was a suspicion of democracy and a preference for rule by technocrats. Those experts have done too well from their misrule and are too remote from the victims of their blinkered vision to be able to change course. Europe’s fault lines will thus open into full-bore fractures due to their refusal to abandon the neoliberal policies that sowed the seeds of this revolt.


* What Americans may not appreciate is that Labour by its constitution is not a Parliamentary party. Its leader is elected by the base, not the MPs. So Corbyn is in a position that is analogous to Sanders winning the Presidential election but not being able to house-clean in the Democratic party.

** Some have put forward the idea that Scotland could be allowed to enter the EU as a current member via being part of the UK now. I don’t see how that works. Brussels operates in a strict by the books manner; that’s perceived to be critically important in keeping the EU together, that all the disparate members can rely on the rules. Scotland is not a signatory to any EU treaties and therefore is not a member. Moreover, there are countries who are dutifully going through the entry process who would be righty outraged by Scotland queue jumping them.

*** Schauble did make threats before the Brexit vote, but now that gambit failed, the Finance Ministry recognizes what is at stake.