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Brexit – May We Live In Interesting Times

February 8, 2017

The Times they are a’changing….

In my blog of 30 November, “Hard Brexit – Evolving Scenarios for Brexit https://samiconsulting.wordpress.com/2016/11/30/hard-brexit-evolving-scenarios-for-brexit/

I identified three distinct key drivers of uncertainty:

  1. The way events play out in the UK – the debates between “hard” and “soft” Brexiteers, and the outcome of litigation over the role of Parliament in invoking Article 50, and the state of the UK economy and economic confidence
  2. Events in Europe – debates between those in favour of compromise and those unwilling to make concessions, influenced by political and economic developments within the EU
  3. External events – in the USA, Russia and elsewhere, and in the global economy and global trade

Subsequent events have highlighted the degree of uncertainty. Whilst the UK Government has clarified to some extent its aspirations for the post-Brexit UK, and the UK Parliament seems set to approve the invocation of Article 50, thus beginning the formal process of Brexit, developments elsewhere have muddied the waters.

Brexit, USA

The arrival of President Trump has marked a huge shift in the US Government’s attitude to Europe. For many decades, the USA has encouraged and supported the development of the EU. President Obama warned that post-Brexit Britain would be “at the back of the queue” for a trade deal with the USA, and he pursued the TTIP trade agreement with the EU. By contrast President Trump has praised the UK referendum vote to leave the EU – calling it “so smart” – whilst criticising what he sees as the German domination of the EU, and musing on the likelihood of its breaking up in the near future.

President Trump’s “America First” line on trade, and hostility to the EU contrasted with the emollient tone struck by UK Prime Minister Theresa May in her speeches at Lancaster House and Davos last month.

A View from the Med

On 26 January, I attended a seminar arranged by Macrogeo Consulting and the Italian Embassy in London on “The Future of Europe post-Brexit and post-Trump”. The speakers were very much part of the Italian Establishment, including the Ambassador himself, and former Prime Minister and EU Commissioner, Mario Monti. The view expressed was surprising, and exemplified the extent to which Brexit is taking place in a rapidly-changing world.

The argument presented was that the EU is facing stresses and challenges that cast doubt on its continued existence – at least in its current form. The challenges include:

  • Failed states, beset by war and terrorism at Europe’s eastern and southern borders
  • Surging population growth in Africa – with an average age less than half the EU’s
  • The vulnerability of poor and failed states to even modest climate change
  • The prospect of mass migration triggered by all three of the above factors
  • The rise of Russia and Turkey as disruptive influences on the EU’s eastern borders
  • The advent of a protectionist and Eurosceptic US Administration
  • The internal economic stresses within the EU, with the debtor countries mired in recession, whilst Germany runs a current account surplus with its neighbours

The view presented by Macrogeo was that by the next Electoral Cycle (ie 2021-22) the EU will be in its death throes. They saw the possibility of a new core, with Germany at its centre, accompanied by the countries of Northern Europe (including Scandinavia and the Baltic countries) and most of the former Warsaw Pact countries, and probably France. They foresaw the other EU countries (including Italy, Greece, Spain and Portugal) forming an outer circle, outside the single currency, but within the single market; and “European Common Space” beyond that, including the UK, Ukraine, Turkey and other non-EU member states.

They posited four possible scenarios for the core, as set out below ranging from a Transfer Union (implying full fiscal and political integration), or a Customs Union, as now, to a loose confederation of sovereign nation states, or a German-dominated Union.

macrogeo-scenarios

What was clear from this was that they did not see Brexit in terms of the UK departing from a durable and stable union. Rather, they saw Brexit playing out as part of a transformation in the EU, driven both by external pressures and internal imbalances that will at best lead to a realignment, and at worst to an anarchic break-up.

What does this mean for Brexit? We will have to see: but it is clear that at least some key European players are thinking about the strategic challenges and options for the EU itself. Their response to Brexit will – to some extent be influenced by their view of the EU’s best response to its own challenges. For example a hostile America and Russia may make an amicable settlement with the UK more desirable. Whilst the pressures of inward migration from Europe’s eastern and southern borders may drive the EU to press hard for open borders or may cause fragmentation within the EU as it seeks to negotiate a mutually acceptable deal.

The uncertainty will continue, as will the need to think flexibly about future scenarios. And events, especially in these interesting times, will continue to change the landscape even as the game plays out.

Written by David Lye, SAMI Fellow

The views expressed are those of the author and not necessarily of SAMI Consulting.

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2 Comments leave one →
  1. Tom Fletcher permalink
    February 8, 2017 11:08 am

    Good blog. I’ll offer you some thoughts, through an economic prism and not the political & emotional prisms that are, in my opinion, plaguing rational debate on this.
    I think we (the UK, and its companies) have a massive opportunity here – at a macro- and micro-level – and I think we will realise that opportunity. In order to capitalise on this, I am increasingly of the view that we need a ‘clean’ Brexit. Don’t for one second think that I don’t understand all of the minutiae (harmonisation, tariffs, legal, political, etc) – I do. But this is bigger than that. The demise of the EU, economically, is a megatrend (c30% of global GDP in 1980, c17% now). IMO, UK is better off being able to flexibly pick its path through the opportunities & threats in the world economy. I’ll also give you an anecdote from my doorstep: our local Ford dealer has just been taken over by BMW, apparently as part of a big BMW drive to buy up dealerships in the UK. Why is BMW (German, most manufacturing still done there) buying up real estate if it fears Brexit? I’ve blogged on similar matters:
    1: http://challenger-mi.blogspot.co.uk/2016/07/brexit-chaos-and-opportunity.html
    2: http://challenger-mi.blogspot.co.uk/2016/09/brexit-exporters-dont-forecast-long.html

    • February 10, 2017 10:17 am

      Thanks for the comment, and the links to your blogs, which put across a cogent upbeat Brexit scenario. What is clear is that it’s a long way to Brexit actually taking place, and there are a lot of events, both internal to the EU and UK, and external that will drive the process and shape the eventual outcome.

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