Thought Arena Beta

 

THE REAL ISSUES

• Thousands of years of battles over national sovereignty do not end because of a single political and economic treaty.

• Decision making by Committee can barely be suffered during good times – it is completely impractical and intractable during bad times.

• Most European countries operate under heavy-handed bureaucracies on their own; adding a massive bureaucratic superstructure is unlikely to have felicitous economic or social outcomes.

• Inefficiencies can be masked by a growing pie (or rising tide), but become perilous when the pie shrinks (tide subsides).

• Without central control of revenue generation (i.e. taxation), economic control (e.g. interest rate policies) and a large percentage of spending, there is little chance of long-term economic success, particularly regarding policies of ‘redistribution’.

• Borders, both internal and external, are the primary cause and result of war.  To imagine simple elimination of borders without ramification is the optimistic product of an unusually long period of relative peace.

• Planned geographic growth of a region can only be effectively applied when there is a clear purpose and mandate and support by all sides.

• In the end, economics will almost always prevail – if plates are full at the dining table, there are few complaints, when they are more empty, someone needs to be blamed.

These issues are central to a complex skein of geopolitics and economics that underlie and loom over the British Exit from the European Union (Brexit).  As one can imagine, there is a huge amount of emotion on all sides, given the potential stakes and the myriad of possible outcomes.  The uncertainty lends itself to the elaborate concoction of scenarios and often prevarication. The world is complicated and unintended consequences and their follow-on ramifications abound.  And at the heart of the matter, uncertainty begets insecurity and insecurity often begets irrationality.  Unfortunately, there is nothing that can eliminate the current uncertainty.  However, not enough people have fully thought out the actual reasons for their concern.  The decision is of sufficient magnitude that it should not be made based on poor politics or incendiary media.

BACKGROUND

The EU is the evolution of a ‘loose’ confederation of countries that was formed largely by Germany and France in the difficult post-rebuilding years after World War II.  It was a union to secure peace and build economic strength for the region.  At its core, the French needed more financial support and stimulus, the Germans a full political rehabilitation and the others who joined, an enhanced geopolitical stability and economic growth engine of a united trade block.  Then, as now, there were many skeptics, among the largest of which was the UK.  Without going through an opinionated blow-by-blow history of the EU, which has come a long distance, and survived many setbacks the current position remains precarious, because the foundation has never been rock solid.

Providing a fully integrated thesis on the current situation lies well beyond the scope of this type of this article.  The purpose of this thought piece is to provide a framework for readers to organize and integrate their opinions on the current economic and geopolitical realities.

To ruin the ending:

There really are no clear conclusions as to whether the Brexit makes sense for the UK or not!

THE CORE BENEFITS OF HOLDING THE EU TOGETHER AND FIGHTING BREXIT

1. A politically and militarily unified Europe.  Europe, as an ever-changing set of borders, has been a hotbed of war and conflict for thousands of years.  Within often very close proximity, it is home to many cultures, languages and customs, as well as many geographies and climates that have led to very different national and regional characteristics; allegiances and enmities have existed for generations beyond counting and often run so deep, one can even wonder if they have become genetic!  The conflicts between and among countries have arisen for many reasons; some have been localized, some much more far ranging; some quite brief, others lasting many decades.  The bottom line, however, is that for all of modern history, conflict has never been more than a few decades away, somewhere within the continent.  World War I and World War II, created an entirely new paradigm with their almost unimaginable level of carnage and devastation.  The clearly unsuccessful policies subsequent to WWI led to a massively different approach after WWII. The idea of encouraging rebuilding among the vanquished, not just the victors was an anchor to the philosophy.  However, within this backdrop of creating broader stability, lay the growing cancer of the Cold War. Within these historic parameters, the justification for a European union of some type seemed (and still seems) fairly indisputable.  Ensuring long-term that Germany was a controllable part of a greater whole appeared beneficial both from an internal and external political perspective.  Few doubted the German’s ability to rebuild, and having them as an integrated ally rather than a potential foe (a recurring theme over centuries) was important; also, given the proximity of the USSR and its growing, and aggressive military posture, having a strong and dynamic military partnership also made sense, although a more global defense policy, which included the U.S. and NATO made this aspect more nuanced.Today, some threats remain the same, some have attenuated and others have developed more recently (both within the geographic area and outside), but the concept of a unified military and foreign policy block remains as valid as ever.
2. A major global trading block.  When the EEC was originally established, the U.S. was the only dominant world financial power.  Europe wanted to be in a position to compete head-to head.  This made and continues to make considerable sense. Over time, Japan emerged as a credible competitor and subsequently China has seen a meteoric rise and other countries have ridden a wave of commodity-fuelled expansion.  This has threatened to reduce Europe’s relative weight and importance on a global basis.  In response to the mounting competition, the EU has actively sought to increase its membership.  The U.K. is a very important part of the equation, not just because of its population base, but also because of London’s global importance as Europe’s clear financial center.
3. A major mutual trading block.  Increasing trade flow within the EU stands to benefit the region overall.  How this balances across nations/regions is key to its success, with different areas benefiting at different times.   To the extent comparative advantage is encouraged by less protectionism and lower frictional costs (duties, different measurements/standards, multiple currencies, financial regulations) and labor is freer to flow, internal trade should be a major stimulus to growth.
4. Open borders.  In the short term, this leads to decreased bureaucracy and increased efficiency.  Simple examples are greatly simplified transportation of goods and increased flow for tourism, although many other benefits do flow through.  To the extent the overall ‘Union’ is successful, removing geographic barriers should, over time, also decrease antagonistic nationalistic attitudes as well.
5. Fluid labor market.  The ability of workers to move within larger geographic areas to find employment is, conceptually, quite positive.  When there is significant growth, it works particularly well.  Problems are most likely to arise, when overall levels of unemployment are high and/or when the overall costs of sustaining individuals (social costs) are borne largely by the host nation, rather than by a central authority.  Overall, however, labor mobility should over time benefit the EU.
6. Unified regulatory environment.  Rules and regulations are like oil in an automobile – not enough and the engine seizes; too much and the engine clogs.   There are many reasons for proliferation of regulation, some positive (prevention of clear abuses), some benign and neutral, but others more insidious (e.g. deliberate, indirect establishment of trade barriers, etc.).  A successful EU that standardizes rules and regulations across all member nations, and does so with appropriate moderation is potentially great for trade and longer-term social stability.

THE CORE PROBLEMS WITHIN THE EU AND THE JUSTIFICATION FOR BREXIT

 

1. Fundamental ideological differences.  The French are not the Germans and neither are the English.  The Italians are not the French and, furthermore, Northern Italians are not even Southern Italians.  The Scandinavians are not the Greeks and the Portuguese are not the Dutch.  And with the proliferation of new members, the different ‘perspectives’ increase factorially.  Wars have proliferated because of very different views on many topics.  The relative peace and generally increased prosperity since WW II have held fundamental ideological and cultural differences at bay.  However, the relative stagnation of the past few years has begun to scrape away the surface plaster from the underlying cracks.  Manifestations of these tensions are most evident in the rapid rise of nationalist parties/policies (both right and left wing) in many countries in Europe.  The desire to create a ‘union’ that allows these differences to be addressed in peace rather than war is laudatory.  It is just not clear that millennia of differences can be made to go away in the halls of the European Parliament.
2. Massive bureaucracy.  Many countries in Europe (led by France) are near the top of the global charts in terms of percentage of the workforce employed by the public sector.  These folks need something to do, so they create rules and processes then ways to administer and enforce them; then they need to evaluate them, adapt them and reevaluate them, etc.   Not surprisingly, this not only creates massive direct costs (paying the bureaucrats), but the even greater problems of what is needed to understand and comply with these regulations.   Large businesses often vote with their feet and look for jurisdictions with less onerous procedures.   Small businesses often simply fail or just do not get off the ground.  The reasons for many specific rules and regulations start with the best of intentions, but we all understand where the best of intentions can lead…  As in all things, a balance is necessary; for anyone trying to run a business in many jurisdictions within the EU, it is clear that the balance has long since been passed.  The added burden of an EU infrastructure makes things even worse.  At present, it appears that things are, in fact, moving in the wrong direction – expect more impediments, not fewer, if you intend to transact within the Eurozone.
3. Poor structure for effectively redistributing resources/wealth among members.  The EU has evolved without having created a structurally sound approach to handling ‘crisis’ in the economies of its members.  There is no reserve of sufficient size, even to handle the insolvency of one of the smaller members such as Greece.  The level of handwringing and conflict that has emanated from the internal debate on what to do with a country without the resources or resolve to fix its own problems (or a currency it could devalue to attract external investment) clearly illustrates virtually total procedural incoherence.  In the end there is a free-for-all debate, significant brinksmanship and the economic gorilla in the room setting the tone for policy.  To some extent, having Greece as the trial balloon is not a bad scenario to help establish a better working process; unfortunately, there appears to be little progress actually achieved.  If/when Spain, Italy or France approaches the brink, there is little that could be done – and then what?  If you are a richer nation within the union, the downside risks on forced subsidy are real and quite high.  Great Britain is keenly aware of this.
4. A confusion of different laws and regulations in individual countries masks potential benefits from centralization.  The argument above for one centralized set of policies is a hypothetical.  The reality is much confusion, duplication, contradiction, etc.  Candidely, this is not the best of all possible worlds.
5. Immigration.  This is a very tetchy topic and getting more so.  Different countries and cultures face the challenge differently.  The problem with the EU’s necessary one-size-fits-all approach means that the solution, almost axiomatically, actually fits no one at all.  Most countries would like to set their own policies, but cannot do so.  Although, this should not be a core issue, because of terrorist activities, it is the topic that will most influence the Brexit vote.
6. Open borders.  The flow of EU citizens across borders, while conceptually a great idea to build trust and lower animosity, has in fact become an area of significant contention.  The idea of foreigners (other EU members) ‘taking’ the rightful jobs of locals has become very contentious.  And this is nothing compared to anger and fear of immigrants (both legal and illegal) having free run across the Eurozone.  This started as an economic fear, but with the succession of terrorist or terrorist-inspired events, the fear has become much more tangible and visceral.
7. A largely ineffective collective defense/military.  If reigning in the historically recurring military ambitions of Germany is the primary objective, then the military cooperation has been successful.  With regard to handling external issues and threats, the jury remains quite skeptical.  The lack of effectiveness in dealing with the former Yugoslavia or, more recently, Syria and the Ukraine, must raise questions on both its economic and practical validity.

CONCLUSIONS

 In theory, it should be a no-brainer for Britain to remain in the E.U.  Having a second major Western super-power should be good for local and global stability both on a geopolitical and economic basis.  In practical terms, Britain is not a small country, but its ability to maintain the niche it wants (i.e. that of a ‘global’ power) over time, as an independent country is unlikely.  Blending its set of strengths with those of Germany and other nations in the EU, on paper, is a win-win situation.

However, the foundation on which the entire EU is built has many flaws, as it is based on many layers of compromises, rather than solid unitary thinking and long-term sustainability and flexibility.  Whether this entails governance, regulation, finances or any other aspect of the union, remaining is based on faith that the current flaws will be remedied, the lacunae filled in.  With a growing number of member nations and increasing disparities within existing members, the ability to effect meaningful and effective change becomes even more difficult.  It is, therefore, not surprising that many do not have this faith.

Great Britain’s geographic separation (together with a strong navy) has provided it some buffer from the continual historic border vicissitudes on the continent.  It has also contributed to perhaps a greater sense of self-dependence and independence.  A vitiation of its powers to determine access to its borders is, therefore, an even more sensitive topic than for the other proud European countries with long histories.

Furthermore, over the past several hundred years, the strong engrained belief that a combination of self-determination and ingenuity leads to success, although somewhat attenuated with its more recent moves towards social democracy, is at strong odds with the bureaucratic administrative approach espoused by many countries on the continent and by the EU governing body itself.

It is hardly surprising, therefore, that emotions are running so high.  They often do when the repercussions of a ‘victory’ by either side involve so many negatives and so much uncertainty.

It seems a shame a decision of this magnitude is being taken at a time and within a context that secondary issues (such as immigration) dominate the debate.  I cannot understand why Cameron does not, in these closing hours, meet in private with Merkel and seek to do what leaders do which is to make the decisions for which they were elected, rather than putting that onus back on an electorate that does not have access to enough of the information to make a reasonable decision.  The framework is simple:

 

1. Make it clear that if Cameron leaves the room without the necessary agreement, he will publicly change his posture to support Brexit and the referendum’s conclusion will therefore be set.
2. Put forward a set of demands that show clear reasoning and address the areas of greatest concern today, even if they are in conflict with the current goals of other EU members.  The clarity of presentation is extremely important, to allow face to be saved on the other side.
3. Offer a more limited set of concessions, that do not nearly balance the scales, but once again allow face to be saved.
4. Set a clear sunset provision (such as five years) and propose a defined mechanism for how the negotiation will work between now and then.  Part of this will be a commitment that, at that time, the decision will not be made by referendum.