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Too Big To Fail: Why The BREXIT That Doesn’t Kill You Makes You Stronger

Too Big To Fail: Why The Brexit That Doesn’t Kill You Makes You Stronger

Tentative judgements on likelihoods.

Gabriel Elefteriu

29 June 2016

There has been no shortage of apocalyptic predictions for the future of Britain outside the EU, both before and after the referendum. Six days in, those who had expected a financial collapse of Britain are scratching their heads as the pound has rebounded to 1.34 and the FTSE100 has recovered all losses since the vote and continues to rise (it’s now at the highest since April). Of course it will all go down again to some degree – celebrations are premature – but already something’s not quite right with this picture. It was supposed to be the end of the world; instead, Angela Merkel is calm, Barack Obama is bemused about the post-vote “hysteria”, and the Governor of the Bank of England is ready.

Nevertheless, there are still predictions aplenty that Britain will break up, collapse economically, and generally become a geopolitical irrelevance: a “little England,” a tiny little poor island floating off the coast of a shining, prosperous EU.

What doesn’t kill you makes you stronger

But what if none  – or little  – of thisreally comes to pass? What if Britain successfully navigates the treacherous Brexit waters and makes it safely on the other side? It is in fact more likely than not that at that point Britain will find itself in the strongest geopolitical position in the Western hemisphere in living memory. Around 2020, Britain will have emerged as a fully sovereign, still a united kingdom (see about Scotland below), and stable country with a largely unscathed economy – certainly in a position to recover any economic losses suffered during the Brexit passage. Its military profile will have been enhanced by increased, not decreased, defence investments (likely required in the context of the EU negotiations and paid for with foreign aid money), and a stronger role in NATO, free of Brussels entanglements. Key military capabilities such as the new aircraft carriers are also scheduled to come online right at that point, reconstituting British global power projection.

Across the Channel, the EU will likely be in continued political turmoil from rising Euroscepticism, and quite possibly facing severe economic difficulties as well – Italy is a short step away from crisis, and don’t even ask about Greece. The attempt by Germany to “show leadership” and “unify the continent” (per the chilling exhortation of the head of the Bundestag’s Foreign Affairs Committee) will backfire eventually, as the radical sovereignty/material benefits trade-offs will become too unacceptable quite fast for a range of countries like Poland or Hungary. On the other hand, if Germany does not do this and attempts a real and deep reform of the EU, it will likely lose control of the process and mayhem will ensue even sooner at current levels of disaffection. Because the EU has refused gradual reform when there was still time, it now faces an impossible choice. Either way, Brexit Britain will be, by a significant margin and by force of circumstance, in a dominating position in the European space at that stage. In this sense, Britain is now playing for much higher stakes than it is commonly understood.

Signs of intelligence failure

The elements that feed into this scenario – which is the complete opposite to that of the expected UK collapse – share the main features of what scholars of intelligence call classic cases of “intelligence failure” – from the Pearl Harbor attack, to the breakout of the Yom Kippur War, to the 9/11 attacks. These were events so outside the conventional thinking of theexperts at the time, that no one saw them coming. Long-held assumptions, whether the invulnerability of Pearl Harbor or the non-viability of European existence outside the EU, can easily acquire the feeling of reality itself. Sometimes real reality drops by and reveals them for what they are: just assumptions.

The negotiation

The assumption of a post-Brexit British collapse is based on the notion that rump-EU will be able to “dictate” the terms of separation on a take-it-or-leave-it basis. It is clear that the central negotiating point will be UK’s continued access to the Single Market (SM). The “sacred” EU rules are that this privilege is inseparable from accepting the so-called four freedoms, including freedom of movement (FoM) which was central to the Leave vote in the first place.

This will be a highly complex negotiation, but in the end it will all turn on whether the UK can obtain a concession from the EU on FoM. Brussels is adamant there can be absolutely no flexibility on this point – “no cherry picking” as Angela Merkel put it. Yet the UK government has a clear popular mandate won in the biggest vote in British history to achieve some manner of control over FoM; it is an absolute political requirement at home. Access to the SM is likewise an essential economic necessity. Both sides will drive a hard bargain – but the EU is likely to blink first, and the UK will get to pick some cherries at least, in the end.

Why would this be so? Because, just like a large bank whose collapse would bring down the entire financial system, the UK is “too big to fail” geopolitically. Neither the EU – particularly Germany – nor the United States can afford to ignore the mutual dependency to the UK (at different levels, of course) in practice.

The economic factor

For the EU, simply letting Britain “go” would be deeply damaging even if the EU was not beset by severe problems of its own. Objectively speaking, at the scale of the EU, Britain is an economic colossus second only to Germany – and not that far behind. Pain inflicted on the UK economy will have corresponding effects in the EU, at the worst possible time. Related to this, it is interesting to note how some are quick to suspend the reality of contemporary economic interconnectedness when suits, in order to cast the EU in the future role of a mere spectator to an exclusively-British mayhem.

The military factor

Britain is also the strongest military power in Europe. Brexit only means rump-EU countries will become more dependent than ever on the Anglo-American-dominated NATO, while within the EU the “division of labour” idea that France can now lead on defence and Germany on economics is only setting the scene for grievous political crises in the future. In NATO, the UK’s profile will increase as it extricates itself from formal political commitments and obligations to Brussels, which will also allow it to strengthen relations with the US. This is not about disengaging from Europe strategically – that is objectively impossible – but about the strictly institutional level. Furthermore, contrary to many expectations of a contraction in UK defence spending as part of a presumed “Brexit recession cuts” programme, London is in fact likely to increase military outlays – paid for, as mentioned, with money from the foreign aid budget which now stands at an indefensible £12bn. This is precisely because military power as contribution to common security provides an ideal political leverage in the upcoming negotiations and in the context of NATO. As security threats continue to pile on the EU from the east and south, alienating the UK in any serious way would simply be irresponsible for Brussels.

These sort of inter-linkages between the EU and UK are replicated virtually in every domain, making  any potential “punitive” EU strategy too costly and pointless. Britain’s science and academic base, for example, is unequalled in many respects and in the top 3 in most; there is no serious question of severing cross-Channel links in these areas, on either side. After all, Cambridge and Oxford universities are in Britain, not on the continent: free movement of students from within the EU to Britain is patently a shared interest.

The American Factor

Analyses since Brexit have largely ignored another factor in this story: the United States. Much will depend on US support for Britain in relation to the EU. John Kerry flew to London immediately after the vote, urging a “sensible” approach from both sides going forward.

The key in all this is, again, Britain’s role in international security. Washington understands that, while some in the EU might be perfectly happy to see the UK implode post-Brexit, this will also deal a massive blow to the international security architecture – precisely when more, not less, British involvement is needed, especially from a US perspective; and precisely when the EU will now be increasingly absorbed with its internal difficulties. It is therefore in America’s interest – quite apart from moral obligations – to support Britain in its Brexit hour of need.

Immediate concerns

Questions still abound on whether any of this will come to pass, and whether the UK can hold together before and through the negotiations. The most likely answer to both is yes.

The referendum result will stand and Article 50 will be triggered. Calls to disregard/cancel the vote are dangerously undemocratic and this has been ruled out by the leaders of all political parties. Disregarding the biggest electoral exercise in UK history will simply blow up the constitution and British democracy; it is next to impossible.

It is worth noting, as well, that talk about a re-run or cancelling is only pushed by a very vocal but comparatively small part of the (largely leftwing) UK public and media. These are precisely the “elites” and the “establishment” that a large part of the rest of the country voted against. What they are doing now is simply digging themselves deeper into the credibility hole they are in. It should also be kept in mind that the Leave camp has stayed very quiet so far – so most of what is now on display in the media is only one side of the argument.

The next Prime minister will come in with a clear mandate from the electorate to trigger Article 50. He/she will have no credible constitutional arguments not to do it.

Regarding the economy, the market/sterling turmoil – which has already abated, but might well return soon – looks worse than it is. This is not an economic crisis, there has been no economic event – such as the house market bubble bursting in 2008 in the US. The volatility is driven by the political crisis and by perception. The fundamentals are strong, the system is resilient. Yes there will be some losses, even a recession, on the back of a dent in confidence, but not much more. The only real problems could come as second-order effects from a global crisis – but that would then affect everyone, not just Britain.

The politics

UK politics has been upended. That is to be expected, and it will take a while until things settle down; but they will once the new Tory leadership is in place by 9 September. Labour’s deep crisis is likely to continue unabated, and Jeremy Corbyn might well survive in post as leader.

That being said, the UK government is fully functional. David Cameron is still at the helm. Nothing has changed. A Brexit planning unit has been set up in the Cabinet Office, which will start cross-Government work on the next steps. After Cameron hands over the government to the next Tory leader, there might be a general election in November or December. That is where the real risk lies for Britain: anything other than a strong Tory majority win will weaken the Government ahead of the EU negotiations.

The final Brexit deal with the EU will depend more on political battles in London than in Brussels. There are now two camps in British politics: the Radicals (who want a clean break from the EU and a full engagement with the rest of the world), and the Moderates (who want the closest thing possible to “back in the EU”, and who reject global engagement because they feel that after the Brexit “betrayal” Britain must now appease the EU and focus everything on Europe). As always in British politics, the result is likely to be a muddled mix: likely, a semi-win for Moderates on relatively loose (i.e. with minimal controls) freedom of labour as part of an EEA-type deal; and a semi-win for Radicals on disentanglement from Brussels and a quasi-pivot away from Europe and towards the wider world, particularly the Anglosphere.

Scotland

Scottish independence in a Brexit context is absolutely the greatest risk to the UK’s standing. It will find it hard to recover from this, and the special relationship will be irreparably damaged.

But it is unlikely that there will be another Scottish referendum. Latest polls show a 59% support for independence in Scotland, but only 41.9% would want another referendum as opposed to 44.7% who wouldn’t (as of 25 June).

The SNP argument is that Scotland is about to be taken out of the EU against its will. But, while Scotland did vote 62% Remain, the intensity of the vote (turnout) was lower than in the 2014 independence referendum (67% vs 84.6%). So it is not clear whether attachment to the EU is at high enough levels to override attachment to the UK.

Related to this, “independence” would inevitably mean a very different deal for Scotland this time compared to 2014. This time, it will mean an exit from the UK internal market, an instant “black hole” in its finances of about £10bn (because of the intervening collapse of the oil price), a controlled border, adopting the Euro, and signing up to the unrestricted “ever closer union” project that Brussels will only accelerate and from which Scotland would have been protected both before and after Brexit if it stayed in the UK. Ironically, voting for independence from the UK, Scotland will find itself less independent than ever.

Most of these arguments have been largely kept out of the public post-Brexit conversation so far, and this accounts for the lopsided current narrative about the almost inevitable Scottish referendum. Tellingly, Nicola Sturgeon, the First Minister of Scotland, has been careful not to declare a referendum in the wake of the 23 June vote as many feared she would do. This is because she understands that the case – when it comes down to it – is against her. But she is playing Brexit with huge deftness, extracting every ounce of political capital for herself from this crisis.

In any event, David Cameron outlined a clever idea to deal with Scottish independence demands. He said in the Commons on Monday 27th that in the Brexit negotiations with the EU we should aim to keep Scotland in both the UK internal market and the EU single market. This seems to mean a potential mini-deal customised for Scotland within the wider Brexit deal, that would keep Scotland in the EEA (irrespective of what the rest of the UK does) together with freedom of movement which would apply only to Scotland. Despite the legal and political difficulties, this would be something in the realm of possibility.

Conclusion

It is said that life is only 10% things that happen to you, and 90% how you react to them. The same is true for Brexit: this is a political event, not a material catastrophe wrought by war or structural economic problems, and UK’s fundamental position and assets are unchanged. But much depends on how it is handled by British politicians. They should step up to the challenge and unite in making Brexit work.

Save some major political blunder, Britain will approach the negotiations with the EU from a strong position. The logic of the situation far more resembles the “mutually-assured destruction” conundrum of the cold war, than the treatment of France at the Congress of Vienna. UK’s ejection from the EU without a deal at the 2-year cut-off point is simply not a viable option for Brussels. With a new prime minister in office and the world overcoming its post-Brexit shock and adjusting to the new situation, Britain will be ready for constructive talks.

No doubt these negotiations will be gruelling. But Britain is “too big to fail” and there are limits to how far the EU can go before it starts inflicting unbearable costs upon itself. It is more likely than not that Britain will get away with a good deal, just as it is more likely than not that the EU will get into deeper internal political and economic troubles. The bottom line for Brexit, therefore, might well be the strongest Britain – relative to the Continent – in living memory. The writing is on the wall.

 

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