The European Union Without Britain

The decision by 51.9% of British voters to withdraw the United Kingdom from the European Union came as a shock to the rest of Europe, even though polls taken in the weeks and months before the referendum showed that this result was a distinct possibility.  Nevertheless, when it was revealed that Britain would be leaving the EU, politicians, business leaders and investors reacted with shock, leaving the markets in turmoil and Britain’s political establishment in chaos.  The immediate impact was obvious, particularly in Britain, as the British pound fell dramatically and stock markets around the world suffered major losses.  While such an immediate reaction was to be expected, what needs to be determined is what the long-term impact of Britain’s withdraw from the EU will be, not only on Britain, but on the rest of Europe and the West as well.

While most international observers have focused on the EU-wide issues (refugee crisis, economic downturn, etc.) that contributed to a majority of British voters opting to leave the European Union, the key factors in the minds of most British voters were domestic issues.  They included opposition to higher levels of immigration in Britain and concerns that British funds that go to the EU would be better spent at home, issues whose facts were less than clear during the referendum campaign.  Meanwhile, much of the blame for the “Remain” camp’s defeat must be laid at the feet of the usually-pro-EU Labour Party and its disastrous leadership by Jeremy Corbyn, whose unwillingness to stanchly back the “Remain” camp led to less-than-overwhelming support for keeping Britain in the EU among many Labour voters.  Now, Britain faces the prospect of another referendum on Scottish independence (62% of Scottish voters backed EU membership), which might now result in a Scottish withdrawal from the EU, something that would have a similar impact on the UK as Britain’s withdrawal will have on the EU. 

The potential threats to Britain’s impending withdrawal from the European Union appear to outweigh the potential benefits from the UK going it alone.  The single greatest risk to the British economy from this withdrawal is the potential for a major decline in foreign investment in the UK in the coming years.  For decades, Britain has been the preferred location for foreign investment for North American and Asian investors in the European Union, due to factors such as Britain’s domination of the financial and professional services sectors in the EU, Britain’s use of the English language, and widespread trust in Britain’s political and legal systems.  Now, businesses that had invested in the UK as the center of their European operations may now consider moving some of their operations to some of the 27 remaining countries in the EU.  Meanwhile, the level of economic and political volatility in the UK is sure to remain high in the coming years as so much uncertainty surrounds Britain’s withdrawal process.  As such, the UK will lose, at least in the near-term, many of the key economic advantages that it held over its European neighbors and this will undoubtedly cause economic hardship in the UK until it can prove that its economy can prosper outside of the EU.

While the focus of Britain’s withdrawal from the European Union has been on the impact that it will have on the UK, there is little question that there will also be a major impact on the EU.  First, while many EU leaders are quick to point the blame at xenophobia and nationalism in Britain, they must also consider the question of why a majority of voters in one of the EU’s most dynamic and globally-connected countries would chose to withdraw from their organization.  Certainly, the poor management of Europe’s recent string of crises (recessions, Greece, refugees, Ukraine, unemployment, etc.) did little to inspire confidence in the EU’s ability to reverse Europe’s fortunes in the coming years and made it easy for the “Leave” camp to paint the future of the EU in a negative light.  Meanwhile, with the notable exception of Angela Merkel (who is reported to be quite distraught by Brexit), the EU and its largest member states have been led by a series of less than competent leaders in recent years, some of whom have been openly opposed to Britain’s unique role in the EU.  Their role in this European disaster should not be underestimated.

Now, the European Union must face the fact that it has lost a member state that comprised 13% of its population, 17% of its economic output and nearly 20% of its total foreign investment inflows.  Moreover, the British economy has outperformed almost all of the EU’s other developed economies in recent years, while London emerged as the unquestioned center of the European economy.  Of course, the two sides could reach a deal that would allow for the UK and EU economies to remain nearly as integrated as they are now.  However, many EU politicians will be opposed to such a deal, fearing that this could lead to other EU member states not fearing the consequences of abandoning the European Union.  What is certain is that all sides in this issue are entering uncharted waters.  Given the fragile state of the European economy at present, and the major concerns facing the global economy as a whole, the timing of Britain’s withdrawal from the European Union could scarcely have been worse.  As such, the world faces yet another threat to its economic well-being and hopes for a more robust recovery for the global economy could be delayed yet again.