Brexit is not even the EU’s worst problem

Prepare for hard Brexit and push for softish Brexit.

BY Iain Martin | iainmartin1   /  14 October 2016

It is not often that one feels compelled to begin a piece by quoting Justin Trudeau. Yet this week the Canadian Prime Minister made such a wise remark that – just for a moment – it was possible to imagine that those who have condemned young Trudeau as a mere empty suit, a leader who looks like a former member of the boyband N’Sync or one of the taller ones from Take That, are wrong.

What, Trudeau asked, is the point of the European Union? The EU is due to sign a trade deal with Canada, but opposition on the continent is strong. After a meeting with French prime minister Manuel Valls, Trudeau said the other day: “If in a week or two we see that Europe is unable to sign a progressive trade agreement with a country like Canada, well, then with whom will Europe think that it can do business in the years to come?”

That is a cracking question. Canada is a great friend to Europe. It is a developed economy and a sophisticated society, a trusted economic and military ally keen to forge even better links. If the EU turns out to be too scared to respond in kind by signing a deal, then what on earth – to paraphrase Trudeau – is the EU for? Hold that thought.

For understandable reasons, much attention right now is on the UK and the difficult start to Brexit. The government is making a mess of the early stages, getting into internal briefing wars and spats with the sovereign House of Commons, which demands a greater say and a clearer line on the aims.

The response from ministers should be simple and bluntly put. Britain is on a precautionary basis preparing for a so-called hard Brexit, in case nothing else is on offer or can be agreed with the EU in a year or so, but simultaneously it is pushing in a spirit of engagement for a softish Brexit and a series of compromises on migration and trade. The EU says this is impossible. This is how difficult negotiations begin.

In the UK the chief focus at the moment is the sharp fall in the pound, which has been hailed as the end of the world by extremist Remainers and a blessing by hardline Leavers. The truth, as is so often the case, lies somewhere in the middle and the outcome is unknowable. The fall in the pound is a mixed blessing. It will import inflation (because imported fuel, commodities, food, machinery and goods will become more expensive) but it should prove a boon to exporters. Britain is in the midst of a tourist boom, with London and other cities packed with visitors still. In the age of online booking, last minute decisions and reservations are easy to make depending on forex fluctuations. There are reports of London retailers selling unprecedented amounts of goods for this time of year.

There is a troubling aspect too. The markets are marking down Britain, and the rise in prices will mean a squeeze on living standards in six months time.

Meanwhile, when Sterling devalued in 1992, after the ERM crisis, interest rates could come down from a high to boost lending and growth. This time they are already almost at rock bottom and have been for years. They will have to rise if too much inflation is imported, which will apply upward pressure on the pound. Mark Carney, the Governor of the Bank of England, declared this week that he is happy to see an “overshoot”, that is inflation a little above target, if it does not get out of hand. Let’s see.

It remains extremely difficult to get a reliable readout on the likely consequences because medialand is in the grip of a bad case of confirmation bias. This week’s scare was: Brexit killed Marmite, the popular British spread. No, it didn’t.

Some Remainers in the media seem to have gone completely nuts. Some Leavers also have their fingers in their ears while they shout “la, la, la” and refuse to admit weakness. Even moderates on both sides do it a bit, preferring to highlight the finding or new statistic that confirms our case or the position we took in the referendum. That said, everyone needs to get a bloody grip. Brexit will be bumpy and take years. But it is not World War II, or III.

There is another obstacle blocking our view. We Brits are – barring a few diplomats, academics and business people – much more myopic on Europe than we used to be. This is curious. More of us travel, and eat and drink European produce and think of ourselves as internationalists.

As Walter Ellis wrote recently for Reaction, we should not underestimate the impact of the decline in newspapers (mid-market and up-market) having bureaus in major European centres, as was the norm 40 years ago. Few news outlets now have much regular coverage of Europe beyond Brussels and perhaps Paris and a bit of Berlin. We see Europe mainly through Brussels and the institutions of the EU.

This makes it more difficult for us to clearly see that the EU is in a terrible mess, although the suspicion that it was broken helped drive the Brexit vote. It is much worse than we thought even a few months ago. The currency – of which London is the trading centre – is still highly fragile and susceptible to a return of the unresolved debt crisis. Even so, foreign ministers of small EU countries expecting Germany to pay the bill shout about punishing Britain for leaving. They cannot know what they’re doing. I keep saying it. Blow up London and you may blow up the euro. This is self-harm if it happens. The City – a global hub – will be fine once the carnage subsides.

Meanwhile, some of Italy’s banks continue to struggle, badly. Germany’s biggest banks are ailing. Greece now has the next stage of its bailout, but demands debt relief. France and Germany have tricky presidential elections coming next year (France in the Spring and Germany in the Autumn). Austria with the far right rising is volatile. And I haven’t even mentioned the migration crisis which has not gone away, to say nothing of porous borders and terrorism in the age of Islamic State. The Hungarians and their allies continue to goad the German government. The 27 is reported in the UK as speaking as one. Come off it.

In this context, Brexit is barely even the biggest problem the EU has. The EU’s point (to answer Trudeau) has become self-preservation and the survival of a broken organisation that has pushed too far on integration rather than being content to stay a trading alliance. Even when Britain tried to get modest reforms under David Cameron, the EU clung to mantras about “the four freedoms” – including open borders – as though they were holy writ and not utopian aspirations invented by politicians less than seventy years ago.
The EU mess could lead us in one of two directions in regards to Brexit. It might not help the doing of a deal, if sensible Germany tries after its elections for a compromise and others – who take German money through the EU – refuse to move. Or European dysfunction and a realisation that London is critical to the eurozone (its dominance of trading is what makes the giant eurozone debt machine go round) may lead to compromise. I hope so.

As I said: prepare for hard Brexit and push for softish Brexit.

Have a good weekend.

Iain Martin,
Editor and co-founder,