Let’s prepare for dismantling the European Union:
Probably the best – if not the only - way to prevent it!
There exists a quasi-unanimous view that if the European Union is to survive it needs to be profoundly reformed. That is where the consensus ends!
There are those who believe that radical reform is politically impossible in the current situation and those who contend that without it, the Union is condemned to oblivion; there are those who advocate the end of “budgetary austerity” and those who make it conditional on instituting “federalism” within EMU; there are those who favour European policies in matters of defence, immigration, environment, digital and energy markets and those who cling to the prerogatives of national sovereignty, etc. Finally Brexit is, for the first time, confronting the EU with the possibility of shrinking; despite being of a fundamentally different nature because it presupposes the survival of the EU, the debate surrounding its consequences offers some interesting parallels though it is far too early to draw any conclusions.
In the face of such fundamental contradictions, any self-respecting government must consider the dismemberment of the EU as a “material possibility” and consequently must prepare for the eventuality. The shock created by Brexit took both Europeans and British by surprise: it is imperative to avoid being caught off guard once again, because the dire consequences of the EU’s collapse would be infinitely harsher, not only on European citizens (including the British) but would spread rapidly worldwide.
Far from wishing to instill “fear” in the minds of European citizens, the aim is to inform them as objectively as possible on the likely consequences of dispensing with the EU, knowing full well that any scenario is uncertain and often dependent on factors beyond the control of the authorities. Public opinion is entitled to be kept informed and governments should be under the obligation to communicate on the anticipated consequences and the proposed remedies in the event that the intensive efforts of those striving to achieve an “ever closer Union” prove insufficient to reach an agreement, whether on the objective or the means of implementing it.
The remarks that follow are predicated on the dismemberment of the EU, implying the simultaneous end of EMU, of the Single Market and of the Schengen agreements. They exclude the alternative of a cobbled compromise which would only postpone the ultimate demise of the Union, rendering its unwinding even more painful; it does not reject reaching agreement on a comprehensive roadmap spread over the necessary timeframe to implement a deep reform of the EU.
Dismembering the EU in order to reassert the primacy of “national sovereignty”, demands reinstating national currencies, reestablishing border controls and imposing appropriate limits to the free circulation of people, goods and capital as well as the freedom of establishment. It would also mean the end of all EU-wide policies such as the Common Agricultural Policy (CAP), the program for research and innovation, etc.
Should some Member States wish to safeguard privileged relationships among themselves, such agreements could only enter into force once the provisions of the EU Treaty are no longer in effect. Therefore, in the (unlikely) event that an orderly process could be implemented without a serious crisis (quickly spiraling out of control), negotiations would create a long period of uncertainty, which would prove incompatible with Member State’s wishes to implement their own independent economic, financial and social programs.
The return to national currencies and national sovereignty – for EMU participants – would provide national governments with management tools which they had been denied as members of the Eurozone. Specifically they concern the ability to devalue and, in agreement with their respective Central Banks, to set interest rates or have recourse to interventions previously implemented by the ECB.
However, as a result of recovering monetary sovereignty, currencies would become fully exposed to international financial markets; this should lead – inevitably – to regulating foreign exchange operations, at least initially, to avoid unrestricted capital flight from countries whose currencies would be deemed vulnerable. Such measures were forced on Greece and Cyprus during their crisis, even though these countries remained in the EMU fold; dismantling EMU would magnify considerably the scope for disruption.
Uncertainty concerning the external value of the “new” currencies would jeopardize the stability of commercial transactions which was a strong feature of EMU and which encouraged a voluntary exchange rate discipline among all Single Market participants, particularly for EMU postulants. A scenario of “competitive devaluations” would lead very probably to protectionism and would jeopardize all the advantages of the single market (the debate in Britain over the loss of access to the single market illustrates its importance).
In addition to the external consequences of reinstating national currencies, the internal economy of each EMU Member would be subject to the severe shock induced by “redenomination” which would create an endless source of legal challenges in respect to the execution of € denominated contracts: indeed, the principle of the “continuity of contracts” which presided so efficiently to the smooth transfer of monetary obligations denominated in the 10 initial tributary currencies to euro denominated contracts is not reversible. This uncertainty would spread to all € denominated contracts whomever the contractors, wherever their location or whatever the law under which they were concluded. When one realizes that the City of London boasts of settling over 70% of transnational contracts denominated in €, one can just imagine the chaos that will result!
A first conclusion can be drawn at this point: the end of EMU would lead to a significant period of economic and financial instability in Europe, the ramifications of which would rapidly spread to the entire world. Every citizen would be affected and, as always in such cases, the most vulnerable would be among the hardest hit.
One of the main drivers that underpins the yearning for “national sovereignty” relates to immigration. Leaving aside the question of the feasibility of controlling effectively migration stemming from geopolitical events (war, poverty, revolutions…) or natural ones (global warming, pandemics, famine…), it is clear that any serious attempt to succeed implies reinstating national border controls. Important investments in infrastructure and personnel will be required as well as negotiating bilateral agreements with neighboring countries. (Viz. the costs of the single border post in Calais between France and the UK).
Combined with exchange controls, border controls would mark the end of the Schengen agreements with devastating consequences on the economy of all Member States. Important restrictions would impair trans-border movement of people and goods which had previously being taken for granted. A mild foretaste is illustrated by the Brexit vote which, even without leading to exchange controls, has already considerably reduced travel abroad by the British this summer following the devaluation of Sterling. In addition, the capacity of EU immigrants to the UK to support relatives back home has been commensurately amputated.
Increased costs and exchange rate risks in a post EU era, will not only reduce international trade but is liable to reduce foreign direct investment in all countries affected, leading to the likelihood of higher unemployment (the probable impact on the City of London of losing access to the single market illustrates the point). Indeed, contrary to what Brexeteers like to underline when pointing to how successful third countries are in trading with the EU, it is not the value or the balance of trade between the parties that is of key importance, but rather the size of the internal market and the protection it provides to its membership.
It is also the reason why foreign direct investment in one EU Member State is highly valued as it provides free movement of goods and services throughout the area, as the British are about to learn to their detriment. Countries with a reduced sized market and an independent currency are far more exposed and vulnerable to world economic and financial markets than those whose economy is more marginally dependent on international trade; it is precisely the case of the USA, China and is still the case for participants in the single market as long as it lasts; these countries can face adverse world conditions with greater “benign neglect” than those who are more heavily dependent on them!
Exiting the EU would also have budgetary implications for Member States: clearly for all those who receive funds in excess of their respective contributions , but also for net contributors to the EU budget because national budgets will have to replace some of lost EU subsidies as well as suffering a likely reduction in tax receipts due to a slowing economy. For instance, the British government has already committed to fully compensate for the loss of CAP and research subsidies while simultaneously abandoning the previous aim to return to a balanced budget by the end of the Parliament.
It should also be evident that dismembering the EU is incompatible with instituting a common defense and security policy or implementing common “European” energy or digital policies, on which the Commission and some Member States are pinning their hopes of revitalizing the EU project. Such proposals only make sense to the extent that they are additional and not a substitute for the existing priorities of completing EMU and setting up a common immigration policy including joint control of EU’s external borders, two objectives that are precisely among those contested by several Member States and decried by all Eurosceptics.
In conclusion, informing the citizen of the difficulties of dismembering the Union and its likely consequences must become a priority if the authorities wish to keep a firm control over the process; failing to do so is likely to generate uncontrollable social unrest and ignite a global crisis comparable to the 1930’s, the memory of which and its ultimate resolution through WWII, has been largely forgotten. Laying out transparently the enormity of the challenge as well as the risks involved constitute probably the best chance of convincing Europeans that, rather than cowing to the deadly sirens of national-populism, it is in their own interest to back the revitalizing of the EU project, which alone is capable of protecting their legitimate interests in a globalized world.
Brussels, 21st September 2016
Paul N. Goldschmidt
Director, European Commission (ret.); Member of the Steering Committee of the Thomas More Institute.
Tel: +32 (02) 6475310 +33 (04) 94732015 Mob: +32 (0497) 549259