Brexit: the unintended consequences.

Position::A SYMPOSIUM OF VIEWS - Cover story
 
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Bold policy changes always seem to produce unintended consequences, both favorable and unfavorable. TIE asked more than thirty noted experts to share their analysis of the potential unintended consequences--financial, economic, political, or social--of a British exit from the European Union.

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Britain has been an essential part of an opinion group defending more market-based and liberal approaches.

MIROSLAV SINGER

Governor, Czech National Bank

There is an ongoing debate about the economic merits and demerits of Brexit in the United Kingdom. However, from my point of view as a central banker from a mid-sized and very open Central European economy, the strictly economic arguments are in some sense overwhelmed by my own, often very personal experience with the "British approach" to the European discussions about the development of the regulatory and supervisory framework for the EU financial market, especially after the period of intense financial turmoil.

But first, let me state clearly that the United Kingdom is an important trading partner for the Czech economy. It accounts for 5.3 percent of Czech exports and 2.1 percent of Czech imports, which puts it in fourth and thirteenth place, respectively, in our foreign trade partner ranking. It is also a source of foreign direct investment, being the eleventh largest investor in my country. Some of its brands--Vodafone, Tesco, and Diageo--are more than familiar to the Czech public. BBC products are a staple on our TV channels. The Czech Air Force seems more than happy with its UK/Swedish Gripen fighters. All this may change with Brexit, especially since it is far from assured that it would be handled smoothly.

For us at the Czech National Bank, the most important issue has been the role played by UK representatives in the discussions about the new European financial market framework. We found ourselves on a close platform, sharing and supporting similar positions on numerous issues, be it the creation and powers of European financial industry agencies (the European Banking Authority, the European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority), the establishment of the Single Supervisory Mechanism and its relationship with supervisors in non-euro-area countries, Basel IB and Solvency II issues, and resolution issues and pan-European resolution funds, to name just a few of the most significant ones. On a more general level, we often find ourselves together with the United Kingdom in an opinion group defending more market-based and liberal approaches to various elements of financial market frameworks.

Yet our opinions can differ. First, we have almost completely different experiences with our countries' financial industries during the Great Recession. The Czech financial sector served as a robust buffer, shielding us from some of the worst shocks. The British have had a rather different experience with their main banks, which to some extent drives their position on risks in retail banking. This difference is heightened by the difference in the relative weight of financial institutions in our economies, as expressed by the size of the financial sector in relation to GDP. The fact that this measure is three to four times larger in the United Kingdom than in the Czech Republic gives rise to different attitudes toward the risk of crisis in the financial industry and to possible crisis resolution. In a nutshell, in sharp contrast to the United Kingdom, the Czech Republic can--if worse comes to worst--afford to close one of its major banks, guarantee its liabilities, and take it into state hands to be recapitalized and later sold, without ruining its sovereign rating.

Another source of friction between the Czech and UK positions stems from the United Kingdom's weight in Europe. It is unthinkable for us to push on the European level an agenda that almost exclusively solves the problems or serves the interests of our own financial industry. The United Kingdom pushed Europe on, for example, the two Markets in Financial Instruments Directive regulatory frameworks, which were supposed to make stock markets and their platforms across Europe more effective, but which in reality placed a heavier regulatory workload on our institutions without really benefiting anyone. I am sure in retrospect that the time spent on MiFID could have been better spent on other issues, such as cross-border EU resolution procedures. The current discussion on the United Kingdom's approach to new ways of masking bonus schemes in banking is another example. This has again been an unhappy experience for us, and here I intentionally desist from mentioning particular cases where UK representatives have cut their own deals and the United Kingdom has abandoned its previously shared positions with us in Central Europe. To summarize, UK representatives often have British exclusiveness deep in their DNA, at the expense of cooperation with other countries.

Still, I am more than certain that the positives of the British presence in the European Union far outweigh our occasional cases of frustration with some of the United Kingdom's less beneficial attitudes toward Europe. This frustration stems from the fact that for my country, the most desirable principles of the European Union include respect for rules--even in cases where we disagreed with them during construction--and equal weights of countries. I have full trust in the wisdom of the British public. They will make their decision according to what they believe is in the best interests of their country. I must also say, however, that it would be a great pity for us to lose the United Kingdom from the European Union.

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The European Union would do what it could to squeeze British financial services out of the Continent.

HANS-WERNER SINN

President, Ho Institute for Economic Research, and Professor of Economics and Public Finance, University of Munich

The British liaison with the European Union has admittedly been difficult. Although they are Europeans, the British still say they travel to Europe when they cross the Channel. With some reluctance, the United Kingdom joined the European Economic Community in 1973, and the French were reluctant to accept it, after French President de Gaulle had vetoed British accession in 1963.

In the meantime, the United Kingdom's trade links with the Continent have increased significantly. The British economy has become a solid and firmly interwoven part of the EU economy, and the City of London has become a hub connecting the EU capital market with the rest of the world.

If Britain left the European Union, all this would be put at risk. In particular, the European Union would do what it could to squeeze British financial services out of the Continent to give EU banks a competitive advantage. Given that the financial sector contributes 7 percent to British GDP which is twice that sector's contribution to German GDP, this would probably be the biggest cost to Britain.

For Europe, a Brexit would have similarly problematic consequences as it would lose gains from trade. Even though European banks would be glad to get rid of their competitors, private households and business sectors importing from Britain would suffer significantly as prices of goods and services would go up.

From a political perspective, a Brexit would be problematic insofar as the European Union would be subject to French planification and lose sight of the basic principles of a market economy. British liberalism was one of the reasons why Germany had advocated Britain's accession in 1973. Losing the United Kingdom would risk building a Fortress Europe rather than a free trade area and drifting even further in the direction of a dirigiste economy.

And, what is more, how could a United Europe become a respectable power in world politics if Britain with its worldwide cultural network and its armed forces no longer participated? No, by all means, Britain must stay in the European Union for its own sake and for the sake of European peace and prosperity.

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Brexit that weakens Europe and weakens Britain also weakens the United States.

JOSEPH S. NYE, JR.

University Distinguished Service Professor, Harvard University, former U.S. Assistant Secretary of Defense, and author, Is the American Century Over? (2015)

In the words of Douglas Alexander, a former Shadow Foreign Secretary, "since the end of World War II, America has been the system operator of international order built on a strong, stable Transatlantic Alliance supported by the twin pillars of NATO and the EU. If Britain leaves the EU, America's closest ally would be marginalized ... and the whole European project at risk of unraveling at precisely the time new economic and security threats confront the West." It is no wonder that Vladimir Putin would welcome "Brexit."

The geopolitical consequences of Brexit might not appear immediately. The European Union might temporarily pull together, but there would be damage to the sense of mission and to Europe's soft power of attraction. Problems of financial stability and dealing with immigration would be harder to manage. Britain might see a revival of Scottish separatism, and an acceleration of its inward-turning trends of recent years. And over the longer run, the effects on the global balance of power and the liberal international order would be negative.

When it acts as an entity, Europe is the largest economy in the world, and its population of nearly 500 million is considerably larger than America's 325 million. American per capita income is higher than that of the

European Union, but in terms of human capital, technology, and exports, Europe is very much an economic peer.

In terms of military expenditure, Europe is second only to the United States with 15 percent of the world total, compared to 12 percent for China and 5 percent for Russia (though the number is somewhat misleading...

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