Bill Jamieson Brexit, Frexit, Grexit, take your exit pick

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Brexit, Frexit, Grexit, take your exit pick…

The real danger of Brexit may be for the EU itself.

Living in a shared building has compensations, but building security is not always one of them. Years ago I lived in a basement flat with the responsibilities and costs of maintenance and repair communally shared.

All went well… until it didn’t. An outbreak of dry rot two floors up and a hefty estimate for treatment soon had the flat owners at each other’s throats. Legal wrangling dragged on for months.

One day the council building inspectors called. I knew something was wrong when they donned hard hats the moment they walked in.

“The problem here,” said one, looking up at the external wall, “is that the only thing holding up your house is the lateral tension of the brickwork. Once that goes the whole lot collapses.”

Until then I never knew lateral tension could hold up anything. But from that moment on I couldn’t walk into the lounge without a hard hat. And as soon as the lengthy work was done I couldn’t wait to move out.

‘Lateral tension’ is not confined to buildings. It is present in most political institutions – and certainly in the European Union. When pressure builds and the brickwork starts to loosen it all becomes unsafe.

So far, debate in Britain over the EU referendum has focused on the economic implications for the UK, with a contingent risk of a UK break-up were voters in England and Wales to vote ‘Leave’ while Scottish voters opted for ‘Remain’.

We might fairly dismiss the risk here as small. But might the UK’s referendum exercise accelerate a loosening of the brickwork that holds the entire EU together?

A ‘Brexit’ is not a UK-only specific risk. To the outside world the relevance of the UK referendum is the potential impact on the cohesiveness of the EU as a whole. While the UK is not in the single currency area, a UK exit from the EU would be viewed as more damaging than that of a Greek exit (or ‘Grexit’) which so dominated markets a year or so ago.

Richard Batley, economist at Lombard Street Research, cites two reasons why this might be so. One is size: the UK is the second largest EU economy after Germany (or third after France, depending who’s measuring). And second, he writes, Brexit would be a voluntary decision “and, once loose, the ‘exit genie’ could not be put away.” Before too long, searching questions would be raised over the prospect of a growing Spanish/Catalan division over independence from the EU (‘Spexit’), while euro-sceptic forces are gaining ground in France (‘Frexit’) and other EU countries.

What is particularly worrying for the pro-EU elites is the fusion of two potent political grievances – anti-austerity and antiimmigration – into calls for a reclamation of sovereignty and pressure for a UK-style referendum vote on EU membership.

Fanciful? A few years ago it was unthinkable that France would chaff at the ties that bind her to the EU project. But opinion polls show that the Front National (FN), the only ‘mainstream’ party advocating a referendum on EU membership, has made big gains. The polls currently show its leader, Marine Le Pen, narrowly winning the first round of the presidential election and then narrowly losing the second round if facing a PS (left of centre) rival, such as the incumbent President Hollande, or more decisively losing against a UMP (right of centre) candidate, possibly Alain Juppé or Nicolas Sarkozy.

However, the UMP/FN gap is narrowing, and it is worth remembering that the UK referendum is the result of a moderate, right-of-centre ‘party of government’ (the Conservative Party) adopting the policy of an insurgent party (UKIP) in order to stem its advance; a relationship mirrored with the UMP and FN in France.

As Batley argues, “The risk is that, at the time of the next euro area economic crisis, whenever it occurs, European populist politicians seeking to protect their electorates from further deflationary pain, will see euro exit as a more ‘reasonable’ policy option than during the last crisis. The Brexit referendum, perhaps irrespective of its actual outturn, is simply an early manifestation of this dawning reality.”

To the outside world the relevance of the UK referendum is the potential impact on the cohesiveness of the EU as a whole.

A weak pound bad news?

Meanwhile, the recent weakness in sterling – the pound falling at one point in late February to its lowest point since March 2009 – has been blamed on the strength of the Conservative Party rebellion over Europe and the campaign for Britain to leave the EU. But is the pound’s fall all really about ‘Brexit’? Currency traders keep a close eye on bookies’ odds as a guide to the vote outcome. And in the week that the pound fell sharply, the bookies are giving ‘Remain’ a 69 per cent probability against ‘Leave’s 31 per cent.

Just as relevant a factor here surely is that the US dollar has been strong against most currencies. So, in considering the pound’s drop, US dollar strength should also be factored in. Note also that there has been nothing like as strong a sterling sell-off against the euro.

And is a lower pound such bad news? For many struggling UK exporters, they will view it as just the fillip they have long needed. n