Bill Jamieson BREXIT: Just the end of the beginning?

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

BREXIT: Just the end of the beginning?

For the UK Brexit is an historic turning. But for the EU itself it could be an existential crisis.

Seldom can a single event have catalysed dramatic change as the UK’s vote to leave the EU. It has swept away the Prime Minister, sent the pound tumbling, unleashed a wrecking ball that has destroyed senior ‘Leave’ politicians, led to a ‘Remain’ supporter becoming the new Prime Minister, triggered a leadership convulsion in the Labour Party which could split it irrevocably – and catalysed central bank action to stave off a feared recession.

All this was packed into just two momentous weeks: a pivotal convulsion that has not just catalysed a new relationship with the EU but changed the face of Britain irrevocably.

After all this, you might think, we are surely due a respite. That, for tens of thousands of businesses trying to survive through this extraordinary turmoil, is urgently wished for. But we have seen not an end to this tumult, only the end of the beginning – and not just in the UK but across the continent. The departure of the UK would subtract 13 per cent from EU GDP and deprive it of its third largest budget contributor. The UK vote may have lit a slow burning but devastating fuse.

Euroscepticism is by no means confined to the UK but is on the rise across Europe. A report from the Washington-based non-partisan Pew Research Centre earlier this summer found that only a slim majority – a median of 51 per cent – of respondents across 10 EU countries still favoured the EU.

Forty-two per cent want more power returned to their national capitals. It found that a majority of people were unfavourable towards the EU in Greece (71 per cent) and France (61 per cent). That followed a steep decline in EU favourability in France (down 17 percentage points from 2015 to 2016) and Spain (down 16 points over the same period). In five of the six nations surveyed in both 2015 and 2016, it found favourability had declined.

European Commission president JeanClaude Juncker may ooze confidence that it is business as usual; that BREXIT is a purely UK problem; that the UK will struggle with years of complex renegotiation of trade deals and that EU integration can carry on – and indeed may now be able to do so at a faster pace.

But that would be to gloss over growing political risk in key eurozone countries – and two key flashpoints in the months ahead. Italy, with a banking system staggering under £300 billion of bad debt, faces a critical constitutional referendum in the autumn. Prime Minister Matteo Renzi is fighting a rise in the polls of the Five Star protest party.

In France, President Francois Hollande is trailing the Far Right Marie Le Pen in opinion polls with presidential elections due in April and May next year.

Both countries face deep political as well as economic challenges.

The departure of the UK would subtract 13 per cent from EU GDP and deprive it of its third largest budget contributor. The UK vote may have lit a slow burning but devastating fuse.

IMF warnings

Even before the UK referendum, the IMF was warning about political tensions in the region. A report on the 19-nation eurozone, written just before the UK referendum, warned that “growing political divisions and scepticism have put the euro area at a critical juncture.

“The usual approach of muddling through appears increasingly untenable, raising the risks of stagnation and further fragmentation.” Downside risks to the eurozone’s growth prospects had increased, amid “growing political divisions and Euroscepticism.” The comments came as it cut its growth forecast for the eurozone as a whole. It now expects the eurozone’s economy to grow by 1.6 per cent this year and 1.4 per cent in 2017. Before the referendum the IMF had predicted growth of 1.7 per cent for both years.

Of particular concern is Italy, where the IMF believes the country will not return to the levels seen before the 2008 financial crisis until the mid-2020s, implying “two lost decades.” Unemployment is already standing at 11 per cent. Its economy is buckling under the weight of total debt (government, household and business) of 259 per cent of GDP.

The flashpoint is the country’s crisisstruck banks. Some 17 per cent of bank loans are bad and the system desperately needs a bail-out. But the government is in no position to afford one. And the EU – Germany in particular – is opposed.

With interest rates in the eurozone already at record lows, the IMF warned there was “very little policy space to cope with adverse shocks.” It urged more “collective actions” from governments to strengthen the currency union.

Now credit ratings agency Moody’s has warned of political shockwaves from Brexit. The UK vote, it said, could even topple the whole EU project. “In the long run, the potential strengthening of nationalistic and protectionist movements could have a detrimental effect on the EU, even threatening its existence.”

Little wonder there are now questions over Jean-Claude Juncker. The EU now urgently needs to ponder its direction of travel if it is to see off this existentialist threat. n