It Was a Union for the Ages, Until Suddenly It Wasn’t. Is Europe Lost?

By showing that European integration can be reversed, Brexit makes the unthinkable thinkable. But that's not the only danger.

The U.K.’s vote to quit the European Union is the enterprise’s worst setback since it was conceived in the 1950s. Until now, the EU has always grown in scale and ambition. For the first time, Brexit shows that Europe’s manifest destiny—ever closer union—may not be destiny after all.

Illustrator: Matt Chase

Merely knowing that European integration can be reversed is a threat: It makes the unthinkable thinkable. But this isn’t the only danger. The union is increasingly unpopular not only in the U.K. but also in other European countries. Its political capital is depleted. Working through the mechanics of Brexit may deepen divisions, severely testing the union’s ability to adapt.

Brexit could conceivably spur support for the union. But this will demand consensus, flexibility, and farsighted calculation, none of which can be taken for granted. If governments can’t rise to this challenge, Brexit may be the beginning of the end of the European dream.
In one way, today’s discontent is nothing new. There has often been a gap between the grandest designs of Europe’s leaders and the readiness of the continent’s citizens to go along. The EU’s remarkable achievements in securing peace and prosperity in the postwar era required brave, visionary leadership, and voters were rarely up to speed. For years, that was fine. The model was top-down institution-building, followed by good results, then popular backing—in that order.

It all worked beautifully. Europe’s postwar political and economic reconstruction was a modern miracle. But now the model is failing. The Brits aren’t the proof. They’ve always been uncomfortable in the EU, late to the party and a nuisance throughout; their vote to quit was a shock, but probably shouldn’t have been. Lately, though, the disenchantment has spread far more widely. According to one recent poll, the EU is less popular in France—France!—than in the U.K.

Source: Pew Research Center
Source: Pew Research Center
Pew Research Center

So what went wrong?

The EU’s deep structural flaws arise from the tradition of overreach. During the 1990s, after the collapse of communism, the EU had to choose whether to broaden the union to include new (and much poorer) entrants from Eastern Europe, or to deepen it with additional commitments to political and economic integration among its existing, and more similar, members. Its main architects were divided: Germany wanted to broaden; France, to deepen.

Their fateful choice was to do both at once. The EU would bring in new members and take further strides toward full economic and political union, notably by creating the single currency—the boldest innovation yet. As things turned out, too bold.

Even at the design stage, many economists said the euro’s political underpinnings were too weak. Monetary union, they argued, demanded a commitment to a form of fiscal union. (If currency devaluation with respect to other EU currencies was going to be ruled out, fiscal transfers would be needed to help cushion economies from downturns.) This would require a widely shared sense of common purpose—in effect, a more fully developed European identity. Without it, member states would balk at collective fiscal action. And balk they did: Fiscal union, with the need for fiscal transfers across the union’s internal borders, wasn’t part of the plan.

If that couldn’t be done, the alternative was to let governments use their own national fiscal policies more forcefully. But the new system said no to that, too: As well as ruling out fiscal union, it set strict national limits on public borrowing. With fiscal policy shut down and monetary policy moved to the European Central Bank, macroeconomic policy at the sub-EU level was therefore all but forbidden.

As a result, the crash of 2008 hit parts of the EU exceptionally hard. In many countries unemployment remains high, especially among the young. Surges of migration within the union have worsened economic insecurity, especially in Britain and France, and added to the feeling that national governments are no longer attending to voters’ concerns.

Europe’s problem is essentially a crisis of confidence arising from this mismatch between ends (the commitment to ever closer union) and means (popular support for EU-wide institutions). The question is whether Brexit can bring the two into better alignment—first, to secure a successful, mutually advantageous post-EU settlement for the U.K.; and second, to quell the secessionist momentum that’s building in some of the remaining 27 member states.

The Leave vote shows that neither will be easy.

In the months before the referendum, Prime Minister David Cameron sought new terms for British membership. Discussion centered on the EU’s so-called fourth freedom—free movement of workers within the union (in addition to free trade in goods, services, and capital). Cameron needed the EU to modify its commitment to free movement. Europe’s other governments said no: The four freedoms, enshrined in the EU’s treaties, are “indivisible.” At home, Cameron’s renegotiation was widely seen as a failure. The Leave campaign won the vote, and Britain and Europe were thrown into turmoil.

Free movement of workers will be a major source of disagreement in Britain’s exit negotiations. Cameron’s successor, Theresa May, has said she’ll seek the closest possible economic integration with the EU, but she’ll insist on restoring control over immigration. This will be hard. Membership in the European Economic Area would grant full access to the EU’s single market, including so-called passporting privileges that allow British financial-services firms unrestricted access, but this model also imposes free movement of workers.

Any plausible alternative would require unanimity among the EU’s 27 members in allowing a degree of flexibility on a core issue of principle, something Europe’s governments have refused to do so far. If no agreement can be reached—the worst case for Britain—exit would impose standard World Trade Organization rules on U.K.-EU exports and imports, without special provision for services. Britain could pursue free-trade agreements with other countries, but the price for regaining control over immigration would be steep.

The focus on Brexit, while understandable, has obscured the pressing need for reform among the EU-27, especially the 19 countries in the euro region. Voters in many countries—Austria, France, Germany, the Netherlands, and others—are increasingly aggrieved about immigration. Many euro area economies are uncompetitive and also afflicted with fragile banks, high public debt, sluggish growth, and high unemployment. The structural flaws in the single currency’s design continue to take their toll.
Ideally Europe would go back to the drawing board, correcting the error it made in simultaneously broadening and deepening the union. A core group would press on with closer integration, including free movement, some form of fiscal union, and the pooling of political sovereignty those would require; a broader group, which once could have accommodated the U.K. (and still might), would choose less integration but remain members of the wider single market. Ends and means would be aligned by moving to a two-speed Europe.

Sadly, the clock can’t be turned back. A complete remodeling risks a collapse of the entire enterprise and seems out of the question. What’s worse, a partial remodeling will be almost as hard. Even modest incremental reforms to allow flexibility where national politics demands it (as with free movement of workers) or new institutions where economics demands it (fiscal union) are likely to require treaty changes. Treaty changes require unanimous approval by member states and, in many cases, parliamentary ratification and/or—perish the thought—referendums.

The current mood of discontent therefore makes Europe’s leaders shy away from changing the treaties, a move that would expose the EU to greater popular scrutiny. It’s a characteristically European dilemma: The less popular the union, and by the same token the stronger the case for change, the more reluctant governments are to attempt serious reform. Overreach meets institutionalized paralysis.

In the short term, the rot can probably be stopped at Brexit. The U.K.’s experience is sure to be challenging, and that will discourage copycats. Even so, Europe’s future seems certain to be heavy on discontent and chronic economic disappointment, and light on dreams come true.
 Crook is a Bloomberg View columnist and member of the editorial board based in Washington.

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