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Losing the U.K. Wouldn't Be So Bad for Europe

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Discussions of a possible U.K. exit from the European Union often center on how the move would affect the U.K. itself. It's only natural, since British voters are the ones who will make the decision, and they care mainly about their own country. There are two sides to any divorce, however, and the relatively passive partner -- in this case the EU -- must also consider the impact of losing the U.K.

The most obvious and most talked-about consequence for the EU would be the bad precedent: Britain's departure would establish for the first time that the bloc can shrink, not just expand. But that may not be too important. Other EU countries won't necessarily want to leave just because the U.K. does.

The London-based Center for European Reform, a think tank with powerful corporate donors, has just published a report identifying more specific effects that a British exit, or Brexit, might have on the EU. It didn't find too many of them. The U.K.'s departure might actually be beneficial to the bloc's cohesion, though it'll lose an important voice on policy matters.

That's been a dissenting voice, for the most part. Between 2009 and 2015, the U.K. was among the minority of states either voting against or abstaining from legislation in 13.3 percent of the cases -- more than any other EU member. Yet the U.K.'s input was influential: It's been the bloc's strongest force for economic liberalization. In a 2015 paper, the strategic advisory firm Global Counsel wrote that, without the U.K. present, "it would become harder to block illiberal measures. Moreover, there would likely be a new regulatory dynamic." The firm pointed out, however, that the EU would still be pressured to liberalize its policies because it would be competing with the U.K. for investment.

The Center for European Reform also points out that Northern European countries such as the Netherlands would still advocate relatively liberal policies within the EU, though they won't be as vigorous as the Brits in defending free trade. "There has been a broad consensus across the Union in favor of moves to liberalize markets for goods, services and labor," the think tank's report says. "Much of this has been driven by eurozone countries' attempt to improve their competitiveness."

Center for European Reform

The EU probably won't reverse the trend toward deregulation, but it might move more resolutely to pull its entire membership into the euro arena, or put the "euro outs" at a distinct disadvantage. Today, the U.K. is the "outs'" biggest champion; the eastern European and Scandinavian countries that have steered clear of the common currency won't have as much clout against pro-euro France and Germany.

There might also be a push toward supranational regulation of capital markets and the harmonization of rules that govern them, including those on tax and bankruptcy. London might lose -- and another financial center might gain -- the big euro clearing houses. Though the U.K. capital would remain an important financial center, the finance industry will have to shift some operations to the continent. As the Global Counsel report pointed out:

EU regulations would make it harder for London to serve European markets, particularly (but not only) for retail banking and euro trading. Some business would be likely to move to Eurozone financial centers or be lost to Europe. Competition to take this business would be wasteful. While one or two centers may ultimately benefit, businesses and households across the EU would bear the cost in terms of higher charges and poorer products.

There would be few other economic consequences for the EU. It would probably negotiate terms of trade with the U.K. the same as before an exit, since the British and continental economies are intertwined. The UK absorbs 16 percent of the exports of goods from the EU's 27 non-British members, and there's an even livelier trade in services. Neither side will want to lose these economic advantages.

The EU-27, however, will probably be more reluctant to negotiate trade deals with other important partners, such as the U.S. The Transatlantic Trade and Investment Partnership, which Barack Obama is promoting in Europe now, has become dramatically less popular in Germany in the last two years, with a recent poll showing that only one in five people support it. Continental Europeans are generally less enthusiastic about free trade than Brits are, and a Brit-less EU will be a much tougher negotiating partner for the U.S, Japan and China.

The U.K.'s "special relationship" with the U.S. is an asset for the Americans: It helps them find inroads into the EU. Brexit would change things: There would be fewer counterweights to Germany, where public opinion is ambivalent about the U.S. Without the U.K., Europe will move further away from U.S.-inspired practices in matters such as privacy vs. security or fighting the terrorist threat. The U.K. has shaped the bloc's terrorism policy more than any other country, and its expertise will be missed, but the other countries will eventually find their footing.

That will be harder to do when it comes to defense. The U.K. is the biggest defense spender in the Union, with 21 percent of the bloc's total military budget, and one of very few NATO countries that fulfill their commitment to spend 2 percent of their gross domestic product on military programs. Without the U.K., the EU will be far less protected, and its members would either have to raise spending dramatically or depend even more on the U.S. than they do now. That would hand extra leverage to the U.S. and mitigate the loss of the "special relationship" as an EU-oriented policy instrument. It would, however, also contribute to resentment between the U.S. and continental Europe, which would be quite mutual. According to the Center for European Reform:

Brexit would encourage those in America who dismiss Europe as a region of sclerotic economic growth with a dysfunctional political system and who argue for more U.S. engagement with booming Asian economies compared with Europe.

All in all -- unless one believes in the magical effect of Brexit on euroskeptics' electoral performance throughout Europe -- the EU's losses from Brexit would be easily manageable. It's likely that the momentous event would bring the remaining EU members closer, ultimately contributing to the creation of a truly borderless market that, as a unit, would be more competitive with other global economic powers. The relationship with the U.S. would probably balance itself after a while, and a solution would be found to the defense issue. 

There is, however, one problem that might prove harder to mitigate in the long run -- that of Germany's uncontested dominance. "Germany's preponderance in the EU has grown in the past five years, because of the disengagement of the U.K., the relative weakness of both France and the European Commission," the Center for European Reform report says. "This situation is not in Germany's interests or those of the other member states."

Germany's leadership is, to a degree, forced and reluctant. Without the U.K.'s spirited opposition, its role will be institutionalized. Even if the Union becomes closer as a result, there are likely to be more policy errors and more resentment against Germany as the driving force -- an attitude that is already widespread in southern and eastern Europe. Sometimes a strong dissenting force can be beneficial to a group, and that's probably the biggest reason why the EU should hope to avoid Brexit.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Susan Warren at susanwarren@bloomberg.net