Rethinking Europe

Brexit Seen From Berlin

U.S. history holds a lesson for Europe: Integration moves in waves.

Credit: MagMac83 Shutterstock.com

Takeaways


  • The EU's low cost is a bargain for a common/standardized legal framework of business, rights and regs.
  • It is easy to forget how far Europe and the UK came as a result of the EU, and not despite it.
  • Could the EU follow the US track of gradual integration of governance across states?

Regardless of the outcome of the Brexit vote, tensions leading up to the stay-or-leave vote strongly make one fact of life indisputable: All of Europe – and not merely the UK – has reached an integration singularity.

What I mean by that is that a large slice of the political class in a rising number of EU countries has concluded that deeper economic and especially political integration offer no further welfare gains, at least not for the median voter.

Unfortunately, in the public space and the media, this plausible assessment is cast in a different light — that the EU itself has outlived its usefulness and is of no further benefit, or even detracts from welfare.

Critics of the EU certainly have a point, and the UK certainly does not have a monopoly on such critics. The European Union is cumbersome and ungovernable, and the behemoth grows larger with each new accession.

EU as a governance and effectiveness bargain

Yet, the EU is also cheap: 1% of GDP remains a bargain for a common EU-wide legal framework of business, human rights and legal principles, product market regulation and standardization, minimum labor standards including child labor, job safety standards and environmental protection.

As to those who argue the EU has turned into a behemoth, I wonder: Where else in the world is there an automatic cap on the size of “big government” like in the EU – and one that is so cost-effective to boot?

It is all too easy to forget how far Europe – and the UK in particular – has come as a result of the European Union, and not in spite of it.

No sense of history

As Gordon Brown points out in a viral video filmed in the ruins of Coventry Cathedral, the counterfactual to the EU is more likely to be centuries of chronic warfare than the decades of peace since its founding. How can that not be related to common values and common prosperity?

Observing the process of economic integration since 1945, with ever deeper trade, migration and capital mobility, one must conclude that it leads inexorably to interdependencies that are not only economic, but increasingly and ultimately political.

Time for a moratorium?

And that is the trigger for the integration singularity. Europe – including the UK – obviously wants to remain a mosaic of peoples, each referring to its own culture, history and common tradition.

A common constitution, government or even fiscal policy are difficult if not impossible even to imagine, let alone construct.

Why not simply call a moratorium on further integration – rather than canceling the whole project?

The experience of the United States on the gains from intelligent integration holds valuable lessons for Europe. In the early 20th century, the U.S. was emerging as a nation which could project power around the world.

Yet, it was also hampered by the patchwork of powers of individual states guaranteed by the 10th Amendment; in a form of automatic subsidiarity, those rights not expressly granted to the Federal Government are reserved for the constituent states.

This arrangement was no accident: In the 1780s, different ex-colonies had distinctly different economic, social and cultural interests. Mutual respect for those interests was synonymous with preserving the Union.

When to opt for more integration

But increasing trade integration and factor mobility spurred the growth of large corporations and large-scale commerce that transcended state boundaries.

Corporations were forced to deal with regulations and governments on a state-by-state basis in the Progressive Era.

That was a time when consumers and workers demanded decisive improvements in food quality standards, product safety, worker protection and common liability rules.

Under such circumstances, it was only natural and efficient to establish institutions to transcend state boundaries, like the Interstate Commerce Commission (1887), the Food and Drug Administration (1906), the Federal Trade Commission (1914) and the Federal Reserve System (1913).

This federalizing wave was followed later by the banking union via the Federal Deposit Insurance Corporation (1933), the Federal Communications Commission (1934) and the Social Security Administration (1935).

Federal agencies emerged as the right option for presenting a single regulatory face not only to large corporations, but also to an increasingly mobile population. This was a natural development.

Europe has followed a similar path, although more readily in some dimensions (food health and safety standards, Social Charter, antitrust law) than in others (common currency, banking union, capital market regime, unemployment benefits).

Exit, voice, loyalty and Brexit

Recently, I picked up Albert O. Hirschman’s classic work Exit, Voice and Loyalty, which had spent three decades of gathering dust on my shelf.

In that masterpiece, the author – exiled to the United States by the Nazis in the 1930s – describes the conundrum of how to deal with a deteriorating situation – a market, the workplace, a labor union, a country or region, a club, or some other association.

In the current British case, Leave is exit, while stay means voice (that is, investing time and energy in the impending change).

Hirschman presciently points out that while exit gives immediate liberation from the problem at hand, it is possibly suboptimal.

Moreover, exit creates external effect on the stayers, possibly nudging them into resolving the problem, in which case the leaver is the loser.

Sometimes, collective action within can be more effective. It is probably in the UK’s narrow interests to stay inside the EU and assemble coalitions to improve the EU’s workings rather than to leave empty-handed.

The Germans certainly see themselves as losing if the UK leaves. While I occasionally hear “let them go!” from colleagues and friends, they don’t really mean it.

Even if their view of capitalism is a little less competition-oriented and a lot more corporatist than in the UK, they will miss the voice of liberal pragmatism as a counterbalance to Cartesian and statist French thinking, or mistrustful and Machiavellian Italian politics.

Brexit could spur northern Europeans to reform the EU, and will certainly cause Germany to redouble its efforts – but it may also cause the union to blow up.

Looming self-emasculation

Will the UK lose as well? Probably. Leaving means renouncing any influence on EU standards that govern 50% of UK exports.

Give up influence on those standards and relegate yourselves to the status of Iceland, Russia, Norway, Turkey or Switzerland? That’s madness.

Just as Merkel’s lonely, hubris-laden decision on refugees had far-reaching de facto consequences for other EU members, Brexit has potentially even more unimaginable ones.

Like the dogs of war, Brexit will unleash a genie of anti-European feelings and a chain reaction of unpredictable and uncontrollable events throughout the continent.

It is likely to spur referenda on the EU in the Netherlands, Denmark and Poland, while strengthening separatist movements in Catalonia, northern Italy, Scotland, Northern Ireland, possibly even southern Germany.

Poland boosted UK economy

Immigration is known to have played a big role in the Brexit campaign and the voting. True, the Brits were swamped by eastern European immigrants who have claims on the UK system of public goods and the welfare system.

Part of this strong flow from the Central and Eastern European countries to the UK has its root cause in Germany’s unwillingness to accept Polish immigration until eight years after their accession to the EU.

Yet, the Poles provided the UK economy with a mass of industrious workers needed in a long-neglected low pay sector.

One has to wonder about all those who detest this immigration wave, but are agog about the UK’s recent economic performance.

It stands to reason that the spurt in UK GDP per capita growth which has occurred in the past 10 years is a function of this supply-side bump, a move which critically pulled the UK ahead of Germany.

One can’t have it both ways: If one is happy about the Poles having strengthened the UK economy, gaining it an advantage over Germany, then one cannot regret the Poles’ presence for migration reasons.

Whatever the case, and quite contrary to Britons’ proud self-perception, Great Britain is not an island.

The spillover effects from what was initially conceived of by David Cameron as a simple maneuver to deal with intra-party squabbles are bound to be momentous in case of an affirmative vote on Brexit.

To abuse Churchill: Never has so much been decided for so many by so few. The stakes are very, very high.

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About Michael Burda

Michael Christopher Burda is a macroeconomist and professor at the Humboldt University of Berlin.

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