03 June 2016

Bruegel: Berlin and Paris need a strategy for Brexit

Guntram Wolff argues that, to avoid a gradual disintegration of the EU if the UK were to leave, political leaders will need to strengthen the attractiveness of the EU and especially the Franco-German alliance.

[...]which political strategy should the EU and its biggest two members, France and Germany, pursue if the UK were to leave? Arguably, the focus will need to shift on making the EU a symbol of progress, stability, growth and jobs. How to achieve this will be an urgent question if the UK leaves, but also relevant if it stays. I see two strategic options with different political implications.

The first one concentrates on the EU of 27 member states. It could entail deepening the single market, putting the interests of citizens first in global trade deals, and increasing security by increasingly working together on intelligence sharing and measures against hybrid warfare. The rationale for this strategy is that all EU member states should be involved.

In particular, non-euro countries such as Sweden may feel that their interests are undermined in the EU dominated by the euro area. Indeed, after a British exit, the non-euro countries would make up barely 14 % of EU GDP. Governance mechanisms that protect the euro area “outs” from a tyranny of the majority would be needed.  The EU should certainly abandon its demand that “outs” have to join the euro and accept a two-speed arrangement.

A growth strategy based on the single market could be highly attractive for Sweden, Poland and Denmark, but also for some euro area countries such as the Netherlands. Paradoxically, the UK’s exit would lead to a set of economic policies that would make the EU more attractive to the UK. But the strategy is also fraught with difficulties. By having to work with 27 countries, progress would likely be slow.

The second strategic option starts from the observation that for both France and Germany, the Franco-German alliance becomes more important if the UK leaves the EU. Germany’s biggest fear is that if the UK leaves, France and Italy will push for more statist policies with more transfers and other distributional policies. France, in turn, would fear Germany turning away from the union.

[...] To revitalise the bilateral relationship, Germany will need reassurances that France is serious about reforming its growth models and becoming a strong economic partner again. France, in turn, will need reassurance from Germany that the integrity of the euro area as a whole is guaranteed, and that Germany will not abandon its special relationship with France.

How could such a reset be credible? In the case of Brexit, policymakers in Berlin and Paris will no longer be able to avoid this question. They may even need to make it part of the electoral campaigns in 2017 in their respective countries.

The instinct among policymakers in both France and Germany is to work more closely together after a Brexit. This need and should not come at the expense of the other EU countries. A credible growth and reform strategy will not only enhance the attractiveness of the euro area but also make the EU more attractive, especially with sufficient safeguards for non-euro countries. Faced with the risk of a gradual disintegration of the entire EU after Brexit, strong political leadership must implement a bold political strategy.

Full article on Bruegel

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