For once, let me start with the disclaimer: I am a German who has spent half of his adult life in London. That may colour my perspective. I am amazed by the current German backlash against the ECB, the only central bank that has ever delivered a prolonged period of price stability for Germany. In the same way, I am amazed by some English views of the European Union which also seem to be partly based on a somewhat peculiar interpretation of European facts. Let me offer a German-inspired view of the Brexit debate. In this message, I cover mostly politics. I will look at the economic angle in a separate message shortly.
IS THE EU HOLDING BACK BRITAIN?
15 years ago, Germany was the sick man of Europe, blighted by excessive regulations and wage costs that drove jobs abroad. The freshly reunited country was slowly heading for disaster. Due to some courageous reforms around 2004, Germany today is the strongest of all major economies in the advanced world. Full employment, strong gains in real incomes and pensions, price stability, a fiscal surplus and a rapidly declining public debt burden: in real life, it doesn’t get much better than that. In addition, few countries have linked their economies so closely to the most dynamic markets in the world as Germany, with Germany exporting three times as much to China than the UK..
What does this have to do with Brexit? A lot. It proves a major political point: within the EU, a member remains free to choose. If it gets its domestic policies right, it can use the EU as a springboard to success. If it gets its policies wrong, as Germany did in the 1990s, it can end up at the bottom of the pile instead. It’s not the EU. It’s domestic policy that still shapes the fate of a nation in Europe.
The common rules and regulations that underpin the common market are far from optimal, to put it mildly. Some rules may be almost as damaging as Britain’s own regulations of its land and housing markets. But claims that EU rules of the common market are holding Britain back decisively or that they prevent Britain from dealing more with fast-growing Asia are not supported by the facts at all. The assertion is almost as outlandish as the German fear that central bank action to stop a financial panic could stoke excessive inflation.
LESSONS OF HISTORY: “NEVER AGAIN“ VERSUS “BALANCE OF POWER“
Germany very much wants the UK to stay in the EU. Beyond any practical arguments, history and geography simply make the UK part of Europe. One way or the other, Britain will always shape or be shaped by Europe, as has been the case from before Roman times. Berlin finds it difficult to understand why the UK may choose to become a passive bystander instead of remaining an active participant in European affairs.
A partial explanation may be that, in one key respect, Britain and Germany have drawn different lessons from European history. After the ravages of two world wars, Germany, France and most of their immediate neighbours came to a simple conclusion: “never again”. They are hence trying to build and maintain a more united Europe as a clear break with a history steeped in blood. For Britain, however, the time honoured “balance of power” approach to European politics still seemed to work even in the two world wars. For centuries, Britain has tended to back the lesser powers on the continent against any would-be continental hegemon who might threaten Britain across the Channel. That Britain may instinctively still try to play a European “balance of power” game that the continent has largely abandoned may be one reason why Britain struggles with the concept of political cooperation within the EU. Conversely, many other EU countries don’t fully grasp Britain’s reluctance to commit itself to any serious integration beyond free economic exchanges.
THE COMPROMISE MACHINE
As a result of this gap in deeply engrained attitudes, a special status for Britain in the EU makes sense. Beyond the opt-outs from the common currency (euro) and the common zone for passport-free travel (Schengen), the EU has de facto exempted the UK from much of the politics and all potential future integration steps. Berlin finds it difficult to understand why many Britons want to get out of this EU-lite nonetheless. That the Brexiteers draw applause from Russian president Putin and other unsavoury populists while US president Obama has expressed a strong US interest in keeping the UK in the EU adds to the impression in Germany that some Brexiteers have a somewhat peculiar understanding of European politics.
Warts and all, Berlin still views the European Union as the best compromise machine on earth. The EU regularly brings together the leaders of 28 sovereign countries to slug out their serious differences in dreary long-night sessions, only to reliably agree on some compromise in the wee hours of the next morning. It is barely edifying, although it may still beat the long filibusters in the US Senate. But it sort of works. And relative to all alternatives tried before in European history – I suppose you get the point.
Germany’s political elites do not see EU membership as a major loss of sovereignty. In the real world, sovereignty is always constrained by the options you have. No vote in the British parliament can grant British firms access to the EU market. To some extent, the EU is the bureaucracy more or less needed to maintain a rules-based common market. Even more so, Germany sees the EU as a forum to balance competing national interests among neighbours with the least-possible friction. That always involves messy compromises. An imaginary “Brussels superstate” may be a convenient scapegoat at times. But an overbearing superstate preventing Britain from realising its potential even more fully than it does already simply does not exist.
HOW WOULD GERMANY REACT IN CASE OF BREXIT?
In a crisis, get back to basics. A British vote to leave the EU would be an unexpected shock for the other EU members. It could embolden anti-EU and anti-market populists elsewhere and trigger speculation that other countries might eventually follow suit. The gut reaction in Berlin and Paris would probably be to strengthen the cohesion of the EU27 and the Eurozone in response to such concerns. Crises are handmaidens of change. On the EU level, I would expect an initiative led by Germany and France for visibly enhanced cooperation on internal and external security up to more joint foreign or even defence policy. On the Eurozone level, the “Five Presidents Report” from 22 June 2015 could serve as a blueprint for such discussions about strengthening the region. Ahead of the French elections in spring and the German elections in September 2017, agreeing on and ratifying such steps would be a huge challenge. But after the shock of Brexit, it might be feasible. A somewhat ironic result of Brexit could thus be a more isolated UK sitting next to a somewhat more cohesive core Europe.
The top priority of strengthening the cohesion of the EU27 and the Eurozone would also affect negotiations with Britain about post-Brexit relations. Berlin would have to attach more weight to French or Polish concerns. A British desire to maintain free access to the EU market for services, especially the “passporting rule”, while restricting the free movement of labour would not find very receptive ears in Berlin. In case of Brexit, the UK may gradually lose its position as the services hub for Europe, put its own political cohesion at risk (think Scotland) and end up with the wrong kind of friends (Putin). Claims that Britain’s future could be brighter outside the EU do not convince many people in Berlin. London is simply in the wrong time zone to be the services centre for Asia rather than for Europe. And in political terms, the visit of US president Obama to the UK and Germany last week may have made one point even clearer than before: after Brexit, America’s “special relationship” with a major European country would likely have to be more with Germany than the UK. The US needs an influential partner this side of the Atlantic with whom it can discuss the affairs of Europe rather than just a bilateral relationship. Seen from Berlin, a Brexit would make Britain small rather than great on the European and global stage. Berlin would very much like to avoid that.