The world is fundamentally different after the “Brexit” referendum in the United Kingdom. It will be decades before we know the full effect of British voters’ decision to leave the European Union.
One thing we can know for sure, however, is that it is in the EU’s best interest to maintain strong ties with the UK, despite the fact that British voters made their decision unilaterally. Too much is at stake to allow the process to be dominated by petty power games that overshadow or undermine common interests, as happens so often in European politics.
Economically, growth in the EU will undoubtedly benefit from an open trading relationship with Britain. A free-trade agreement that includes financial services will minimize the damage from Brexit for all parties involved, because European firms will still rely on London as the region’s only global financial center. Even if banking services migrate elsewhere in the eurozone, companies like Volvo, Siemens, and Total will still need London if they are to compete with companies like Toyota, GE, and Exxon.
Politically, the EU and the UK will benefit from maintaining close cooperation because neither side is spared from the problems afflicting the region today. These include increasing aggression from Russia and its president, Vladimir Putin; the rise of ISIS and the threat of homegrown terrorism; and refugees fleeing to Europe from the Middle East and North Africa. Moreover, the Brexit vote does not change the strategic importance of NATO, where continued cooperation is necessary and where the EU needs the UK as much as the UK needs the EU.
So, what should the EU do? European Commission President Jean-Claude Juncker has called for more federalism – for more power to be delegated to the EU’s governing institutions. I consider Juncker a close friend, but I strongly disagree with him about this idea. Moving toward deeper integration or centralized control would be a dangerous path to take, for it would increase the risk of other members choosing to leave the EU. And, beyond that hazard, there are other reasons to avoid federalist measures.
Politically, the EU and the UK will benefit from maintaining close cooperation because neither side is spared from the problems afflicting the region today
Consider the main economic argument offered by federalists: the eurozone needs a common fiscal policy to harmonize policy decisions, such as taxation. This is wrong for two reasons.
First, the EU’s fundamental economic problems are structural. Europeans will continue to gravitate toward populism if they do not see improvements in their standard of living, which will happen only with higher productivity growth. A single fiscal policy would not bring this about – and could make the problem worse. What Europe needs, instead, is a reform strategy that increases competitiveness and reduces barriers to competition.
In particular, EU policymakers should pursue policies that make labor markets more flexible. These would include lower marginal tax rates, tighter criteria for determining benefits eligibility, stricter requirements for job searches, more resources for skills training, and less restrictive employment- protection regulation.
The second reason is political. Put plainly, there is no political support for the higher taxes and spending cuts that would be necessary with a common fiscal policy. Brussels would be accused of wasting taxpayers’ money, and any effort to disregard public opinion and impose fiscal integration on EU members would only backfire and fuel the wave of populist rage that carried the Brexiteers to victory.
Anders Borg, a former Swedish finance minister, is Chair of the World Economic Forum’s Global Financial System Initiative.