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The Past, Present, and Future of the EU – Are More Referenda to Come?

As we all know by now, on June 23, Britain surprised the world by voting in a referendum to leave the European Union.

This shouldn’t have been so unexpected, however, as Britain has been at loggerheads with majority EU opinion ever since it joined in 1973.

EU leaders shouldn’t think that by allowing Britain to leave, albeit at a likely heavy cost, they’ve solved their problems. In reality, the EU structure is so flawed that several other countries have a substantial chance of staging similar referenda in the next two to three years.

From a Rocky Start…

Britain’s problems with the EU are structural and long-standing. Even as a free-trade area, it made little sense initially for Britain, which had worldwide trading links and a historic free-trade area in the Commonwealth.

Since Britain lacks natural resources, has a heavily industrialized economy, and has historically been a leader in worldwide trade, its natural trading partners were the Commonwealth countries, with which it established a modest Imperial Preference scheme in 1932.

Britain’s negotiator at the 1944 Bretton Woods conference, Maynard Keynes, disgracefully gave away Imperial Preference to assuage the prejudices of the anti-imperialist Roosevelt administration.

Still, opening negotiations with the European Community in 1961 was an inferior alternative for Britain to re-developing and deepening Commonwealth trading links.

…Comes a Crumbling Foundation

In 2016, memories of Imperial Preference aren’t a major factor even among the more elderly British voters.

If the EU had remained a simple, free-trade area, Britain probably would’ve remained a moderately contented member. However, the original founders of the EU included a goal of “ever-closer union” in the 1957 Treaty of Rome, and by 1992 the Maastricht Treaty attempted to move the EU towards a federal superstate.

This was a major change in the EU’s purpose and John Major, the feeble British prime minister at the time, should have put it to a referendum. It almost certainly would’ve been rejected, which would’ve kept Britain within the Single Market and killed the superstate.

Faulty Policies

In practice, the EU bureaucracy has favored policies that are normally favored by bureaucracies:

  • It regulated everything it possibly could, much to the annoyance of local interests.
  • It promoted the euro, and allowed the European Central Bank to run a vast asset-purchase program that distorted capital markets, and – by skewing investment decisions – damaged productivity throughout the EU.
  • It’s been a keen proponent of global warming mitigation schemes, often with the help of national governments, but with much less enthusiasm from their voters.
  • It’s attempted to maintain budgetary controls in member governments, necessary for the euro to function, but by now it’s caved in several times when pressure was applied.
  • And by promoting “free movement of labor” within the EU but then failing to enforce external border controls properly, it encouraged a wave of low-skill immigration from troubled areas of the Middle East and North Africa.

Rushing to the Exit

Unsurprisingly, several countries now have large minorities that want to rid themselves of EU-imposed policies they find damaging, and restore national autonomy.

France, for instance, has a large nationalist party that’s likely to do well at 2017’s elections, and then demand a referendum on EU membership.

Holland also has a large nationalist party that wants to copy Britain’s referendum.

Extraordinarily, Austria, which is almost precisely at the center of the EU as it’s now constituted, is likely to elect a Freedom Party government that also wants a referendum.

In Eastern Europe, both Hungary and Poland have nationalist governments that want to remain within the EU, but with drastically changed policies. Both also bitterly object to the EU consensus on economic policy.

Britain’s referendum may well be contagious. What’s more, if Britain exits the EU on relatively favorable terms, the demand for other renegotiations may become overwhelming.

And though it’s difficult to see how Austria, for example, could prosper as an entirely independent entity without substantial trade links with its neighbors, the country may very well try.

Evolution or Extinction

The most likely solution, and perhaps the best, is for the common currency and much of the superstructure built up since 1992 to be abandoned, and for the “ever closer union” language to be written out of all documents in the EU constitution.

The euro might become a “northern euro” limited to Germany, the Netherlands, and Scandinavia, which have the fiscal discipline to work together in such an arrangement.

Other countries, while remaining close allies and operating a strong free-trade agreement with each other, would no longer elect Members of the European Parliament (MEPs), but simply continue as each other’s allies and trading partners.

There would be no common foreign or defense policy, although on many matters, EU countries would act in concert.

Subsidies to the poorer areas of Europe would continue, but at a modest level. And countries like Greece would find their own economic equilibrium by re-adopting the drachma and watching it decline to perhaps a quarter of its previous level, thus balancing their external payments.

Perhaps that would be an arrangement that Britain could rejoin, while maintaining the trade relations it negotiated for itself with outside countries.

In fact, that layout is almost exactly what the British were told they were joining back in 1973, and the country would probably have little difficulty commanding majority British support if parameters were, eventually, put in place to secure the sanctity of such an EU.

Good investing,

Martin Hutchinson