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A smaller and less influential EU

If the ‘leave’ camp wins the UK referendum on June 23, the EU will become smaller and weaker both in economic and geopolitical terms.

The EU share of the world population will fall from 7.0 to 6.1 percent. In terms of world GDP, in purchasing power parity terms the EU share will decrease from 17.0 to 14.6 percent, and in current international dollars from 23.8 to 20.0 percent. The EU share in global exports of goods and services at current prices and exchange rates will fall from 33.9 to 30.3 percent (Table 1).

The EU’s share in the global financial market, where the City of London plays a dominant role, will suffer even bigger losses. The UK is also an important corporate governance centre, where the headquarters of many transnational corporations and research and innovation centres are based. It is also the source of many high-quality EU civil servants. Excellent British universities offer education to students from the entire Europe and the world.

Finally, the UK has a prominent position in global decision making processes – as a permanent member of the United Nation’s Security Council (one of the two EU member states), G7 (one of four EU member states), G20 (one of four EU member states), the International Monetary Fund and World Bank (4.11 percent of the voting power and one of 24 Executive Director positions) and the Financial Stability Board (one of six EU member states).

If “leave” wins, the transition process may take several years. It would greatly increase legal and economic uncertainty, . Even if the UK votes to stay, the referendum and amended agreement will absorb a lot of political and administrative resources, which could otherwise be used for other purposes.

Will Brexit help the remaining EU speed up integration?

, despite its negative consequences for the UK and EU, may remove a major obstacle to further integration, by taking away the UK’s opposition to ‘ever closer Union’. However, such hopes might prove overly optimistic.

First, the UK is not the only EU country against integration initiatives – see the problems with completing the Banking Union, or accepting the burden sharing mechanism to tackle the refugee crisis. Due to its opt-out clauses the UK does not participate in these projects, and there are other EU member states that are reluctant to accept larger degree of burden and sovereignty sharing related to them.

Second, the political and economic shock created by Brexit could be either a force for further union, or for further disintegration of the Union. Given the increasing strength of Eurosceptic parties in many EU member states, the second scenario is at least as plausible as the first one.

The EU-UK accord as the price of avoiding Brexit

Fearing the negative consequences of Brexit for the rest of the EU, other member states made concessions to the UK to help Prime Minister David Cameron to win the June 23 referendum.  They have been specified in the form of the draft Decision of the Heads of State or Government, Meeting within the European Council, Concerning a New Settlement for the United Kingdom within the European Union and six other documents attached to the Conclusions of the European Council meeting on February 18-19, 2016 (European Council, 2016). If the ‘remain’ cam succeeds this EU-UK deal will be activated immediately.

The deal is disappointing for UK Eurosceptics, who would like to see a larger transferral of EU competences back to national governments. Perhaps it is also not wide-reaching enough . However, it will have important consequences for EU integration overall.

It also raises various legal questions because it changes de facto the EU Treaties, without the inter-governmental conference and due treaty change ratification procedures. It promises changes in the EU secondary legislation, which are subject to the European Parliament’s co-decision prerogatives.

Paralyzing new integration initiatives…

The Section C (on Sovereignty) of the draft Decision mentioned above (European Council, 2016) effectively suspends the reference to ‘…ever closer union among the peoples of Europe’ in the Preamble of the Treaty on European Union with respect to the UK.

Strangely enough it does not cancel out the second part of the same sentence, which says that decisions in an ‘ever closer’ union ‘…are taken as closely as possible to the citizen in accordance with the principle of subsidiarity’. Furthermore, the EU-UK accord emphasises a stricter implementation of the subsidiarity principle, among others, in the form of the declaration of the European Commission on a subsidiarity implementation mechanism and a burden reduction implementation mechanism (Annex IV to the Conclusions – see European Council, 2016).

The draft decision also officially accepts that the UK ‘… is not committed to further political integration into the European Union’. Given that each new area of integration within the EU may involve a transfer of a certain degree of national sovereignty to the EU governing bodies, this means that no substantial treaty changes (of the sort similar to the Maastricht, Amsterdam, Nice or Lisbon treaties) will be possible in future (treaty change requires unanimity of all member states).

Furthermore, deepening integration via EU secondary legislation (i.e., within the mandate of the existing treaty) could also be opposed on the ground that it means further political integration with the purpose of an ‘ever closer Union’.

The second paragraph of Section C (‘The references in the Treaties and their preambles to the process of creating an ever closer union among the peoples of Europe do not offer a legal basis for extending the scope of any provision of the Treaties or of EU secondary legislation’) may also have an impact on future rulings of the European Court of Justice, which in the past .

…when the EU must cope with new challenges

The risk of stopping new integration initiatives comes exactly at the time when the EU needs more internal coherence, power and ability to respond to numerous challenges.

As revealed by various external shocks in the last couple of years, including the global and European financial crisis, a deteriorating situation in the EU neighbourhood, and massive inflows of refugees, the current EU integration architecture remains incomplete and not effective enough.

As a voluntary project in which each major step forward, at least those requiring treaty revisions, must obtain the unanimous approval of all member states, the EU is a hybrid construction with many institutional asymmetries. Economic integration has advanced further than political integration, because some member states consider political integration to compromise their sovereignty.

In ‘tranquil’ times, the EU could survive with such asymmetries, but they are proving to be a serious problem in the time of multiple crises. Therefore, it requires serious changes and amendments, particularly in areas which may be considered ‘political’ and sensitive to national sovereignty, for example, common external border protection and common asylum and migration policies.

Integration à la carte

When one member state obtains a permanent waiver from participating in further integration projects (and perhaps will be followed by other member states) the only two ways to advance European integration will be either via the mechanism of enhanced cooperation (within the EU Treaty but used only in respect to minor initiatives such as a divorce law so far) or separate inter-governmental treaties outside the EU Treaty, similarly to the fiscal compact or treaty on the European stability mechanism.

Both mechanisms make existing EU integration measures less internally coherent. They will lead to ‘integration à la carte’, with strong incentives for individual member states to focus on short-term political interests rather than long-term integration and common European challenges.

The EU decision making process will become even more complex, and less efficient and transparent than it is now, providing Eurosceptics with new anti-integration arguments. Eventually it may lead to the weakening and even partial institutional disintegration of EU governing bodies, as various narrower integration circles will require their own management and coordination mechanisms.

Non-Single Market for financial services

So far the UK has been considered a champion of building the European single market, with the exception of the common currency (which, in economic terms, is an important instrument of reducing cross-border transaction costs).

In the light of the recent EU-UK accord, this commitment becomes much weaker. The UK successfully requested exemptions in two important areas – financial integration and free movement of people – and these exemptions go beyond country-specific opt-outs. The financial integration opt-out may also be used by other non-Euro area members and the concessions on free movement can be used by all member states.

The formal purpose of the agreement on economic governance (Section A of the draft Decision mentioned above – see European Council, 2016) is for the UK to retain partial sovereignty in financial regulation and supervision. It is intended to prevent the UK and other non-Euro area countries discriminating against the Euro area members, while allowing the latter to deepen economic and monetary union.

However, in practice it will be difficult to distinguish between financial sector regulations aimed at deepening monetary integration and those related to single market rules. It is likely that the single market for banking and financial services will become even more fragmented between members and non-members of the banking union.

The draft Council decision on specific provisions relating to the effective management of the banking union and of the consequences of further integration of the euro area (Annex II to the Conclusions – see European Council, 2016) establishes that at least one member state that does not participate in the banking union may indicate its opposition to any new legislation to be adopted by qualified majority, and trigger an additional round of discussion on that issue.

Eventually, the qualified majority voting in the Council and majority voting in the European Parliament will apply, but non-banking union member states may slow down the process of adopting new regulations.

Free movement of people under question

Another important single market principle, the free movement of people, has been affected by the UK’s increasing fears of labour inflows from other EU member states.

On the one hand, none of the individual measures agreed represents revolutionary change. They include: tightening residence rules for non-EU family members of EU citizens, extending the possibility to deny EU citizens residence on national security grounds or if they do not have the resources to live in the destination country, indexation of exported family benefits to the local living costs of the residence country, and limiting in-work benefits to newly arrived workers for up to four years.

If taken together, these measures signal a tendency to restrict the free movement of people within the EU. This freedom has not been perfect so far, for example, in the limited cross-border portability of pension benefits. The new measures can be applied by all member states once they come into force.

Several EU member states, including the UK, suffer from excessive and sometimes inefficient social policy provisions. Generous social welfare programmes limit labour mobility, and create serious competitiveness problems and perverse incentives in a globalized, open-border environment.

However, the solution to these problems is reforming welfare state institutions and instruments, rather than discriminating against the citizens of other EU member states.

Given increasing anti-immigration sentiments, the UK may also backtrack on its hitherto pro-EU-enlargement policies. The list of actual and potential EU candidates includes countries with much lower income-per-capita level compared to the UK, which can make the UK more reluctant to accept new members.

Euroscepticism will not disappear

The concessions accepted by other EU member states to avoid Brexit will not appease Eurosceptic politicians in the UK or in other countries. Even if the ‘remain’ option wins the UK referendum on June 23, Eurosceptic sentiments will remain strong.

Among other factors, Euroscepticism will be fuelled by the UK’s increasing detachment from the mainstream European integration process and EU politics.

More opt-outs and special provisions for the UK based on its sovereign sensitivities mean less ability to influence strategic choices and decision making process within the EU. This self-exclusion process, which began from the common currency opt-out in the Maastricht Treaty, was deepened by subsequent opt-outs and will be further reinforced by the new agreement.

Elsewhere in Europe, the concessions granted to the UK to try and avoid Brexit will encourage Eurosceptic forces to demand opt-outs and special institutional solutions for other countries.

Regardless of the result of Brexit referendum, the EU will not be the same as before. Either it will be seriously weakened by Brexit, or with the UK still on board it will be less internally coherent.  The integration process, even if justified on the grounds of increased returns to scale or delivering pan-European public goods, will face serious obstacles.

References

De Grauwe, P. (2016): Why the European Union will benefit from Brexit, Ivory Tower, February 22,

European Council (2016): European Council meeting (18 and 19 February 2016) – Conclusions, General Secretariat of the Council, February 19,

Kartnitschnig, M., and Hirst, N. (2016): A long, costly and messy divorce, Politico, March 2,

Miller, V. (2015): “Ever Closer Union” in the EU Treaties and Court of Justice case law, House of Commons Library Briefing Paper, No. 07230, November 16,

Pisani-Ferry, J. (2016): Is Europe Worth the Effort?, Project Syndicate, March 1,