UK and the EU – close ties are a must

Why is Brexit even on the table?

Michael Heise: The UK’s relationship with the EU has always been a special one. Margaret Thatcher’s “No! No! No!” is still in memory. The referendum held in 1975 was very much about remaining part of an economic club, not an alliance of countries striving for ever closer union. Today, there is a growing sense that too much power is being ceded to Brussels – just like in the old days. Also, strong immigration pressures add to euro-skepticism.

Mohamed A. El-Erian: I agree with the context Michael just set out. In doing so, I would stress the fundamental difference in the vision for European economic integration. For the UK, it is essentially about a well-functioning free trade zone among members of the European Union. For many other countries in Europe, and particularly those in the smaller grouping of the Eurozone, it is about much more than that – namely, an ever closer and comprehensive union that speaks to economic, institutional, political and social aspects.

This fundamental difference in vision – a long-standing one – has been accentuated by tactical political posturing. Sensing potential vulnerability to UKIP, a non-traditional UK-party advocating an EU exit, Prime Minister Cameron used the run-up to the recent parliamentary election to stress a Conservative Party promise for a nationwide referendum. And it worked well. 

Michael Heise:  If the UK leaves the EU, the calls for Scottish independence will rise again loudly.
 From left: Mohamed A. El-Erian, Chief Economic Advisor of Allianz and Michael Heise, Allianz Chief Economist
From left: Mohamed A. El-Erian, Chief Economic Advisor of Allianz and Michael Heise, Allianz Chief Economist

What would be the economic, financial, geo-political, political consequences of a Brexit?

Michael Heise: Both the EU as well as Britain stand to lose from a Brexit in economic and political terms. A Brexit might not cause immediate turmoil on financial markets as it would be an orderly process, but it would have major long-term consequences. London’s role as the largest financial center in Europe would be undermined and investment in the “gateway to mainland Europe” would be redirected. The economic impact on the EU would likely be more limited. Countries with long-standing trade links with the UK, like Ireland, Luxemburg and Belgium would suffer most from a UK exit. 

Politically, the departure of the UK would impair the image of the EU and reduce its clout on the international stage. Internally, EU moves towards more integration might become easier without the reluctant Brits. But that would come at the price of losing the liberal and pragmatic stance of British policy influence.

Mohamed A. El-Erian: Yes, it would be costly for all involved, and especially the UK. This realization is likely to focus minds in two ways: first, before the referendum, in helping the UK work with its EU partners to agree on some concessions that would allow the Conservative Party to “declare victory.” Thus they would be in a position to advocate to voters to opt for continued EU membership; and second, for the Party to unite with other mainstream political parties in the campaign to remain in the EU. In turn, these two factors would materially lower the probability of a Brexit.

How can the UK and its European partners work together to prevent Brexit?

Michael Heise : The EU Commission and, perhaps most importantly, the German government have both signaled their willingness to listen and cooperate. At EU level, a working group has been established to explore solutions. There should be common ground concerning some of the British demands for EU reforms and subsidiarity. But Britain’s new deal cannot go too far. An opt-out of the free movement of labor will not be granted. But there could e.g. be more rights to restrict benefit payments to EU migrants. Also, there may be ways to give national parliaments a stronger say in EU lawmaking. Reforms that require a change in the EU treaties cannot be implemented quickly but there might be a protocol that sets out issues in the interest of Great Britain when the EU treaties are re-opened the next time. According to the recent “five-presidents-report”, this may be the case after 2017. 

Mohamed A. El-Erian: There are a number of possible EU concessions for the UK that can then be used to strengthen the underpinnings of the union, at least rhetorically. Over the longer-term however, the fundamental difference on vision will remain; and there will again be a periodic need to find a way to reconcile them operationally.

What model would Britain follow if it left the EU, including its economic relationship with the EU?

Michael Heise: The UK would surely aim to maintain close ties with the EU. It would have to accept the product and consumer protection standards in the single market. Treaties would have to be renegotiated. For the UK financial center, there may be the strongest repercussions. And to offset the potential loss of the gateway benefits, a detached UK might well be tempted to relax its regulatory framework in order to remain attractive to foreign banks. Such regulatory competition would undermine EU drives towards uniform financial market rules and it might reduce the goodwill of EU member states in negotiations with the UK.

Mohamed A. El-Erian: If it were to exit, a low-probability event in my opinion, Britain would do so in the context of pursuing an alternative preferential arrangement – some type of Association Agreement that would provide it with a status similar to what Switzerland currently enjoys.

So, what probability do you attach to Brexit?

Michael Heise: I believe that a Brexit is quite unlikely. If the UK leaves the EU, the calls for Scottish independence will rise again loudly. Scotland wants to remain in the EU. I do not think British voters will want to risk a renewed referendum for independence in Scotland. Furthermore, the upcoming debate will show that there is not much to gain either economically or politically by a UK exit.

Mohamed A. El-Erian: It’s a low probability. Of course, there will be lots of political noise and posturing. But, when push comes to shove, Brexit will be avoided.


Text/Interview: Andreas Klein

Mohamed A. El-Erian: There will be lots of political noise and posturing. But, when push comes to shove, Brexit will be avoided.

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