George Friedman argues the European Union, not Britain, is the weaker player after the Brexit vote

George Friedman argues the European Union, not Britain, is the weaker player after the Brexit vote

By George Friedman*

The vote has come and gone. A major European nation has chosen to leave the European Union. The markets have had their obligatory decline. A weekend has passed. It is time to think about what exactly has happened… and what it means, if anything. 

The real drive to leave had little to do with economics. It had a great deal to do with immigration. The EU’s economy has been in wretched condition since 2008. 

The EU has been unable to forge a plan that would fix dire unemployment in southern Europe and revive the stagnant economy. The EU’s founding treaty promised prosperity. It has failed. Germany has the healthiest economy in Europe, but even it struggles to grow. 

The case for staying in the EU was that leaving would ruin the British economy. This assumed, of course, that staying in a broken union would help the economy. The logic of that escaped me. It is hard to see any economic benefits that would be lost. As I put it in my book Flashpoints, “Britain will avoid the destabilization in Europe by pulling away from the EU and closer to the United States.” 

The EU, not Britain, is the weaker player 

The UK is Germany’s third-largest export market. It is the fifth-largest for France and Italy. It is absurd to think these countries would stop selling to Britain or put tariffs on British exports. The British would respond in kind, and Europe cannot afford a trade war even if it feels insulted. The EU did not create the existing trade patterns. They were already in place. The EU’s members will not allow Brussels to disrupt them. 

Nor did the EU create the patterns of investment. Britain’s banks channel global capital and are a huge source of investment for the Continent. The EU is hardly going to hamper that flow by blocking investments. 

As for regulations that could force EU banks to relocate jobs and resources to Frankfurt, this misses a number of points. Given Europe’s weakness, the burden is on the EU to show continuity. It needs the flow of capital. 

Further, it is the clients who will determine the world’s banking hubs. London has been a traditional banking center preferred by foreign clients. New York - not Frankfurt - is the alternative to London. If clients had wanted to bank in Frankfurt, they would have already done so. 

Obviously, nothing will happen in the immediate future. But it is not clear to me that there will be any real economic blowback. The UK is not Greece. Attempting to shun the British carries heavy potential consequences. Anything imposed on the British will resonate on the Continent. And Germany - which gets almost 50% of its GDP from exports - is not likely to let anyone hinder that trade. 

The economic impact of the UK leaving the EU is minimal because the EU - not Britain - is the weak player. The EU is fighting with Poland over political changes… has criticized Hungary on human rights… is still engaged in the Greece disaster… has an emerging Italian banking crisis. Additionally, Finland is in grave economic trouble, and anti-EU parties are gaining strength in several member states. 

The EU has so many internal issues they are hard to count. Its retaliation is the last thing Britain should fear. 

Immigration seen as loss of national self-determination 

As troubling as Europe’s economy is, it was not the prime mover in the referendum. The contentious immigration debate holds that honor. And immigration itself was not really the issue. Britain was quite comfortable with immigrants until Brussels began making demands. 

The EU dictating the rules was the problem. It was a question of sovereignty. That the EU could make decisions that would change the character of Britain was not okay.

Granted, there was a large vote for staying. The British media have been eager to point out that those who voted to leave were less educated, had lower incomes, and so on. They were also most likely to be affected by immigration. 

Immigration is socially destabilizing. There is always friction between older residents and immigrants. I immigrated to the US as a small child. The buffeting of that experience on both sides is burned into my memory. 

But, better educated and wealthier individuals normally don’t experience this element of immigration. The tension on the streets rarely enters the halls of academia, senior civil service, or banking. 

Not surprisingly, the question of sovereignty wasn’t critical to this class. Just as large-scale immigration did not concern them. Immigrants like my family would not be moving into their neighborhoods. 

We moved to the Bronx in New York because that was all we could afford. We lived next to other people who settled there because it was all they could afford. The older residents had a sense of ownership of the neighborhood. As my family and others moved in, that ownership was threatened. They had little else to claim as their own.

In Britain, the immigrant issue was critical and created a sense of powerlessness. First, Britain was not in control of its immigration policy. Second, the British who were for it, to a large extent, did not feel the profound social costs of immigration.

That fee was going to be paid by those who - again with many exceptions - voted for leaving. So it was a revolt against the British establishment and the EU. As with most things, it was much more complex than it seemed. 

When all else fails, acknowledge the obvious 

The EU has already responded. This statement from the foreign ministers of Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, defines the future: 

We will continue in our efforts to work for a stronger and more cohesive European Union of 27 based on common values and the rule of law. It is to that end that we shall also recognize different levels of ambition amongst Member States when it comes to the project of European integration. While not stepping back from what we have achieved, we have to find better ways of dealing with these different levels of ambition so as to ensure that Europe delivers better on the expectation of all European states…. However, we are aware that discontent with the functioning of the EU as it is today is manifest in parts of societies. We take this very seriously and are determined to make the EU work better for all our citizens. 

This was the EU’s answer to Brexit. They recognized that not everyone wants the same level of integration and will respect that. They are aware that many are discontent with the EU. 

In other words, after the British vote, they acknowledge the obvious. This is a unique evolution. It is not clear what they are going to do, but they are not going to punish Britain. They can’t afford to. 

At the same time, there is a bit of humor in the statement. The EU has 27 member states and, apparently, only six foreign ministers met and drafted this response. Poland wasn’t there. Neither was Spain. Nor were the other 19 members. The new “inclusionary” EU has met and promised to do something. We’ll see if anything actually happens.

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*George Friedman is editor of This Week in Geopolitics at Mauldin Economics. This article first appeared here and is used with permission.

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Clearly the world of equity investors agree because the European markets have taken a significantly greater hammering than Britain's

agree whole heartily, i think when the dust settles in 10 years people will be looking back saying what a success, why did we not do it earlier.
we only have to look across the tasman to see the fighting between the states and the government to see sometimes big is not always best, what happens is the weak have just as much say and get to suck off the rest without having to sort themselves out

Refreshing to read a sensible article on Brexit. I have been thing that the UK will now become more attractive to finance. The UK is spiritually separate from the Continent and should remain so. It would make more sense to have a union of UK, Canada, Australia and NZ. No commonwealth, just the "A" team.

Hear hear George, my sentiments exactly. The EU has been nothing but a German benefit programme. They export goods, services and finance to the detriment of other members, particularly the periphery.

To think there won't be consequences or concessions, direct or indirect seems naive doesn't it?

To assume the UK will continue to get the same single market access they currently have without compromise, without freedom of movement or without contributing to the EU financially as the Swiss and other nations do doesn't really seem possible and that's already been highlighted by Merkel and Junker and others in the EU - even the german car manufacturers that everyone talks about - http://www.bbc.com/news/business-36646251.

Not to mention the huge political upheaval it's caused in the UK itself with the Tories and even Labour. Markets dislike uncertainty. And there is a lot in the UK now and for a few years to come at least. That will have an impact on invest, national debt etc. and that flows through to people at the end of the line. And in those few years, immigrants can still come to the UK.

You see the speech from Farage in the EU parliament, that kind of antagonising will not get the deal the UK wants. But it will piss off a lot of people.

There is no way to know how this will play out, but to think it will all go the way of the UK is a bit misguided.

Good comments.

No . The end of the EU was when it turned from a fiscal to a political union

No. It was the UK that vetoed further political integration of the EU and pushed for expansion of the common market without regard for the consequences.

Many of the negative aspects of the EU are the result of UK influence and the EU now has the opportunity to flourish without the UK.

No sane person would advocate further political integration of the EU. The same thinking produced a number of empires in Europe over the last 2,500 years (Roman, Austro-Hungarian, etc) and each crumbled into dust. Why? They all worked to serve and enrich the masters in the power centre at the expense of the people. The same thinking in the EU today wants to take sovereignty away from the independent countries and the EU elite view democracy with absolute contempt, so know that even your commentary and opinion (let alone a vote) would count for nothing in the minds of these megalomaniacs.
The EU will definitely not flourish, and it is highly likely to disintegrate before 2030, if not sooner. The UK will be far better off on its own and will avoid going down with the Titanic...assuming that the peoples' votes are not sabotaged in the meantime.

They are not losing control, they are about to tighten their grip and force Europe into a super state controlled by banks and erect an EU army ran by the heads. They will push more for more control and lean even closer to a straight fascist state where public opinion in the EU doesn't mean JACK. It doesn't already. If the rest of the nations don't hurry up and jump ship they will all be done and enslaved further by Vatican and central bank control.
Europe is about to be finished with the rest of the world. They will destroy the markets world wide and push martial law everywhere if they don't get their way. We are far from winning this chess game. The markets will fail if the EU survives or breaks apart and they will maintain their control by force and martial law.

Loosen the tin foil hat mate.

Two-speed Europe is the future of enlarged EU, Juncker says

http://uk.reuters.com/article/uk-britain-eu-juncker-idUKKCN0T72N320151118

Correct - but UK politicians or royal members , not the people

Just re-reading my copy of 'Flashpoints', Friedman's 2015 book. www.amazon.com/George-Friedman-Flashpoints-Emerging-Hardcover/dp/B01FMVNJCW

Interesting...as a Hungarian Jew, his reconstructions of the journey his parents must have made is fascinating reading. For all the blether about Britain's choice, there's no doubt the other side of the Channel is much, much worse off, as it is starting from a mixture of denial, fear, apprehension and national interests which are all at internal variance within each nation-state, let alone as between them all.

As a character in John Berendt's book 'City of Falling Angels' www.amazon.com/City-Falling-Angels-John-Berendt/dp/0143036939 remarks apropos Venice 'Until they built the bridge [to italy], Europe was a island.' Britain feels much the same about Europe.....despite what the MSM say.

Well put.. and exactly what is happening here, loss of sovereignty and large scale immigration. I will vote on these two issues alone

Eurisis.
Will be the new region's name as Isis and associated groups flood into France, Italy, etc.

Really good article. The vote was one about the people exerting power over the elite and they won for once. Immigration is indeed part of the mix when governments run an economic policy, much as they deny it. He well describes that immigration does not impact so much on the elite.
The current New Zealand government should reflect on this vote and what it says about the willingness of citizens to be sacrificed in the interests of an economic imperative that is vague at best about the benefits to them.

Of course, Brexit needs a Song.

Tom Waits (who else?) - 'One Last Look' https://www.youtube.com/watch?v=vy2VYgs8bkg

At last a more sensible rational realistic article. The first one I've come across.

will frexit be next, looks like lots of countries starting to think carefully about the real benefits of being part of the EU.
as the saying goes those that dont learn from history are condemned to repeat it.
the EU looks more and more like the roman empire, individual states ruled by a central policy maker that is out of touch
http://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=11666196

Maybe good for the UK eventually, maybe not. Its a chance to do something different, but its just a chance.

The UK can have a beautiful free trade deal with the EU and still be worse off. The elephant in the room is the London finance industry, which is going to be badly hurt if they Brexit.

Whats for certain is that London being the centre of Europe's finance industry will end, and that will hurt the city in the short term. London competes with New York because of EU regulations and the trade in EU equities and bonds, and that will end. It may not drive much business to Frankfurt or Paris, but it will certainly move a lot to NY.