Richard Burt & Philippe Maze-Sencier
One should not underestimate the shock wave unleashed on the United Kingdom (UK), the European Union (EU), and the Europe-US relationship by the outcome of yesterday’s Brexit vote. Britain’s choice is one of those historic moments that will be as significant and defining for the continent as the fall of the Berlin Wall. Today’s outcome is the result of a 20-plus year process that started with the Maastricht treaty and the fundamental decision taken in the early 1990s by France and Germany to move toward some sort of a federated Europe. While the British signed up to a common market fostering trade and services across Europe when they joined in 1973, they were never comfortable with the idea of an “ever closer union.” The coming months will see the beginning of a number of political crises, in both the UK and on the continent, that will likely pit many EU member states against one another, and will certainly reverberate around the world.
On the UK: The Kingdom came out reeling from a bruising referendum campaign that has delivered a ground shaking result and underscored some of the deep fractures faced by this country of four nations. The country is more divided than ever between two roughly similar halves (pro- and anti-Brexit), between London and the rest of England, between England and Wales versus Scotland and Northern Ireland, between the young and the old, and between native-born Britons and immigrants.
Yesterday’s vote also put in sharp contrast the growing divide not only between metropolitan Britain and provincial Britain, but more specifically between London as an economically vibrant, open, and multicultural hub and the rest of England, especially its northern part, still reeling from the effects of the financial crisis despite all the talk of a “northern powerhouse” and economic success story by 10 Downing Street.
The immediate political fallout has been David Cameron’s resignation announcement: he intends to step down by October, and his henceforth heir-apparent George Osborne will depart with him. The Conservatives now have a couple of months to get organized and put two names on the ballot between whom their Members of Parliament can choose. The two most likely candidates are London’s former mayor and leader of the “Out” campaign Boris Johnson and the Home Secretary, Theresa May.
The hydra of a Scottish referendum is most likely to rear its head once again, with the aggravated possibility of Northern Ireland joining the band wagon, or at least reconsidering its links to London. Not a single Scottish constituency put the “out vote” in the lead, and an overwhelming 62% of Scots voted to “Remain,” while 56% of Northern Irish did the same. Nicola Sturgeon, Scotland’s First Minister, has already said the Scots saw their future as part of the European Union, even if despite their unequivocal vote, they still faced having to exit the European Union after the Leave campaign edged ahead across the UK.
Finally, the process of determining who will handle exit negotiations between London and the bloc of now 27 countries and how this will be done (when to trigger Article 50 of the Lisbon treaty that governs the withdrawal from the EU of a Member State) remains unprecedented.
On the EU: The risk of a domino effect among other EU members is real. France’s Marine Le Pen and Dutchman Geert Wilders have already called for their citizens to be given the same chance as the Brits to vote on their future and their membership in the EU. It is also hard to ignore the populist pattern forming across Europe, in which a divided Britain is joined by a divided Spain, a divided France, a log-jammed Italy, a fragmented Germany, and Poland and Hungary flirting with extremes. Furthermore, the populist surge in Europe presents a real threat both to the EU as it exists today, and to the larger transatlantic alliance, because of its underlying skepticism about the EU, its negative view of the continent’s relationship with Washington, and its positive inclinations toward Putin’s Russia.
The vote’s result also brings back to the fore Europe’s old problem of a Germany either too strong or too weak, and its debilitating effect on the continent. The France of today is too weak to counterbalance Germany, and the disappearance of Britain’s moderating role is likely to leave Germany exposed, forcing it to rethink its position in and approach to Europe.
Under Article 50 of the Lisbon Treaty, a country has two years to negotiate its withdrawal from the Union. However, the clause has thus far never been invoked, and untangling 43 years of EU legislation may require much longer than two years. When to formally trigger that clause, what kind of conditions the rest of the EU will be willing to give the UK, and how much maneuvering room the country will have are all up in the air at this stage.
Finally, the European Union is likely to be struck by paralysis for the next few years, trying to navigate the exit negotiations with the UK and the French and German elections in 2017, all while handling an ongoing migrant crisis, terrorism threats on its territory, a resurgent Russia, a failed-state in Ukraine and the war against ISIL in the Levant.
On the US: German-US relations are likely to become even more important than they already are, displacing in all but name the “special relationship” between Britain and the US. Having lost its most faithful ally in the EU as a result of the Brexit vote, the US will need to pay even closer attention to Germany, the country becoming Washington’s de facto primary partner on the continent. With Britain gone, the Germans may also find themselves more vulnerable to Moscow’s pressures for a more “balanced” position and relationship, possibly straining relations between Germany and the US as well as the EU and the US.
Defense and intelligence matters may be the one area where the US-UK special relationship will survive in light of both the Kingdom’s role and capabilities as America’s closest and longest military ally. Similarly, NATO is likely to get a further injection of life, as it is the only institutional platform on the continent bringing together EU countries, the US, and the UK.
On the European economy: In the run-up to the referendum, perhaps the loudest warnings against a Brexit came from London bankers who feared losing access to the EU’s single market. Many financial firms run market operations, including securities trading, out of London, but these activities are often regulated at the EU level. Furthermore, all these firms rely on the EU’s “passporting rights” allowing non-European firms that are registered in at least one of the EU’s 28 jurisdictions to operate in all other member countries. With Brexit, all businesses operating across the EU from a UK base could be affected by a loss of passporting rights.
International financial institutions would be most severely affected by such a loss: these firms will likely relocate and thousands of UK jobs are also likely to go with them. The fate of passporting rights still has to be negotiated as part of the exit discussions, and most financial institutions have contingency plans to move staff and operations outside the UK, but implementing them will be neither easy nor cheap. Frankfurt, Paris, and Dublin will compete for London’s spoils.
By the same token, plans by the European Commission to create a US-style capital market across the EU have suffered a massive setback. Britain’s decision to exit the EU will leave London on the outside looking in, while building a single market for capital markets without the biggest player clearly changes the dynamic.
Finally, in an already difficult environment, the TTIP negotiations will be further complicated in the near term with the disappearance of one of its strongest supporters in the EU.
In conclusion: The consequences of the UK’s decision to leave the EU cannot be underestimated, while the exact extent of its impact will take months and years to assess. While the vote marks the end of a long and difficult debate, it also represents the beginning of what will be a protracted period of uncertainty and even instability for Britain and Europe alike. It also can be understood as a defeat for the transatlantic relationship and a possible victory for Putin’s Russia.
Lastly, while it is hard to say what the UK means for US presidential politics, it is interesting (and perhaps ominous) to note that Donald Trump called the vote “fantastic.”