Blog Post

Six lessons about “real” people, Brexit, and the EU

The result of the UK referendum on 23 June has been portrayed as a victory for "real people". But what consequences will the result have, and how should the UK and EU now react?

By: Date: June 27, 2016 European Macroeconomics & Governance Tags & Topics

“…this will be a victory for real people, a victory for ordinary people, a victory for decent people.”

These are the words of Nigel Farage, on June 24, celebrating what he described as independence day. And he goes on

“We have fought against the multinationals, we have fought against the big merchant banks, we have fought against big politics, we have fought against lies, corruption and deceit.

And today honesty, decency and belief in nation, I think now is going to win…..”

“I hope this victory brings down this failed project and leads us to a Europe of sovereign nation states.”

These words will resonate across the UK, the EU and across the world for quite some time. They will need substantial debate in the coming months.

Let me start with six reflections.

1. “Real people”

What does it mean to say “a victory of real, ordinary and decent people”, when 75% of young voters cast their ballot to remain, and poorer cities like Glasgow voted to remain and to keep their rights as EU citizens?

Distinguishing between “real” people and “unreal” people is divisive language and should be called out as such.

Within 24 hours of this victory, social media were full of reports of xenophobic attacks on decent and real people with foreign backgrounds living in the UK. At many points, this has been a poisonous and alienating campaign.

2. Constitutional and political crisis

The referendum has left the UK in a political and constitutional crisis. Clearly, Brexiteers had not believed they could or even should win and looked ill-prepared. Scotland’s first minister has already announced that Scotland may call a second referendum to remain in the EU, while half of the Labour party leadership has stepped down.

So far, no one has accepted the responsibility of triggering the Article 50 exit negotiations (and it may well be that the article is never triggered).

In such circumstances, external pressure from the six foreign ministers of the EU founding members as well as the European Parliament is unlikely to be helpful. It is the UK that legally and formally has to start the official process and the EU should respect that. The political and constitutional crisis in the UK can only be solved there – even though delays will be costly for all EU economies and societies.

3. Inequality

We should carefully consider whether this vote is a result of a fight against “multinationals and merchant banks”, and how much this is related to the EU.

For a start, we must recognise that income inequality in the UK is substantially higher than in most major continental EU countries.

This is despite high welfare spending in the EU; as Angela Merkel is fond of pointing out, the EU represents 5.7% of the world’s population, 22% of its GDP and 50% of its welfare spending.

We must also recognise that the EU, has improved workers’ rights, for example in a working rights directive that defines working time and other benefits.  Labour party leader Jeremy Corbyn warned of a “bonfire of workers’ rights” in the UK should it leave the EU.

We must recognise that many UK regions that benefit from EU funds strongly voted to leave.

But we must not fool ourselves: the perception of increased pressure on the middle classes, the falling labour shares and the high youth unemployment in Southern Europe are serious problems that need to be addressed.

The EU is, in my view, providing answers to these problems. But the answers are not good enough. Compared to other regions such as the United States, our social and economic model produces less inequality. This is an important success for Europe which is poorly understood.

Brussels and the national capitals need to work on this issue and address the problem seriously. This requires macroeconomic policies that are more countercyclical, and social policies targeted at greater social mobility. It also requires us to agree on appropriate corporate and inheritance tax.

But whether these economic issues have been the main issue in the UK is unclear.

4. Negotiations

How should the EU negotiate with the UK if and when it triggers Article 50? We can already see two different approaches. German Chancellor Angela Merkel is willing to give time and to be accommodating to some of the UK’s likely demands, not least in view of domestic economic interests. She has also emphasised the need to focus on the EU 27. France, in turn, seems to take a rather hard line towards the UK and puts the focus on the euro area.

In my view, our approach should be based on our principles: If the UK wants to trade with the continent, it must respect the acquis. For example, if it does not respect the above mentioned workers’ rights directive, trade should be penalised to avoid social dumping on the continent and so on. It will be central to insist on all the achievements of the single market.

A central area of negotiations will be about financial services. The resignation of the British Commissioner Jonathan Hill is a sign of how British influence on financial matters is set to shrink. It is an important but open question how much of financial services will move from London.

The EU budget dimension is probably less important. Certainly, many will argue that the rebate should be ended and the UK should pay like everybody else. Let us not forget that the budget is agreed to help regions that are performing worse. Some may not like the support of farmers but a single market for agricultural products only works if all receive the same financial support.

5. Does the EU need reform?

The answer is yes… And many Bruegel scholars have been calling for and proposing reforms before this crisis. The need to reform has now only increased. In an interconnected world where contagion reaches everyone, you cannot achieve reform, you cannot improve the lives of ‘real’ citizens, by taking an isolationist approach. A successful reform agenda will only be achieved together, with partners who can, and do, trust each other. And there is no better way to cement friendship and trust than through concrete action. And while we certainly need a narrative and a vision, we also need to build trust through concrete actions in the short term that are feasible within the existing treaties.

What kind of reforms should we be focussing on? I would emphasize three concrete steps:

  • The euro area and its governance with a particular emphasis on achieving policies of better demand management and relative price adjustment.
  • The relations between the euro area and the remaining countries outside the euro area. In fact, those outside will represent only 15% of EU GDP once the UK has left. And as André Sapir and myself have argued elsewhere, a deepening of EMU will almost inevitably affect those outside. Migration and defence policies may be more neutral but are also highly controversial. Perhaps most promising would be a single market agenda as I argued elsewhere.
  • A sustainable and inclusive growth model. The EU was a leader in sustainable and inclusive growth and had productivity gains and world leadership in some of these markets. It is important to develop a vision of how we want to shape the future growth model to the benefits of our societies. And we can certainly not accept the intergenerational divide.

6. Urgent action on the economy

First, policymakers must manage financial stability. This is mostly a task for central banks. But politicians should be supportive, in particular regarding any necessary ECB action to stabilise the economy.

Second, macroeconomic policies must react. Stock markets are already heavily affected across the board, and the Brexit shock is likely to weigh on the euro area recovery. With inflation rates close to zero and the monetary policy at the constraining zero lower bound, it will be important that fiscal policies and structural policies are ready to act. We certainly cannot afford another recession.

More difficult is the macroeconomic stabilisation of the UK economy. There is little space for more monetary policy, and the fiscal deficit combined with the current account deficit is another limiting factor. Of course, the depreciation will help the UK economy but the reputational damage of the fallout will likely decrease British competitiveness for years to come. It will be important to closely look at capital outflows and the decline of investment.

 

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

The decline of the labour share of income

What’s at stake: at odds with the conventional wisdom of constant factor shares, the portion of national income accruing to labour has been trending downward in the last three decades. This phenomenon has been linked to globalisation as well as to the change in the technological landscape - particularly “robotisation”. We review the recent literature on this issue.

By: Silvia Merler Topic: Global Economics & Governance Date: April 24, 2017
Read about event

Upcoming Event

May
31
12:30

Inclusive growth: global and European lessons for Spain

Can manufacturing still be a driver for inclusive growth around the world? What European and national policies can foster inclusive growth in Europe? What is the situation in Spain and what can Spain learn from the global and European experiences?

Speakers: Cristina Cabrera, Zsolt Darvas, Maria Demertzis, Alejandra Kindelán, Robert Lawrence and Federico Steinberg Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Calle Los Madrazo 36-38 Madrid
Read about event More on this topic

Past Event

Past Event

Global outlook and policy priorities

At this event the Managing Director of the International Monetary Fund, Christine Lagarde, will speak about the global outlook and policy priorities, ahead of the 2017 IMF Spring Meetings

Speakers: Christine Lagarde, Jean-Claude Trichet and Guntram B. Wolff Topic: Global Economics & Governance Location: Brussels Date: April 12, 2017
Read article More on this topic More by this author

Blog Post

Lagarde picture

Building a more resilient and inclusive global economy

Curtain raiser speech ahead of the 2017 IMF Spring Meetings delivered at Bruegel by the Managing Director of the International Monetary Fund.

By: Christine Lagarde Topic: Global Economics & Governance Date: April 12, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: what are the possible liabilities?

The EU-UK financial settlement will be a complex part of the Brexit negotiations. Here the authors estimate that at end-2018 the EU will have outstanding commitments and liabilities totalling €724bn. Most of these relate to spending after the UK’s likely departure date, but are tied to commitments made during the UK’s EU membership.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

Brexit bill negotiators must answer these 12 questions

Is Brexit a divorce, or is the UK leaving a club? This is the first question to answer as negotatiors discuss the key aspects of the EU-UK financial settlement. The authors present various scenarios, and find that the UK could be expected to pay between €25.4 billion and €65.1 billion. But the final cost can only be calculated after extensive political negotiations.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article Download PDF More on this topic

Working Paper

WP_2017_03 cover

Divorce settlement or leaving the club? A breakdown of the Brexit bill

To bring transparency to the debate on the Brexit bill and to foster a quick agreement, the authors of this Working Paper make a comprehensive attempt to quantify the various assets and liabilities that might factor in the financial settlement.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article More by this author

Blog Post

Giuseppe Porcaro

29 charts that explain Brexit

From financial services to the creative industry, from trade to migration, this selection of charts maps out the troubled waters of Brexit, and provides a compass through blogs and publications Bruegel scholars have written on the topic.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: March 28, 2017
Read article More by this author

Parliamentary Testimony

House of Lords

Brexit: EU budget

On 25 January 2017 Zsolt Darvas appeared as a witness at the House of Lords Select Committee on the European Union, Financial Affairs Sub-Committee.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, House of Lords, Testimonies Date: March 7, 2017
Read article More on this topic

Blog Post

Schoenmaker pic
Nicolas Véron

Brexit should drive integration of EU capital markets

Brexit offers EU-27 countries a chance to take some of London’s financial services activity. But there is also a risk of market fragmentation, which could lead to less effective supervision and higher borrowing costs. To get the most out of Brexit, the EU financial sector needs a beefed up ESMA.

By: Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 24, 2017
Read article More on this topic

Blog Post

unnamed
Simone Tagliapietra

Brexit goes nuclear: The consequences of leaving Euratom

The UK Government has confirmed that it will withdraw from Euratom. But what does Euratom actually do? And what will happen when the UK leaves? The authors find major risks, potential costs and open questions.

By: Enrico Nano and Simone Tagliapietra Topic: Energy & Climate Date: February 21, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement: the “Brexit bill”. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 17, 2017
Load more posts