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SAGA CORNER

Brexit and Breaking EU

After the Second World War, Europe was devastated, the UK tired and drained and the USA remained the only dominating global power, militarily and economically. The foresighted American leadership wanted to safeguard the possibility of any future war in Europe and intensify its control over it. Therefore, it decided to integrate and develop Europe and European Common Market (EEC), the present European Commission (EC) came to exit.

EU, a political-economic union, began functioning with six countries in 1957. It swelled to 28, concerting almost the whole of Europe an integrated single market governed by a uniform system of laws applicable on all member countries. It ensured free movement of people without passport control. Foreigners could also move freely in the EU (excepting a few countries) with Scheme visa. Goods, services, and capital were also allowed without restrictions within the EU. This expansion of market and free movement boosted development in the member countries.

EU was doing well till Euro was introduced as the common currency by 19 of the 28 member-countries (known as Eurozone). Till then, the Eurozone countries were growing at two per cent growth rate. However, from 1999-2015, the post-Euro period, the growth rate fell to 1.3 per cent and the unemployment rate went up to over 10 per cent and 25 and 21.6 percent in Greece and Spain respectively. In non-Eurozone countries it was only five per cent.

Euro made Europe depressed because of inadequate competitiveness and fiscal austerity in weaker countries. Stronger nations like Germany and the Netherlands developed faster and became more competitive compared to the rest of the Eurozone, building large export surpluses. They lived off domestic demand created in other Eurozone countries, leading to inadequate economic performance of the EU and the rest of Europe, including the UK. The depressed Eurozone caused deflationary effect not only in Europe but also across the globe.

No doubt, Euro-zone was a self-inflicted wound but other factors also contributed significantly to its illness. First, the creation of wide-ranging regulations and meddling in business in the name of conformity caused poor growth in EU by killing competition and diversity between European countries that had made Europe globally dominant.

Secondly, the fiscal-ineptitude resulted in spending common funds on less-productive programmes. For example, farmers forming just 5.4 per cent of EU’s population and contributing only 1.6 per cent to EU’s GDP received 47 per cent of the EU’s overall budget through Common Agricultural Policy (CAP) hand-outs. So a minority of unimportant and inefficient workers got more than €58 billion in subsidies. Eighty per cent of it went to only 25 farmers (landed gentry, mega-farms and large-scale agro-industrial conglomerates). Thus, EU’s limited funds were handled inadequately.

Thirdly, EU ignored basic growth factors like investment, simpler and lower rates of taxation, infrastructure and education and suppressed competition between different European nations. EU leadership and bureaucracy largely concentrated on integration that bestowed greater power on them.

Finally, the European debt crisis following the U.S. subprime mortgage crisis, triggered by insolvent American homeowners who defaulted on their mortgages aggravated the problem. World-over banks with investments linked to those mortgages started losing money. Lehman Brothers collapsed and the scared banks and investors, globally, stopped lending to each other fearing going bust. European banks had invested heavily in the American mortgage market and were hit hard. Governments in many EU countries like Germany, France, the UK, Ireland, Denmark, the Netherlands and Belgium tried to save their banks. But the cost proved very high. In Ireland, it almost bankrupted the government until fellow EU countries stepped in with financial assistance.

The problem began to affect governments as Europe slipped into recession in 2009. Markets went in panic worrying that some countries may be unable to rescue troubled banks, and so investors began to look more closely at governments’ finances. Greece was the first country to come under scrutiny because of its falling economy and public debt almost twice the size of the economy. Governments that were regularly borrowing large amounts to finance their budgets, accumulating massive debts suddenly found no one to lend to them. Thus a banking crisis became a sovereign debt crisis.

Today EU is desperate because of its own ruinous contradictions and spectacular failures. Its creators promised to bring peace and prosperity, but their grandiose folly fuelled only debt, despair and disintegration. It is in trouble because the complex, cumbersome and expensive federalism that lacks any kind of local democratic legitimacy. People are asking why one cannot offer a job to a talented local and have to advertise?

EU is breaking because it has become elite-driven. The idea of free movement of people was gracious, but it mattered little to that majority who never travelled beyond their city. The arrogant and engorged bureaucracy with intrusive regulatory power with no accountability caused more frustration. Arrogance, stubbornness and complacency were the response of Brussels to David Cameron who went to renegotiate Britain’s relationship with the EU. He only wanted a modest package of reforms, but unbending EU leaders declined to agree to even a minor change in migrants’ rights to claim welfare. The way he and Nigel Farage were humiliated at Brussels after Brexit vote shows utmost arrogance.

Brexit can be the beginning of EU falling apart as it denies national and local freedom to operate. It has vertically divided societies between the university-educated versus the unqualified, of town versus country, of the middle-class versus the working-class, of young versus old. The electoral victories of nationalist and populist parties in Britain, France, Austria, Denmark, and the Netherlands reveal the chronic dissatisfaction with the E.U. Brussels seems to be losing touch with ordinary citizens across EU. A Pew Research survey found that only 38 per cent, six points lower than in Britain, people favour EU in France. In weak economies like Italy and Greece, citizens were furious over German-imposed austerity. In Eastern Europe nationalists blame EU for imposing values like gay marriage.

Sluggish growth, high unemployment, painful austerity measures, and risky bailouts have worsened the situation. EU’s intrusions into national sovereignty, like its increased control over national budgets, the Fiscal Compact Treaty binding nations to fiscal discipline, and moves to create a banking union with a common supervisor and mechanism for dissolving failed banks may deepen trouble. Despite EU leaders’ optimism the economic problems in EU are continuing. Growth is still very low and unemployment high. Problems in Greece are continuing; in fact, it may face another crisis when the Government tries to reform its unaffordable pensions system. Portugal and Spain are also heading in the same direction. The continuing refugee calamity is threatening the social fabric of Europe and local societies are refusing to accept Islamic refugees. Anti-immigration and anti-EU movements like the Front National in France, the Dutch Party for Free and the Swedish Democrats are gaining strength. This fury may worsen if Islamist terror attacks increase.

EU should learn from ASEAN whose success is by adopting a culture of ‘musyawarah and mufakat’ (consultation and consensus in Indonesian). The approach of high degree of discreteness, informality, pragmatism, expediency, consensus building, and non-confrontational bargaining styles, and not EU’s adversarial posturing and legalistic decision-making procedures has stability to the 27 country region. By organising more than 1,000 meetings a year it has developed thousands of invisible formal networks in the region. Its policy of non-intervention in one another’s domestic affairs has resulted in peace, progress and prosperity in the region.

If the arc of Brexit is to be checked, the EU leadership has to give more autonomy to member countries. History proves that too much centralisation causes breakdown, sooner or later. That is the reason dictatorships fall. The Soviet system also broke down because of too much of centralisation. For EU to survive Brussels will have to listen to the agitated people.

Dr. Halan,a commentator on politico-economic affairs, is the former Resident Editor of Financial Express and past Member of Press Council of India

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By TIS Staffer
the authorBy TIS Staffer

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