Brexit Doesn’t Have to Be a Disaster

(Bloomberg View) —

As British Prime Minister Theresa May starts the clock on Britain’s departure from the European Union, there’s no real question that the divorce is going to hurt both parties — and Britain, to be sure, much more than the EU. But this isn’t to say there’s no upside. The right kind of deal will recognize these opportunities and try to make the most of them.

This whole misadventure began with historic errors of judgement — former Prime Minister David Cameron’s decision to call a referendum on U.K. membership, and Europe’s decision to deny him significant concessions in the talks that followed. Further miscalculations over the coming months are likely and could easily make a bad situation worse. But a friendly parting is still possible, and in both sides’ best interests.

The main argument against this view is that the EU should rationally want to punish Britain for its choice, to deter other countries from following its lead. Too much is made of this.

Even the friendliest split, one that kept Britain’s trading privileges mostly intact, would leave Britain at an economic disadvantage. Unavoidable disruption means that jobs would still be lost, and not just in the City. The fall in sterling since the referendum has already cut the purchasing power of U.K. incomes. Also, Britain is quitting partly to regain control of its borders — yet immigration, in economic terms, is a good thing, not a bad thing. Tighter restrictions on flows of labor are a punishment in themselves, no less so for being self-inflicted.

Europe’s leaders do need to deal with mounting anti-EU sentiment, but taking a punitive line with Britain isn’t the best way. Europe’s citizens have legitimate complaints about the union. Telling them, in effect, to remain silent or else might suppress some of those complaints for now, but won’t provide a sound democratic foundation for the constitutional changes that Europe needs. An EU that better serves its citizens is the right way to build stronger support for the union.

Britain, bear in mind, was always an outlier, fundamentally opposed, as other member nations are not, to the EU’s core principle of ever closer union. And having retained its own currency, it was already half-out. Those differences cut against the idea that if Britain now escapes with only slight wounds, further exits of similarly inclined nations will quickly follow. Despite the recent discontent, no other EU members are similarly inclined. A far greater danger of other exits would arise in the longer term from the EU’s failure to repair itself.

That brings us to the upside of Brexit from the EU point of view. One of the clearest lessons of the past ten years is that fixing the euro zone will require a further measured dose of economic-policy integration. The union’s banking and capital markets need to be fully merged. A limited form of fiscal union is needed as well, involving jointly issued bonds and intra-union fiscal transfers.

Granted, such initiatives now enjoy little support, but they are no less necessary, and they can’t be postponed indefinitely. In due course, they’ll require treaty changes and, in turn, the unanimous backing of member states. Even without Britain and its bred-in-the-bone reservations about the European project, securing this backing won’t be easy — but at least it won’t be impossible.

There’s an upside for Britain as well. It can regain some of the power of self-government it has lost as part of the EU. Perplexing as this may be to elite opinion, that’s worth something to much of the country. It will come no doubt at some economic cost, but this cost can be reduced both by seeking the closest and most cooperative partnership with its EU neighbor, and by using exit to liberalize its economy and its other trade relations further and faster than it could as a member. Again, this won’t be easy. Again, at least it won’t be impossible.

The coming negotiations will be fraught. They could fail before the substance of the talks even begins — over Europe’s demand for monies owed, over the status of EU migrants, over mere process (such as whether exit terms should be discussed in parallel with transitional trade arrangements). The point is to understand that the die is now cast, that further recrimination over how this came about serves no purpose, and that the best bet for both sides is to make the most of it.

Crook previously served as an official in the British finance ministry and the Government Economic Service.

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