Who Really Holds the Cards in the EU-Brexit Stand-off?

As we warned even before the elections, if the British government fails to honor a majority vote to leave the EU, it won’t be the first time that a referendum in the EU, after people voted the “wrong way,” would essentially be squashed. And if London does manage to pull off a tactical withdrawal from the EU, it’s unlikely to be painless.

The British people may have managed to drown out the constant doomsaying of Project Fear in order to vote for independence from the EU, but the fear and dread are more present than ever as establishment forces on both sides of the English Channel warn of all the imaginative ways in which the EU will seek to punish the UK for its reckless disobedience.

You can hardly blame disillusioned eurocrats for wanting to make Britain suffer for its brazen disregard for European unity, especially as growing ranks of EU members begin entertaining similar ideas of holding their own in/out referendums. To deter other European countries from leaving the bloc, the European Union “should refrain from setting wrong incentives for other member states when renegotiating relations,” recommends one internal German finance ministry document.

The European Commission’s increasingly jaded president, Jean-Claude Juncker, has “insisted” on showing a “tough stance” towards the British government. He has also given members of the European Commission strict instructions not to hold any talks with Britain or visit the country until the U.K. government launches formal proceedings to leave the EU.

But however tempting it may be to make an example out of the UK, it could end up backfiring.

As is widely acknowledged, one of the main causes of the Brexit revolt is the pent-up frustration of the disenfranchised working and lower middle classes, the olvidados (forgotten ones) of post-industrial Britain. By voting against continued EU membership, the long-abandoned lower ranks of UK society were able to finally exact their revenge on the country’s political and business elite and the political parties that had long sold them down the river.

The problem for the EU is that restless, angry, disenfranchised voters is hardly a uniquely British problem. It is a phenomenon that Mark Blyth, professor of Political Economy at Brown University, calls Trumpism, and it is on the rise throughout advanced economies, as even the European Commission now rather belatedly concedes:

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.

Gold-Bust-2

As much as it would like to, the EU appears to be quietly acknowledging that there are stringent limits to just how far it can go in its collective punishment of British society, especially given the growing public opposition across Europe to further integration.

As John Mauldin points out, 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.

Almost one in three cars sold in Britain comes from Germany, making the British island the biggest export destination for German car producers. It is around a fifth of the total number the industry exports worldwide. In 2015 Britain reached a new peak of 2.6 million car registration, 86% of which were not produced in the UK.

A market of that size would no doubt be sorely missed, especially given that Germany’s biggest car manufacturer, Volkswagen, posted its worst annual loss ever in 2015, having set aside more than $18 billion to address recalls, legal settlements, and other potential penalties resulting from its use of software in diesel-powered vehicles to dupe U.S. emissions tests.

Even in the EU, money does most of the walking and talking. The fact that the UK is a very large net importer of EU goods, especially those made by Europe’s manufacturing powerhouse, Germany, whose economy is already fizzling thanks to a slowdown in China and Western-imposed sanctions on Russia, should give the British government a relatively strong hand in Brexit negotiations, assuming they ever take place.

So just how much economic pain is the EU willing or able to impose on its 27 other Member States in order to make an example of the UK?

Considering that the Greek disaster is still unfolding, Finland’s economy is beginning to wobble, France continues to seethe with strikes and pitched street battles, and Italian and Spanish banks are so crocked that they need constant infusions of cash just to stay afloat, the answer is probably “very little.” In fact, once you drown out all the noise, bluster and propaganda, it’s hard not to conclude that the EU, not Britain, could well hold the weaker set of cards right now.

That’s not to say that the UK will not suffer dire consequences if it tries to consummate its divorce from Brussels. Political polarization and instability have already reached levels not seen for decades. There is also the (somewhat overblown) threat of Scottish separatism to contend with. And the UK economy is almost certainly in for a hellishly bumpy ride in the months and years ahead, especially if its trade deficit continues to worsen, credit rating agencies continue to downgrade its debt, and the City of London loses much of its allure as a global financial center (none of which are certain).

And yes, Brussels can hurt the UK; in fact, it could probably wreck the British economy if it so desired, namely by severing all trade ties with London and cancelling the City’s passporting rights. But it would be a desperate act of (to borrow one of Cameron’s pet Project Fear expressions) willful “self-mutilation”!

In the end, however tough the road that lies ahead may seem for Britain’s policy makers, businesses, and workers, it pales into insignificance compared to the nation-building challenges faced by the self-anointed architects of the European Super State. By Don Quijones, Raging Bull-Shit.

And how will Brexit impact the US where business optimism is already “lowest since the height of the Financial Crisis.” Read… How Vulnerable is the Shaky US Economy to Brexit Fallout and European Bank Meltdown?

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