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If Brexit is a Success, Other Countries Will Follow

Nov 2, 2017


If you believe the papers, it looks like the Brexit negotiations aren't going to make it in time.

Of course, time is a relative thing. There's talk it'll be easier to extend the two-year deadline under Article 50 than negotiate a transition before March 2019. Which exposes that the two-year deadline was nonsense in the first place.

If you bother reading Article 50, it explicitly provides for an extension to the two-year limit anyway.

But what of the effects if we do extend the Brexit negotiations?

On the one hand, uncertainty from the lack of a deal is harmful. Extending that uncertainty to an even longer time is even more harmful.

On the other hand, Europe seems to be imploding politically over time.

Let's take a look at the latest developments on the second hand. After all, if your negotiating partner is growing weaker over time, the incentives of negotiating change fundamentally.

Electoral nightmares for the EU

Andrej Babiš of the ANO party has won the election in the Czech Republic. The party is anti-euro, but not anti-EU. It doesn't hold a majority, but anti-euro parties put together do. That includes the surprise second-place party, pretty much forcing the Czech Republic to seek an escape from the planned currency adoption.

The worm has turned on the euro. More on that below.

In Catalonia, the crisis continues without resolution. Apparently, the Spanish government will take control of the region and then hold elections.

I don't understand how this will improve the situation given the Catalan independence movement has surged in popularity since Spain's crackdown. A new election is surely more likely to embarrass Spain by giving more power to the Catalan independence movement at the regional level. Then they'll have the democratic legitimacy which Spain is trying to deny.

For now, the Catalans are attempting to defend their homeland with a human wall. Given they can build towers out of humans that are many stories high, this is no idle threat. It also has a Gandhi ring to it, which is good for publicity. On the ground, the Catalans aren't so peaceful though.

Over in Italy, the Lombardy and Veneto regions held their own referendums on Sunday. The question put to the people asked whether they wanted reforms towards greater autonomy from Italy.

In Lombardy, the "Yes" vote was 95%, while in Veneto, 98%. It looks like the government in Rome was right when it pointed out the referendum was pointless. Nothing but a stunt to entice more voters in the next election.

Still, armed with the results, negotiations between Rome, Venice and Milan are set to begin within two weeks. With Italian banks and the national government struggling financially, the whole thing has plenty of wildcard potential.

The motivation behind the reforms in northern Italy is similar to Catalonia's. And Brexit. And the Bavarian independence movement. And the West Australian one. And the Scottish one, when the oil price was still high. And so on and so forth. It's all about money.

The northern regions of Italy want to stop subsidising the south with unequal tax flows. The way to do this is an increase in autonomy. But, in this case, not a departure from Italy altogether.

At least "Not for now" the Lombardy president told Reuters. He's watching Catalonia carefully before making a move. And the Italian negotiators must be mortified by the implicit threat he is making to follow Catalonia's lead.

So the turmoil inside Europe isn't just driven by euroscepticism. There's all sorts of political change afoot.

In the midst of all this, it's no surprise that the EU's lead Brexit negotiator has announced he is resigning after the initial two-year negotiation period ends. He knows the EU's position is weakening over time.

Michel Barnier also claimed that British planes would not be able to take off or land at European airports under a hard Brexit. I'd love to see a European politician explaining why they didn't allow British planes to fly to Europe any longer. There is no way they could pin that on Brexit given everyone else in the world can fly to Europe.

Escaping the zones

It's obvious that a proper deal is best for both sides of Brexit. In the end, the EU negotiation team admits it is making decent progress and has a treaty in the works.

So why all the drama?

The real reason is all about the nature of the EU. If Brexit is a success, other countries will seek to follow. You can see the same phenomenon happening right now with the euro in the Czech Republic.

Britain led the way on avoiding the currency. And the north/south economic divide inside Europe illustrated how sharing your monetary policy with all of Europe leads to a "two-speed Europe". That's become the Czech argument for avoiding the euro and its shared interest rate.

The same story is playing out with the Schengen zone. Under a hard Brexit, Barnier threatens us with a border. The likes of the one between Austria and Italy, or Norway and Sweden during the refugee crisis perhaps?

Freedom of movement is breaking down in much of eastern and central Europe. But Barnier still claims that Britain cannot get a good deal without adopting freedom of movement, for example. You can't have the benefits without the costs.

Describing the EU's institutions and values as costs is of course the point. And nobody ever explains why trade must be accompanied with things like freedom of movement. Doesn't anyone remember what the EU was originally supposed to be? A customs union. Not a trap.

Britain led the way on avoiding the euro and Schengen. It escaped the EU's two zones. Now it's leading the way out of the EU altogether.

Euroscepticism on the inside

The EU sits on top of its internal turmoil like Brer Fox on top of an ant-hill. In the story, he has finally captured Brer Rabbit after several volumes worth of failed attempts. Brer Rabbit is destined for rabbit stew at last.

But Brer Rabbit is cunning. He buys time by tricking Brer For into sitting on a soft, grassy knoll... that happens to be an ant-hill.

Eventually the ants begin to bite and Brer Rabbit makes a Brexit while Brer Fox howls and scratches.

The EU faces a choice. Surrounded by euroscepticism and political change of surprising variety, it can dramatically cut down on integration, or it can step up efforts. No political institution sits still and does nothing (which, incidentally, would be my entire manifesto as your prime minister).

Abandoning integration would mean an end to expanding the eurozone and EU. Or at least slowing down the expansion. This refers to both the currency and the political union. Think of it as a consolidation. There would be no joint military, more "exceptions" to freedom of movement and much more winding down various EU initiatives.

The second option is fascinating. Pursuing more Europe, as they say, would mean altering the nature of the EU in a fundamental way. With so many nations electing eurosceptics to government or majorities, these would have to be overridden in the political process. The EU would no longer be about consensus. And its member nations would put up a fight.

This would be a de-facto vindication of Brexit. And make other exits far more likely.

The key message from Europe's chaotic election season is surprisingly simple. MEP and Brexit campaigner Daniel Hannan put it best at our conference. You can find out how to watch his speech and all the others here.

He told the audience that the EU was simply on the wrong side of history. The world is transitioning to ever smaller states, governed ever more locally. Just counting the number of nations in the world over time makes this obvious.

But the EU is trying to integrate. To form a superstate. At some point, this is against the will of the people.

The real danger is who they turn to when their government goes against their will. And that is why Britain can be proud of its politicians. The buffoonery of a Boris Johnson is preferable to the antics of Donald Trump, Viktor Orbán and Andrej Babiš.

Until next time,

Please note: This article was first published in Capital & Conflict on 24 October, 2017.

Having seen the true nature of the investment banking business in 2008 from inside Wall Street's most notorious bank, Nick decided to find somewhere he could give honest, hard-hitting and profitable investment advice in an ethical way instead. Nick has worked in financial publishing since 2010 as the editor of the Daily Reckoning Australia, the retirement themed Money for Life Letter, and Strategic Investment Australia. He joined Southbank Investment Research in 2015 as editor of Exponential Investor. Nick holds degrees in Finance, Economics and Law from the prestigious Bond University, is a qualified Financial Advisor in Australia.

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