The Bear’s Lair: Will Brexit break up the EU?

In 2017, British voters will have the opportunity to express their opinion in a referendum on leaving the EU. Currently the vote looks tight, although the decision of Labour leader Jeremy Corbyn to abandon the convictions of a lifetime and support EU membership is a blow for the anti- camp. Yet if Britain votes to leave the EU and actually leaves, the effect on the remainder of the EU will be considerable – and there must be at least a sporting chance that the entire union could break apart.

If the EU had remained the simple free trade zone and friendship pact British voters were told they had joined at the time of the last referendum in 1975, the referendum’s result in 2017 would doubtless be very similar to the result then – a majority of 67% to 33% for staying in. It’s a cold, rough world out there without Britain’s European friends. It made little sense in the 1960s for Britain to ally itself with other sclerotic manufacturing economies, and not with its Commonwealth associates who had cheap labor and endless raw materials. However if the EU were a free trade zone it would also make no sense in 2017 for Britain to undo the relationships built up over 40 years and seek to fend for itself and build relationships with countries which have found other “best buddies” elsewhere.

There are two reasons why Britons might nevertheless vote to leave the EU. The first is the EU commitment by the 1957 Treaty of Rome to “ever closer union,” present in 1975 but deliberately under-emphasized in the referendum campaign. With a multiplicity of languages, religions and cultures, “ever closer union” between the peoples of Europe seems to most British neither feasible nor desirable. Indeed, discouraging the continent of Europe from uniting into one polity has been a central tenet of British foreign policy since the Romans left.

The second feature of the EU which might cause Britain to vote to leave it is its intrusive bureaucracy, parliament and judiciary, which seek to micro-manage every facet of British life, and to impose their unpleasant social and economic views on the naturally conservative British populace. This is an ever present problem with trans-national bodies: their functionaries quickly lose all allegiance to the countries and societies from where they came and take on a bureaucratic-imperialist politics of trans-nationality, social liberalism and economically Keynesian state control that is very unpleasant to those forced to live under it.

Essentially transnational bureaucrats come to believe the “Keynesian bureaucrat fallacy” that the world would be much better run if every facet of life was controlled by transnational bureaucrats schooled in the economics of Keynes and the social views of the Bloomsbury Group. Since Keynesian economics doesn’t work because Keynesian bureaucrats make very bad economic choices in the complex real world, and most well-adjusted people find the Bloomsbury Group thoroughly repulsive both artistically and personally, the result is a very unhappy helot populace in all areas governed by such people.

Hence 2017’s referendum is in the balance. If the British vote to leave, they will then have two years to negotiate exit terms, finally leaving at the end of 2019, presumably. The question before us, however, is not the future fate of Britain, of which I have written in a previous column, but the future fate of the European Union itself.

Initially, the reaction of the Eurocrats to a British exit is likely to be one of relief. They will have got rid of an “awkward squad” that tended to insist on opt-outs from all the fun stuff, and could be relied upon to vote against any “ever closer” treaty the bureaucrats came up with. Of the remaining dissidents, Scandinavia (minus Norway) is too small to block much, and has a tendency to behave like “good citizens” when the general good is advanced. Eastern Europe is mostly too poor and dependent on EU subsidies to object much to EU plans. Dissident governments like Hungary’s can always be painted as neo-Nazis, while Romania and Bulgaria are such corrupt economic wrecks that the bureaucrats can threaten to cut off funding or launch a corruption investigation if they step out of line. As for the Mediterranean countries, they will mostly assume that any new rules can be evaded by their skilled citizens, aided if necessary by bought-off bureaucrats of their own nationality. Thus provided Germany, France and the Benelux countries can be brought to agree to bureaucratic designs, the EU nomenklatura can surely proceed with their plans at full speed.

There’s no question that the bureaucrats will have an agenda for the new slimmed-down EU. Border controls must be abolished in full, in order that the bureaucracy can itself control who is allowed into the new glorious EU, without any national objections being permitted. Immigration of “refugees” will be encouraged, because once they become voters the new inhabitants will break down any national or cultural identities that stand in the way of bureaucrat-driven integration.

For the bureaucrats, the EU must form its own defense association, wholly independent of NATO, with its own armed forces, so that when the United States goes into one of its bombastic Imperialist phases, in whatever part of the world, it can be resisted, with the EU exercising its full power of 27 votes plus a Security Council veto in the United Nations. An alliance must be formed with Vladimir Putin’s Russia, so that his ambitions are directed towards non-EU countries in the Middle East and elsewhere, and the EU can join with him in resisting the U.S. and its allies without fear of a sneak attack on the Baltic States or Bulgaria.

Economically, the excesses of Anglo-American capitalism must be stopped, and a Rhineland model of social market economy put in its place. Cowboy markets must be exiled from the EU and London blocked from doing EU business, while carefully controlled closed EU markets for bonds, foreign exchange and equities must be set up in Paris and Berlin (not Frankfurt – too far from government control) in which interest rates are controlled and capital allocated according to the needs of the Union, as determined by the economic experts in Brussels.

Of course, environmental emissions will be strictly controlled, and a cap and trade system set up for all pollutants, with caps set by the EU’s experts and trade organized by carefully managed bourses in Paris and Berlin. Naturally, the European social model will regulate hours and working conditions, to ensure that trades union rights are properly recognized, discrimination of all kinds is stamped out and workers are allocated their proper allowances of vacation, maternity leave and personal days, without being forced to work more than moderate amounts of overtime. Finally, the latest new dream, euro banknotes will be eliminated so that interest rates can be set sharply negative, euthanizing the rentier even more thoroughly.

There is just one problem with this EU bureaucratic dream: it will cause economic collapse and mass populist rebellion within well under a decade. My lovely late wife and I had lunch in 1993 with the Deputy Governor of the Bulgarian National Bank, who said he had been dealing with the Comecon masters in Moscow for a lifetime, and found the new potential masters in Brussels very similar in thought processes, but more unpleasant to deal with and more contemptuous of Bulgaria’s needs and aspirations.

The well-disciplined countries and nationalities, such as Germany, Scandinavia and the Netherlands, will find themselves priced rapidly out of world markets, with massive white elephants of bureaucratic resource allocation ensuring that productivity falls by 30-40% within a very few years while unemployment soars above 50%, particularly among the younger inhabitants. The troubles of the German electricity market, which today has costs of twice the world level, will rapidly spread to their entire economies. As in the former Austria-Hungary after World War I, the collapsing scale and efficiency of local industries will cause living standards to fall catastrophically.

At the other extreme, Eastern Europe, with Bulgaria and Romania leading the way and southern Europe, led by Greece, Italy, Cyprus and Malta, will rapidly become controlled by mafia cartels, employing labor at sweated wages paid in cash, driving legitimate businesses out of existence, and competing though open warfare, as in the less well-regulated parts of Mexico today. Tax collections from these countries will collapse, as will the living standards of their inhabitants, as life resumes its Hobbesian state of very unpleasant nature. Like Greece today, these countries’ Mafia-controlled governments will find that the worse they behave, the more likely they are to receive handouts from their richer neighbors in northern Europe.

For the young, well-armed and tough, life in these countries will become stimulating and at times highly lucrative, if liable at any time to be cut short. For everybody else even the economic basket-cases of northern Europe will seem like a nirvana.

Needless to say, with British encouragement it is to be hoped, the peoples of the EU periphery will quickly see that their only way out is to follow Britain’s example and choose independence. One by one they will demand an EU exit of their own, with Scandinavia, the Baltic states and the better run countries of Eastern Europe being first in line. The EU may try to resist by force, but will lack the moral underpinning with which President Lincoln was able to overcome the similar claims of the U.S. south. The EU’s territory will quickly be reduced to France, Germany, Benelux and a residue of Mediterranean and Balkan states where government authority has effectively collapsed and anarchy reigns.

By the time this happens, it is to be hoped that Britain has made advantageous trading agreements with nations with plentiful supplies of raw materials, such as would have been her best partners in 1960. She should then welcome the terrified exiting EU states into her new arrangements, forming a loose free trade zone with no centralized bureaucracy and no common legal impositions.

No doubt these arrangements will eventually be codified into a new Treaty, whose preamble will speak of entry into an “ever freer and more independent association” – the exact opposite aspiration to that of the foolish Treaty of Rome.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)