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Michael Hüther in "The International Economy" Contribution 9. June 2016

A Brexit would change the European Union's characteristics significantly

A Brexit is not in the national interest and neither is it in the European Union's interest, says IW-director Michael Hüther in a guest commentary for the magazine "The International Economy".

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The EU-UK relationship has historically been a difficult one. First, in the 1960s French President Charles de Gaulle opposed a British membership. Then, with de Gaulle out of office, the United Kingdom joined the European Union in 1973, only to hold a referendum on its membership in 1975 – a bold domestic policy move pulling together Labour for decades. Back then, the British looked up to continental Europe, and over two-thirds voted "remain."

Until today, the United Kingdom’s EU membership is a curiosity. The British rebate and Schengen opt-out give continental Europeans the impression that UK representatives practice cherry-picking while preferring isolation to integration. The economic entanglement between the European Union and the United Kingdom, however, is not to be underestimated. Apart from propagandistic UKIP estimates, most serious researchers quantify stark GDP per capita losses for the United Kingdom (and also for the leftover EU member states) in the case of an exit from the European Union. A recent IZA study simulates a synthetic United Kingdom as a non-EU member from 1973 on. The researchers find that the synthetic UK performs around 25 percent of current GDP per capita worse than the real EU member state United Kingdom. Although other studies find less devastating effects, a self-inflicted Brexit is, frankly speaking, economic suicide.

Which country would voluntarily risk renouncing a quarter of its income? The discussion becomes even more puzzling when zooming in on the British achievements during the last decades: The United Kingdom was the main driver behind the shaping of the single market as well as the integration of former Soviet-dominated countries into the European Union. Today, both initiatives are seen as the building blocks of a prosperous, converging, and peaceful Europe.

Hence, just as in 1975, a Brexit is not in the national interest and neither is it in the European Union’s interest. Today, in contrast to forty years ago, the British economy looks more dynamic than its continental counterpart. The referendum might actually be lost! The Kingdom needs the Union, but the Union also needs the Kingdom.

The fragile crisis countries Ireland, Portugal, and Greece would be hit especially hard. These countries have a high exposure to Brexit as they share remarkably tight bank links with the United Kingdom, ranging from 21 percent of GDP in Portugal to 174 percent of GDP in Ireland.

In the long run, a Brexit would change the European Union's characteristics significantly, shifting power away from countries where liberal economic policy dominates. This change has institutional consequences as the liberal country bloc – consisting of the United Kingdom, the Netherlands, as well as the Scandinavian and Eastern European countries – loses its blocking minority in the EU Council. Germany would no longer represent the pivotal swing player. Economic policy would shift away from its market economy anchor, more and more influenced by a politically determined and more regulated environment.

The United Kingdom’s valuable contribution to the European Union is reflected in the bargaining position UK Prime Minister David Cameron took when negotiating his deal in Brussels. Although the outcome, which stipulated efforts for more competitiveness and the dismantling of bureaucracy, might seem vague and disappointing, it is a step in the right direction. Furthermore, the British referendum raises fundamental questions about what "an ever closer union" – first set by the Treaty of Rome and lately reinforced by the EU institution’s five presidents – actually means.

EU President Jean-Claude Juncker is trying to build a self-centered institutional structure. The demanded intensification of fiscal integration – for example, fiscal capacity – would hamper a sovereign’s incentives to build a globally competitive economic structure. It is exactly this European dead-end that the United Kingdom and Germany could fight together, and a battle most probably lost without British influence.

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