THE BREXIT DIVIDE
Tensions are rising as Britain prepares to vote on its membership in the European Union. Inside the country, rhetoric has become personal and extreme over an exit that some argue threatens to stifle trade and push the nation's economy into recession. Outside, the very notion of a united Europe is under severe strain. Whatever voters decide, it's a union that may already be too fractured to save
What's at stake for Britain
Roland Shipham smiled as the bright red "battle bus" emblazoned with Vote Leave across the side pulled up in front of the clock tower in Kettering, a small city in the heart of the English Midlands.
The doors opened and Douglas Carswell, an MP for the UK Independence Party, bounded down the steps to greet Mr. Shipham and a couple of dozen supporters. One volunteer gave the MP a British flag while others fanned out across the square handing out Vote Leave pamphlets.
A small altercation occurred as an exuberant supporter shoved a leaflet at a woman and told her that women have a lot to fear from the European Union because it threatens family life. "You should not be peddling fear like that. That's appalling," the woman said before storming off.
Mr. Shipham, a retired miner, was unfazed by the tussle and calmly explained his reasons for wanting Britain out of the EU. His main complaint: immigration.
"This country can't stand too many more people. There's no work," he said.
With less than a month to go before the June 23 referendum on the so-called Brexit, both sides are scrambling to win over voters in what has become one of the nastiest campaigns in recent history. Families have been torn apart, long-time political allies have fallen out and the campaign rhetoric has become personal and extreme.
Conservative MP Boris Johnson, a prominent Vote Leave campaigner, has invoked Hitler and Napoleon, saying they failed to unify Europe by force and the EU is an attempt to do the same thing by different means. Prime Minister David Cameron, who wants Britain to stay in the EU, has suggested the leader of the Islamic State group and Russian President Vladimir Putin support Brexit.
Christopher Furlong/Getty Images
Polls show the side backing the EU, Britain Stronger in Europe, or Remain, is in the lead. But that's deceiving. Remain enjoys strong support among younger voters – up to 53 per cent for those under 35 – but they also have the lowest voter turnout. By contrast, Vote Leave does well with older voters – 54 per cent among those over 55 – and they tend to vote in greater numbers.
Much of the campaign has focused on economic issues and whether Britain's economy can thrive outside the EU. A long list of economists, think tanks, investors and international organizations has concluded the country will be worse off if it leaves.
The Organization for Economic Co-operation and Development estimated that by 2030, gross domestic product per household would be up to £5,000 ($9,500) lower if Britain left. The International Monetary Fund indicated London's status as a global financial centre would be eroded because British firms would lose passporting privileges to the EU. Bank of England Governor Mark Carney has said the country could face a technical recession if it votes to leave. There are also fears the stock market will fall, mortgage rates will rise and the pound will weaken.
Dozens of companies have come out in favour of Remain, too, and some chief executive officers, such as the CEOs of Microsoft UK and Hewlett Packard UK, have appealed directly to employees to vote for staying in the EU. HSBC CEO Stuart Gulliver said the bank would move 1,000 investment bankers to Paris if Britain leaves the EU, and companies such as Airbus, Eurostar, Goldman Sachs, JPMorgan Chase, Citigroup and Morgan Stanley have donated money to Britain Stronger in Europe, among others.
A recent poll of the Canada-United Kingdom Chamber of Commerce, which has more than 250 members, found that 68 per cent believe that Brexit would be negative for their business.
"We haven't found anything positive to say about a Brexit vote," IMF managing director Christine Lagarde said recently.
Those on the Leave side say these groups have been wrong before and that exiting the EU would save taxpayers billions of pounds and give Britain control over its future. Money that currently goes to the EU could be spent on improving health care, education and other necessities, they argue. And they say businesses would be freed from a myriad of EU regulations that hold the economy back.
One of the most hotly contested topics is trade and how Britain would access the EU and other markets if it pulled out. About half of Britain's exports go to the EU and roughly 10 per cent of EU exports go to Britain.
The EU treaty has provisions for a country to leave, but they have never been tested. According to Article 50, if a member gives notice of withdrawal, it has two years to try to negotiate a new arrangement with the EU on trade and other matters. During that time, the departing country remains a full EU member. Reaching a new deal wouldn't be easy. Britain would be subject to the EU's terms and timetable for discussions. And any new agreement would have to be approved by each member country.
Britain could simply ignore the exit provisions and pull out of the EU on its own. But experts say that would make it almost impossible to negotiate a favourable trade deal with the EU.
Those on the Remain side argue that Britain would face prolonged and difficult negotiations over a new trade arrangement, and that EU members would not be very accommodating. They also note that EU agreements cover Britain's trade with 60 non-EU countries. U.S. President Barack Obama also said Britain would be "at the back of the queue" when it came to reaching a trade deal with the United States.
Norway and Switzerland have trade relationships with the EU without being members. But both countries are still subject to EU rules and pay into EU programs, without a say over how the money is spent. And the EU has not expressed an interest in doing similar arrangements with other countries.
The Leave side counters that EU members and other countries will want a trade deal with Britain because it is such an important market. "We're Germany's largest export market. We have a £60-billion-a-year trade deficit [with the EU]," said Mr. Carswell, the UKIP MP. "Put it the other way, EU member states have a £60-billion-a-year trade surplus with us. Are they going to want to stop selling us things because we vote to leave? Of course they are not."
He also pointed out that EU trade deals get bogged down with demands from member countries, such as the Canada-EU agreement that has yet to be ratified because of issues raised by a couple of countries. "If you are one of 28 member states, far from getting a good deal, you never actually seem to get a deal," he said. "If we were outside the EU, we'd go straight ahead."
And while polls show the Remain side has largely won the economic argument, Vote Leave is ahead on immigration. Their campaigners got a boost recently with figures showing net migration to Britain hit 333,000 in 2015, the second highest on record, and that the number of EU migrants to Britain has hit a record 2.2 million, further stoking fears that these people are taking jobs away from Britons.
That's a concern to voters such as Phil Mcilvaney, 35, who works in a convenience store in Kettering. He is worried about the rising number of immigrants to Britain and whether the country can support the influx. But so far, he has been largely turned off by the campaign, saying he has lost trust in politicians on both sides. "First of all, no one trusts anything that's being reported to them and no one knows anything about it anyway," he said. "You get your oldies that know a little bit more about the EU because they lived through it. You ask anyone my age or younger, they won't really have a clue."
-Paul Waldie in Kettering, England
EU member states by year of entry
Red = new member; black = existing member; dark grey = future member
What's at stake for the EU
The European Union doom list since the 2008 financial crisis has included the endless threat of Greece's expulsion from the euro, deep recession, obscene unemployment, deflation, dud banks, the rise of parties on the extreme right and left, terrorist attacks and the refugee crisis. The EU survived them all.
Now comes the Brexit vote, where the EU might finally meet its Waterloo.
If Britain uses the June 23 referendum to wave goodbye to the EU, the EU will lose its second-biggest economy, after Germany, its most liberal market voice, its banking centre and its most powerful military force, raising the question: Can the EU survive after Brexit and, if so, in what form?
The shape of the EU minus Britain would not just pose an existential crisis for the EU, which is still the world's biggest trading bloc, it would have the potential to damage global trade and the trend toward more open markets. A broken EU could well spell the end of the transatlantic trade agreements that are are still in the works with Canada and the United States (known by their acronyms CETA and TTIP) and possibly result in the re-establishment of tariff and non-tariff barriers that would make trade and investment more difficult both within Europe and from outside it.
The EU minus Britain would spell bad news for the EU, at least in the near term, according to Citigroup's economics team led by Willem Buiter. That's because most EU countries are running a big trade surplus in goods with Britain (though not in services), worth about 0.6 per cent of continental EU's gross domestic product. Assuming Brexit would reduce EU exports to Britain by 10 per cent, and reduce imports from Britain by the same amount, the EU's GDP would take a one-off hit of 0.05 per cent, Citigroup said.
The longer-term picture is complicated and would depend largely on the nature of any new trade agreement between Britain and the rump EU, which could take many years to negotiate. The short-term shock of the breakup would have potentially deep repercussions on both sides of the English Channel. "One lesson from the turbulence of the last eight years is that financial lines transmit economic calamities from one country to another almost instantaneously and often amplify the original shock," Citigroup said.
If the EU negotiates deftly, a scenario might emerge that would work to the EU's economic advantage in the long term. Over the past 15 years, Britain has soaked up more than 20 per cent of foreign direct investment into the EU, making it the most popular destination. Foreign investors, such as car and aerospace companies, might redirect future investments into the EU were Britain to leave. Through cunning or stealth, the EU might even find ways to dislodge London as Europe's financial centre in favour of Frankfurt or Paris, although that could take decades.
Bombardier Inc., which has an aerospace factory in Northern Ireland and a big train factory in Derby, England, is watching the Brexit debate with trepidation. Montreal-based Bombardier Aerospace has come out against Brexit, while Bombardier Transportation, the Berlin-based train division, is officially neutral. But its executives will admit privately that they fear Brexit. That's because the Derby factory, once the world's biggest train centre, sells products and services throughout the EU. If train buyers in the EU had to pay import duties on trains and services from Derby, they might favour competitors such as Alstom or Siemens.
There are two mainstream political-economic views of a post-Brexit EU. The first is that, shorn of its most Euroskeptic and unruly member – Britain – the rump EU, dominated by the 19 euro zone countries, would face fewer obstacles to integration, including a full banking union, which would see common regulatory oversight and a common bank resolution system, and come closer together. The opposing view is that Brexit would unleash centrifugal forces that would see the EU spin apart.
A good number of economists, strategists and voters in continental Europe see the latter view as somewhere between likely and certain. "If the U.K. were to leave, you might see a swift move to reinforce the EU's commitment to integration, but Brexit might trigger a rethink of what the EU project should be – maybe less integration rather than more integration," said Nick Greenword, an economist at Afi, a Madrid financial and economics consultancy.
The bleaker view of a post-Brexit EU is one of outright turmoil that could lead to the EU's disintegration. The theory is that Brexit could trigger chain reactions, with me-too referendums in various countries with a history of Euroskepticism, such as Denmark, Sweden and Finland.
Recent polls suggest Brexit could inspire a looser EU or no EU at all. A recent Ipsos poll found that 58 per cent of Italians and 55 per cent of the French want their own referendums on EU membership, regardless of which way next month's British referendum goes. More than half of voters in Italy, Germany, Sweden and Hungary believe some EU countries would follow Britain out the door if Brexit comes out on top. Most Italians and French think Brexit is inevitable even if they do not fully understand why the Brexiteers want to abandon the EU mothership, all the more so since first-quarter annualized growth in the EU, at 2.2 per cent, came in faster than the rate in Britain or the United States.
While the EU remained intact in spite of nearly eight years of unrelenting economic pain, there is no doubt that the "ever closer union" principle embedded in the EU treaties was in trouble even before British Prime Minister David Cameron in 2014 promised the in-out referendum to appease his Euroskeptic Conservatives.
Schengen – the open-border, passport-free region that takes in 22 of 28 EU countries (and four non-EU countries) and is the cornerstone of the EU's open market – is all but dead. Border fences and checks have sprung up in several Schengen countries, including Greece, Austria and Sweden, because of the refugee crisis and the terrorist attacks in Paris and Brussels. While they were billed as "temporary," they are likely to persist as long as refugee crossings into Europe keep surging.
The fiscal rules that put allegedly strict limits on the debt and deficits of EU countries is also unravelling. In recent days, Italy, Spain and Portugal have all negotiated deals that will give them flexibility on their deficits without fear of penalties.
At the same time, skepticism about the European "project" – the grand integration dream – and the EU's ability to handle crises ranging from refugee flow to the debt time bomb is getting shrill. In February, Italian Prime Minister Matteo Renzi, who has emerged as the most prominent leader of the anti-austerity movement and has criticized Brussels for allowing the refugee crisis to swamp Italy and Greece, compared the EU bosses to "the orchestra playing on the Titanic."
George Tzogopoulos, the Greek academic who is a lecturer at the European Institute of High International Studies in Nice, says any future in-out EU referendums would depend in part on how easily Britain leaves the EU if the vote goes in favour of Brexit. "If Britain could be like Switzerland, with most of the privileges of EU membership without actually being in the EU, why wouldn't other countries do the same?" he said.
On the other hand, the EU could treat a British exit as a nasty divorce case and make life miserable for British negotiators as they try to strike new trade deals with the EU. Discouraging other countries from me-too referendums would be the goal.
What seems certain is that, Brexit or not, the EU will change after the June 23 vote. Brexit could set off a domino effect that might leave the EU shattered. If Brexit is avoided, the EU might be tempted to allow other countries to cut special deals with the EU, as Britain did in the months leading up to the referendum. Either way, the EU stands to become a looser union, and, in time, possibly a defunct one.
-Eric Reguly in Rome