Brexit is a chance to fix Europe

Posted on August 8, 2016

ECB announces surprise rate cut to historic low to spur growth...epa04383668 (FILE) A file photo dated 07 August 2014 showing a over-sized barbed wire, part of an installation, seen in front of the European Central Bank (ECB) in Frankfurt Main, Germany. The European Central Bank (ECB) announced surprise interest rates cuts on 04 September 2014 as it steps up its efforts to spur economic growth in the eurozone and to fight the threat of deflation. The Frankfurt-based ECB said it had trimmed its benchmark refinancing rate for the second time in three months, lowering to a historic low of 0.05 per cent. The bank also lowered its deposit rate, which is the rate charged for banks depositing funds at the ECB, deeper into negative territory, cutting it by 10 basis points to minus 0.2 per cent. The move sent the euro down to 1.3 dollars, while shares climbed on markets across Europe. EPA/BORIS ROESSLER©EPA

The single currency has to be more attractive in a new Europe, argues Leonhard Fischer

All eyes are on Britain and the uncharted political landscape it must navigate to exit Europe. But the EU, as the other party in the negotiation, should face scrutiny, too. Supporters of the union seem actually to hope Britain will suffer as a result of its democratic decision. Certainly they appear to take delight in any news confirming their pessimistic predictions.

Many are still calling for a firm hand to be used against the UK — which is naive since Britain represents a significant proportion of EU gross domestic product (about 16 per cent in 2014, says Eurostat) and it will continue to be a leading trading partner and staunch political ally in a challenging world. Their argument seems to centre on the logic that Britain must not be allowed to escape too easily for fear of encouraging others to follow. Why so little faith in the appeal of their own union? I suspect that they fear it is actually the dysfunctional euro, rather than Brexit, that poses the biggest risk to the EU.

    When the euro was introduced, it was hailed as a highly liquid currency union, rivalled only by the dollar market, which would attract investments from all over the world and deliver economic growth. The hope was that it would come to represent an irresistible gravitational force, tempting even its strongest critics into its orbit. None of this has come to pass.

    For a start, neighbouring countries are not exactly queueing up to join, thanks to persistently low rates of economic growth across the eurozone as a whole. Furthermore, it is mainly the
    European Central Bank, with its ever growing balance sheet and negative interest rates, that
    keeps the eurozone liquid — much to the dismay of financial institutions. There is no real confidence in the future of the euro. The Brexit vote merely reflects existing difficulties about which the EU is in denial.

    Unlike the EU, the currency union cannot be left by any member without widespread economic and political fallout. Yet for the euro to survive, a solid banking union and some sort of system of pan-eurozone guarantees will be required at a minimum. Germany can and will agree to this only if members of the single currency relinquish aspects of their fiscal autonomy. To put it bluntly, the eurozone has to integrate further — whether or not member states like it — if the collapse of the euro, and with it that of the EU, is to be avoided.

    This is where the Brexit vote provides a unique opportunity to fix what can no longer be ignored. The EU as a whole cannot function within the constraints of a rigid one-size-fits-all corset: it needs to create a diverse range of models for national participation. The single market can provide the critical link between these models, allowing Europe to thrive and the eurozone to exist as one of the models but not the only one. It is economically silly and politically wrong to use the single market as a form of strong-arming. Reducing the choice to either staying in, adopting the semi-detached Norwegian model (full taxation without representation) or an “out means out” edict cannot be the answer if Europe is really all about joint peace and prosperity.

    In light of this, the Brexit vote offers an opportunity to start afresh with a blank canvas. Europeans should not waste time on hurt feelings and blame games. The focus should be twofold. First, the single currency zone would have to offer attractive rates of growth so that nations are willing to sacrifice some sovereignty in order to join. Second, for nations that choose to be outside the single currency, the principle should be that they adopt as many EU standards as necessary while retaining the maximum national sovereignty, using the mechanism of the single market as the hub that holds together the new models of Europe.

    If we achieve this, the people of the UK might have made the right choice in June, albeit for the wrong reason.

    The writer was until April
    chief executive at BHF Kleinwort Benson Group

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