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Analysis
After Brexit, austerity heads for the door

After Brexit, austerity heads for the door

European effort foreseen to ‘stop populism’ 

by David Marsh in Amsterdam

Wed 6 Jul 2016

An all-out pan-European effort to ‘stop populism’, especially to tackle social and economic ills by lifting fiscal constraints and relaxing German-style austerity, is likely after the UK’s anti-European Union vote, according to an Amsterdam meeting of OMFIF’s Dutch advisory board.

The 4 July gathering sounded a generally positive note on referendum repercussions, with some form of UK-EU rapprochement foreseen for coming years, striking compromises in areas like freedom of movement to counter immigration worries and allow continued EU-UK trade and investment. Noting the practical difficulties of a complete rupture, as well as room for flexibility on all sides, one attendee asked if the next step might be: ‘Brexit for the exit.’

Despite the ‘Zeitgeist’ of anti-EU movements in many countries, including the Netherlands, there would be no Dutch referendum on ‘Nexit’ – the Netherlands version of the UK departure, participants said. Rather, the Dutch, following a generally successful half-year EU presidency which mitigated some of the bloc’s worst challenges including on migrants, would step up efforts with other EU governments to promote greater integration, including in the military sphere.

Europe would also use budgetary manoeuvring room to try to overcome economic problems and fight the economic and social frustration and alienation that lay behind the UK outcome. The meeting heard a plea to use concerns over immigration as a lever to introduce longer-term development and governance-strengthening measures in Middle East, Asian and African countries that are sources of migration to Europe.

Although the Netherlands, as one of the EU’s principal creditors, is sceptical about the European Central Bank’s quantitative easing and negative interest rates, there was a general expectation that the ECB’s bond-buying programme would proceed beyond the present cut-off date next March.

In a similar way, despite formal opposition from the European Commission and the German government, the EU was likely eventually to agree the Italian government’s emergency national measures to prop up Italian banks. One policy veteran cautioned that repeated concessions by Angela Merkel and opposition from anti-euro parties were severely narrowing the German chancellor’s options in domestic politics.

One advisory board member said Europe had already introduced a large measure of political union – an unrequited Dutch demand at the time of the Maastricht treaty of 1991-92 which paved the way for monetary union – although ‘we don’t call it that.’ This was evident in spheres like banking union. The next step was to implement last year’s so-called ‘five presidents’ report’ on further European integration – although this would be difficult until after next year’s French and German elections.

There was an air of fatalism about the British choice. One pro-integrationist board member said, in a few years, ‘The EU will be quite a large country. The UK will be a small one.’

Another participant commented: ‘The UK has a tradition of joining when things are a success and leaving when they are no longer a success.’ Monetary union, which played a large role in the British debate even though the UK is not part of it, ‘is not a success for several reasons. One of them is the heterogeneous nature of the group [of euro members]. This cannot be changed, at least not for the time being.’ 

The euro would stumble on through crises, this participant predicted, ‘because an orderly liquidation is impossible'.

The euro’s evident difficulties, including desire for debt relief from Greece, make the next few years replete with challenges, including for the Netherlands. ‘Germany will have the economic power. France will have more political power. This cannot be in the interests of the Netherlands,’ one official said. 

David Marsh is Managing Director of OMFIF.

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