By Christian Dargnat
Christian Dargnat is the former CEO of BNP Paribas Asset Management. He spent his career in investment banking, strategy and asset management. He notably chaired and co-chaired the European Fund & Asset Management Association (EFEMA) from 2011 to 2015, and chaired the MEDEF’s ‘Monnaies et Système Monétaire International’ from 2010 to 2013. Since 2008, Christian teaches at HEC and Ecole Polytechnique in France. This article was originally published in French on 27 June 2016 on his blog dargnatnomics.com.
What does ‘Brexit’ stand for?
It stands for the rejection of an ultra-liberal society. As history teaches us, when inequalities are perceived as unbearable by those who compound society, the people questions its institutional models. The British vote reflected as much a dissatisfaction with the way interactions between the EU and the UK were organised as a discontent with the distribution of wealth within British society. The voting gap between Londoners and the rest of Britain is symptomatic!
It stands for the fracture line between those who wish to embrace the world because they see opportunities, and those for whom globalisation is synonymous with more precarity and the loss of acquired rights and advantages. The voting gap between social classes and between generations is symptomatic!
It stands for the incapacity of the EU to sort out the consequences of the 2008 crisis and to foster growth again. The fact that the EU only recovered its 2008 GDP level in 2016, while other regions of the world topped it years ago, is symptomatic!
It stands for the growing divergence in national priorities among Member states. Germany and Britain are essentially concerned with the Single Market for goods and services. France is concerned with retaining EU’s indulgence towards its immobilism in reforming the country. Italy is concerned with negotiating with Brussels about the fate of its ravaged banking system. Central and Eastern European members are concerned with the Russian threat and Southern members with the refugee crisis…
It stands for the absence of a European project. When was the last time the peoples of the EU were presented with a federating project? Wherever one looks – in the economic, cultural, military, environmental fields – no project has yet been formulated and paralysis has prevailed since the ‘no’ votes of 2005. This has been a lost decade for Europe, entangled in a succession of crises: the financial crisis, the economic crisis, the Greek crisis, the migration crisis, and now Brexit… There will be more if nothing changes.
It stands for the failure of the elites and their rejection by the peoples, feeding into populisms and nationalisms that – falsely – promise to empower them again. Cinque Stelle in Italy, Podemos in Spain, UKIP in the UK, the Front National in France, Trump in the US, are all symptomatic! The blindness of the elites about the possibility of Brexit, their total unpreparedness for such an outcome, are also symptomatic!
What does Brexit bring us?
It brings instability for the UK. The fifth largest economy in the world was institutionally stable for centuries. It is not anymore.
Great Britain may become Little Britain in the coming years, if Scotland – the heart of Britain’s naval nuclear power and a third of Britain’s territory – leaves. Ireland is another wild card. ‘God save the Queen…’
It brings uncertainties for Europe, enabling the resurgence of centrifugal forces – Scottish, Catalan, Padanian… – and the return of financial tensions.
Capital flows from the rest of the world to the EU will slow down – meaning a higher risk premium on EU assets. Low-risk investment will also flee the periphery of the EU – meaning an increasing gap between the ‘core states’ and a rest already under pressure.
Brexit will worsen the ‘bureaucratic’ flavour of the EU by pumping all its energy in the coming months. Forced to focus on the exit negotiations, EU structures will not make any progress on other issues. The process triggered by the now sadly famous Article 50 of the TFEU will take years, and will spare us no irony – Britain is supposed to chair the Presidency of the EU as of July 2017! – and no opportunity costs. While we tackle the British exit, the rest of the world is moving forward…
Brexit accentuates the shift in power within the EU towards the East and German dominance. Since the 16th Century, the British foreign policy has always aimed at maintaining a European balance of power as a way to avoid the emergence of a challenging state on the continent – first Spain, then France, Russia, Prussia and then Germany. De facto, while Brexit does not prevent Britain from continuing to do so, it significantly reduces its political margin of maneuver in a European context characterised by a powerful but inert Germany, a weak France, and a vindictive Russia who is cheering at this sign of European division…
Brexit weakens the EU. Geopolitically, economically and financially, the EU is weakened by the exit of the world’s fifth largest economy, second largest maritime power, first financial place… reinforcing both the image of national states incapable of solving their identity problem and one of a dysfunctional and powerless pan-European entity.
Brexit encourages Euroscepticism and inward-looking attitudes – politically, culturally, economically. Nationalism, defensive identity-politics, protectionism will prevail.
Brexit will weigh economically on the British population. Factors of recession compounded by lower investments, fewer jobs, downgrading of the sovereign rating and uncertainties in general will weigh on an economy whose current account is already in deficit by 7% of its GDP. The UK is in dire need of foreign investment… and I have no doubt that Chinese-British relations will tighten as a result.
How to avoid a generational failure and European decomposition – inevitable if the status quo is maintained?
We need to close the parenthesis of a decade of inertia – 2005-2016 – and grab the steering wheel again in a strong signal to the peoples of the EU. It will be difficult, because of the widespread rejection of everything that institutional Europe symbolises, but it is necessary lest the rejection of the European idea result in the end of the European Union, with catastrophic consequences in the long terme. Let us not forget that periods of peace on the European continent are exceptions of history!
A democratic debate to prepare an overhaul of the european project is necessary.
In this regard, however hard the blow, the exit of our British partner, who played an ambiguous role in the construction of the EU during its forty-three-year long membership, is an opportunity.
We need to rapidly restore the situation of Italy, who is the next ‘weak chain’ in the EU. The Italian economy is completely paralysed by the weight of 20% of impaired loans. The transfer of this weight from the banks to the national budgets, and the resort to the financial tools of EU solidarity are inevitable, however high the thurifers of the ‘Bail In’ will cry.
We need to foster EU growth again. The German savings glut has become as acute a problem for EU growth as the absence of reforms in France or crippling unemployment in the South. An agreement has to be reached immediately between those countries for the EU to escape this fatal process.
We need to stop blaming EU institutions for all our ailments, national and european. The source of our ills resides essentially in our national insufficiencies.
Against a European fragmentation that feels ineluctable, as the strategic divergences between member states have become too strong to maintain the status quo, we need to propose a Covenant of European Sovereignty to the member states, with the principles of Responsibility and Solidarity as its two pillars. If the EU wants to remain an actor of its own destiny on the global stage, we have to rethink the definition of its collective might in budgetary, energetic and military, not only monetary, terms.
The opinions expressed here are the author’s own and do not necessarily reflect WeBuildEurope.eu’s position.