Brexit, Grexit and the Donald

Under Article 50 of the Lisbon Treaty, any member state has the right to withdraw from the European Union. Should the U.K. vote on June 23rdto withdraw, it would likely wish to retain the free trade area relationship and the free movement of capital. Notification to the European Council after the vote would start the negotiation clock ticking. 

Withdrawal by the U.K. would leave a roughly €7 billion hole in the EU’s budget. With no spending cuts, Germany would possibly have to pony up €2.5 billion per year. Needless to say, this will not make the Germans happy. If spending cuts come, the most significant target would seem to be Poland, which is the largest net recipient of EU funds – on the order of €13 billion per year. The Poles are already unhappy with the concessions granted to the U.K. concerning benefits for immigrant labor. There are currently more than 800,000 Poles in the U.K. Any cuts to structural funds would surely increase Polish unhappiness. 

Once withdrawal is notified to the European Council, a withdrawal agreement would have to be concluded within two years. Treaty obligations cease from the entry into force of the withdrawal agreement, or two years from the date of the notification at the latest. However, the agreement would contain transitional arrangements which some writers estimate could last up to 10 years. EU member states could be expected to drive a hard bargain, as the examples above indicate. For example, why should the City of London be allowed to conduct the bulk of the world’s trade in Euro currency and derivatives without being under EU regulation? A withdrawal agreement is subject to approval by a qualified majority of the rest of the European Council. It is difficult to see how the negotiation would be anything other than long and painful.

Because David Cameron has got the concessions he already bargained for, he is hoping for a substantial majority to vote in favor of remaining in the EU. Short of that, even a vote to remain in the EU will mean the issue drags on and on in British politics. 

On the Greek side, its parliament voted this Monday (by the narrowest of margins), after witnessing riots on Sunday, for further cuts in pensions and increases in some taxes. The hope is that bailout cash will resume flowing and that the EU (read Germans) will again consider debt reduction for the Greeks. Good luck with that. Note that in the fall 2015 Eurobarometer Poll, 63% of Germans tended not to trust the EU, higher than the EU average of 55%. In a spring 2015 Pew Research poll, 59% of Germans thought that the EU had been good for their economy, but positive opinions were already trending lower at a moment before the immigration crisis reached full impact. Favorable opinions in Germany were lower than in Poland and Spain, according to the Pew data. This does not bode well for any increases in debt write-off or other concessions to Greece. Many, including the IMF, can’t imagine that Greece will ever pay off its debt, now approaching 200% of GDP. The chances for economic recovery in Greece are slim to none with constant austerity. Also on Monday this week, EU Finance Ministers revealed possible debt restructuring (not reduction) from 2018 if Greece meets the conditions. Details are scheduled to be announced in two weeks. The EU is hoping to get the IMF on board. It is now seven years after Greece slid into severe recession with the acknowledgement that its sovereign debt position was untenable. How long Greece remains politically stable under these conditions is anyone’s guess.

What does all this have to do with “the Donald”? Europeans, and many Americans, are aghast that the presumptive Republican Party nominee for President of the U.S. is the vulgar, xenophobic, lying and not-too-knowledgeable in foreign affairs Donald Trump. But perhaps it is instructive to examine what exactly the Donald has tapped into in American politics. Since before the first (Bill) Clinton administration, the elites of both major American political parties and the U.S. Congress have abandoned any pretense of representing the middle classes, not to mention the poor. While politicians mouth soothing words at election time, the trend has continued unabated. The American electorate is out of patience and the Donald understands.

On the Democratic Party side, the strong showing of Bernie Sanders represents a vote against the “business-as-usual” centrist positions of the Clinton dynasty. Senator Sanders is a self-proclaimed Social Democrat (a species almost unknown in the U.S.). One conclusion from all this is that the U.S. has reached a tipping point. What follows is hugely uncertain. To borrow an Obama analogy, endless delays in addressing real grievances only produce more citizens with pitchforks. Europeans have kicked the can down the road on the Greek problem for so long it is hard for the EU elites to imagine doing anything else. The U.K. has followed suit with the Brexit issue which has torn at the heart of the Conservative Party for decades. It may do so far beyond the June 23rd referendum. Beware Europe! “the Donald” may be your future as well. 

Kevin Capuder
Chair of Business Administration Department