Annette Bongardt and Francisco Torres recall that the Eurozone risked seeing its legitimate efforts to strengthen the EMU vetoed by the UK, a country with a derogation from the monetary union. They argue that had ‘Remain’ won, the prospects for completing and sustaining the EMU would have worsened and dissatisfaction with the EU would have increased. In their view, the departure of the UK opens up the perspective to gear up financial regulation in the single market towards the Eurozone’s public good of financial stability, thereby reinforcing the economic union, a crucial area of the monetary union.
Had the outcome of the UK referendum on its EU membership been different – not ‘Leave’ but ‘Remain’ –, the Eurozone would have risked seeing its legitimate efforts to strengthen EMU, including where necessary by deepening the single market, to be vetoed by a country with a derogation from EMU. The UK Prime Minister’s (at the time David Cameron) unilateral demands for a ‘new settlement for the UK in a reformed European Union’ regarding ‘the integrity of the single market in the face of Euro-area measures’ (among other demands, such as the end to the treaty commitment towards an ‘ever closer union’), which had been (rather incautiously) accepted by the other 27 EU leaders for him to campaign in favour of remain, would have implied an even stronger UK opposition against the necessary completion of EMU. In other words, had ‘remain’ won in the referendum, the prospects for completing and sustaining EMU would have worsened and dissatisfaction with the EU would have increased.
The necessary convergence of preferences for a ‘genuine’ EMU was already difficult to achieve in light of increasing EU membership and more heterogeneous member states, but progress was further complicated by the fact that membership in the Euro area sub-club – where interdependencies are larger and the completion of EMU governance is more urgent – has remained smaller than the EU club’s. The announced departure of the UK from the EU leaves only one member state with an opt-out from EMU, namely Denmark, which however shadows the Eurozone. All the other (present or future) member states are to join monetary union at some time, upon fulfilling the requisites (or at least they so committed when they joined the EU).
Image by Adrian Petty, licenced under Creative Commons.
In an EU club whose integration objectives have advanced since the Maastricht treaty to Economic and Monetary Union (EMU), the UK has been harbouring preferences for a stand-alone (and incomplete) economic union. Once the Eurozone became established as the de facto core of European economic and political integration, those different UK preferences became untenable. During the global (economic and financial) and especially the Eurozone sovereign debt crisis, the UK’s stance started to collide with the need to make the monetary union work. It became clear that further integration and institution building were needed in the economic union sphere as to impede the unravelling of monetary union, and with it of European integration achievements like the single market (as it cannot be treated as static with regard to EMU requirements notably with regard to financial services).
It is in the legitimate interest of present and future Eurozone members that economic union be deepened with regard to Eurozone requirements to make the monetary union sustainable; doing so requires not only structural reform at the member state level but also advances on EU-level governance. However, the requirements on the EU’s economic union seemed irreconcilable with some preferences expressed by the ‘Remain’ camp in the UK, which saw the UK staying in the single market while adhering to policies of its choice. Needless to say, such a pretension is not acceptable for the other member states.
In that sense, Brexit does mean Brexit. Not only because British citizens voted to leave the EU – and that basically means the single market given the UK’s manifold opt-outs –, but also because the UK cannot pretend, from the inside or from the outside, to cherry-pick on the single market. It may (re-)apply for European Economic Area membership, which comes with the right of full access to the single market but also with all the inherent obligations.
Among all EU members, the UK stands out as the least involved in the building of European economic governance. The UK’s stance had not only been limited to maintaining itself at the margins of economic governance advances during the crises but it also actively tried to impede them, even by employing its veto. Because of the UK’s veto, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG), also known as the Fiscal Compact, could only come to life as an intergovernmental treaty outside the EU legal framework. The UK did not participate in the Euro-plus Pact and in the European Banking Union either. Moreover, the UK also did not wish to constructively assist any of the member states whose economies underwent adjustment (bailout) programmes. It did not participate in the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM), having made an exception only for Ireland, to whom it was in the UK’s national interest to provide bilateral loans in light of financial sector interdependencies.
The UK’s non-cooperative stance is somewhat puzzling. The country has benefited significantly from the Eurozone, most notably because of a high proportion of euro-denominated financial activities taking place in the City of London (unlikely to continue after Brexit), which normally should only be done inside the regulatory area under the control of the ECB, and because of privileged access of UK banks to the ECB’s liquidity operations during the global financial crisis.
In his special deal with the EU in February 2016, David Cameron had demanded and been granted a number of guarantees in order to support ‘Remain’, among which that the single market would not be geared towards Eurozone requirements. The vote in favour of Brexit made that very problematic (and self-harming for the EU) concession invalid.
Brexit thus ought to make it easier for the Eurozone to go ahead with necessary institutional reforms to complete EMU, which happens to be a sufficiently challenging task even without the opposition from within of a large and important member state. The departure of the UK opens up the perspective to gear financial regulation in the single market better towards the Eurozone’s public good of financial stability, thereby reinforcing the economic union in a crucial area for the monetary union. It could also prove easier to bring intergovernmental economic agreements into the Community framework at some stage.
This post represents the views of the authors and not those of the BrexitVote blog, nor the LSE. It originally featured on The UK in a Changing Europe blog.