Saturday, June 25, 2016

Zeihan on Geopolitics: Brexit

By Peter Zeihan

With 28 countries it is easy to get lost in the geopolitical maelstrom that is the European Union. Over the next few days (and couple of years) there will be literally thousands of stories to tell about the Britain-EU breakup. All will matter hugely to someone, but only a few will matter hugely to everyone. So let’s focus on the major points.

The United States is withdrawing from the world. The United States created and maintained the global free trade order. Without the United States’ smothering security presence, much of the world either will devolve as local powers fight for the scraps or return to their pre-1945 state of affairs. In Europe it will be a bit of both. One outcome among many is that the geopolitical environment of enforced peace and open trade that enabled the Europeans to form the EU in the first place is disappearing. For reasons well beyond the Europeans’ control, the EU is ending.


And for reasons well within the Europeans’ control, the EU is ending. If there is anything that the European Union has shown us in the past decade, it is that even in the face of an existential crisis its constituent members cannot come up with a common plan, much less a common vision. The European financial crisis -- complete with the Greek crisis -- began in 2006 and slides further down the rabbit hole with every passing year. The continent has suffered five recessions since this all started with most of its members now possessing smaller economies than before the Great Recession.

Europe is also dying for reasons independent of geopolitics and policy. All but six of its 27 members (the UK is one of the six) have already aged past any hope of demographic recovery. Germany -- the country the EU seems to be pinning its hopes on -- has the world’s most distorted population structure, with more people in their 50s than 40s than 30s than 20s than teenagers than children. Which means that all three forms of economic growth -- consumption, investment and export -- are about to prove beyond them. In essence, Europe’s aging is transforming it into a collection of old folks’ homes.


It isn’t hard to make the case that the UK jumping ship might not be all that bad of an idea.

So what happens next?
  • The Brits will need a replacement trade association. There are two options. The easier of the two is a broad scale reinvigoration of the Commonwealth which will give the UK greater access to its old empire with countries large and small, near and far. The second is both simpler and more complicated: joining NAFTA. Simple in that the Canadians will make Brentrance a cause célèbre but complicated in that the Americans will make the Brits pay through the nose (think Lend-Lease). The Brits will ultimately succeed at both. Expect the Brits to be the only country in the world with a meaningful trade deal with India, and expect all the former British colonies that trade with the EU to shift loyalties.
  • The EU leadership will want to hurt the UK, and hurt it badly, in order to dissuade others from following suit. In this they will fail. As the UK demonstrates that the EU isn’t inevitable a number of countries will see their own political systems reorder to the new reality. In particular, I’d keep my eye on Hungary (whose political system is departing from democracy and so just doesn’t fit in the club any longer), France (who feels the whole European project has gotten away from them), and Sweden (who only joined the EU because a united Europe served as a hedge against Russia).
 
  • The UK was the one big country constantly pushing for the EU to expand and liberalize. Without London’s influence the EU’s slide towards parochialism, protectionism and a Fortress Europe mentality will harden. No more expansions. No more common foreign policy. No more Airbus.
  • Expect the broad scale weakening of the European financial sector. Most of the EU’s financial business is settled in London and undoubtedly some of that will now relocate to the Continent. But most -- to the EU leadership’s chagrin -- will not. This will induce the EU to attempt to force its relocation using regulatory means. Considering that capital flight from the eurozone is already at record highs, expect such regulatory efforts to backfire. Horribly.

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