“A two-speed post-Brexit Europe is best avoided”

EU member states should focus on striking a free-trade deal with Britain.
Hans-Werner Sinn

Financial Times online, April 16th, 2017

Brexit is a problem not only for Britain but for the EU as well. The British economy is as big as that of the 20 smallest member states put together. So it is as if 20 of 28 countries were leaving the bloc at the same time.

Brexit destroys the European equilibrium, rendering otiose minority rights in the European Council: the Lisbon treaty specifies that a blocking minority needs 35 per cent of the EU population. Together with the UK, the so-called “Deutschmark bloc” (Germany, the Netherlands, Austria and Finland) has a population of exactly 35 per cent. These are all countries in favour of free trade.

At the same time, the countries surrounding the Mediterranean, which have traditionally been more reliant on protectionism and state intervention, have a population of 36 per cent, which is also a blocking minority. The Lisbon balance has been destroyed because the first block shrinks after Brexit to a population share of 25 per cent, while the Mediterranean countries extend theirs to 42 per cent. They may now seek to turn Europe into a trade fortress.

The erosion of minority rights requires new negotiations of the existing EU treaty, if not a notice of termination pending a change of contract by the “free traders” in the EU. This new negotiation will not be feasible once the negotiations with the UK have been completed — they have to be started simultaneously. They should re-organise both the internal relationships within the EU and the relationship with the UK. Once the latter has left, there is no chance to reform the EU.

Member states should stop promoting the idea of a “two-speed” Europe, which is reflected in the divisions between the eurozone, the Schengen area and the EU. Pursuing this idea further will antagonise Poland, as well as Denmark, Sweden, the Czech Republic and Hungary. Responding to Brexit by giving the eurozone more state-like structures is to separate the north and east and draw a dividing line through Mitteleuropa, while making the northern eurozone states paymasters of a new Latin currency union.

The fact that France wants this two-speed approach is not surprising. The division of central Europe has been a central tenet of French policy since Richelieu. For example, Emmanuel Macron, the independent centrist candidate for the French presidency, proposes a joint European budget, eurobonds, common deposit insurance and common unemployment insurance. The northern eurozone countries should resist these policies and opt for a generous free-trade agreement with Britain instead.

The advantage of free trade is particularly strong when labour cannot move. The EU insists that free trade can only be granted in conjunction with free movement of people, but this is economic nonsense. When labour cannot move, the gains from trade are particularly high. Without free movement of people, the differences in wages between countries remain greater, and the higher these differences, the larger those in the relative prices of goods. This is the basic source of gains from trade.

There are two models for a federation. The first is characterised by strong minority rights and voluntary co-operation. Decisions have to be beneficial for at least some member states and do no harm to any others. This model is stable because everybody wants to be part of it. The second is based on majority decisions without strong minority protection. In this model, decisions that benefit a majority but harm a minority will be taken even if the majority gains less than the minority loses. This model creates losers who would rather leave. To prevent exits there is a need for punishment, but the fear of punishment itself creates animosity and instability.

Whatever happens, the UK will continue to be the EU’s neighbour and it is advisable to treat one’s neighbours well.

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