Pippa Malmgren on Brexit and Shaping the Way Ahead: The Next Phase of European Development

2017-01-25 By Robbin Laird

Europe ever since the end of World War II has seen significant change.

And clearly, after an upsurge of growth in the 1950s and 1960s, growth and development have been tougher to come by.

European collaboration on the Continent began with the European Coal and Steel Community and evolved into the European Union. Britain applied for entry, a process initially blocked by President de Gaulle, but joined eventually in 1973 along with Ireland and Denmark.

In 1985 when Jacque Delors became president of the European Commission, he set in motion a number of objectives to transform the European Union into a body largely dominated by the European Council to one which is today driven by two non-elected bodies, the European Commission and the European Court of Justice.

Jacques Delors proposes that the European Community should by the end of 1992 remove a series of barriers to free trade and free movement of capital and labour creating a “single market”. Delors believes the single market programme will revive European integration by spilling over from the economic into the political arena.

http://news.bbc.co.uk/2/hi/europe/3583801.stm

In his interesting analysis of the Brexit phenomenon by a former Labor Party government Minister of Europe, Denis Macshane noted that Thatcher’s reaction to Delors was perhaps indicative of future difficulties.

“We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level with a European super-state exercising a new dominance form Brussels.”

But this was in many ways what would come back in last year’s vote on Brexit as a key theme as well.

(Denis Macshane, Brexit: How Britain Left Europe, London: I.B. Tauris, 2016, second edition, p. 72.)

Then in 1987, the single European Act enters into force, which was a modification of the original Treaty of Rome and aims at a complete formation of a common market.

Next the 1991 Maastricht treaty on European Union, which is a major shift in the focus of the European Community and which embraced many of the reforms suggested by Delors, came into force.

It paves the way for monetary union and includes a chapter on social policy.

The UK negotiates an optout on both.

The treaty also introduces European citizenship giving Europeans the right to live and vote in elections in any EU country and launches European cooperation in foreign affairs security asylum and immigration.

 With the fall of the Berlin Wall and the collapse of the Soviet Union and then with the Treaty on European Union coming into effect in 1993, the way was cleared for a major expansion of the evolving approach to the European Union.

Focused on a “peace dividend,” Europe largely turned swords into social plowshares and invested into the expansion of the European Union Eastward.

The Bosnian War in the 1990s provided a significant bump in the road but the strategic trajectory was set – the expansion of the European Union with a single currency, free movement of peoples and a new social contract.

Unfortunately, crises in the Middle East, the rise of Putin and the economic crisis of 2008 have generated significant pressures upon these strategic impulses towards an expanded and vibrant and dynamic European Union.

Very fundamental challenges face the European states – no clear economic growth strategy; no clear path towards significant debt reduction, no clear way to defend Europe against a resurgent Russia, and a porous border system penetrated by migrants and terrorists alike in the face of the commitment to free borders within the European Union.

It is against this background, that those who want to leave the European Union won the Brexit referendum in June 2016.

The actual course of negotiating a way ahead only will happen when the British government invokes Article 50 in the treaty which defines the broad process of how a member leaves the European Community and the British Parliament approves of the start of the process.

But when Britain invokes Article 50 this year, a new President in France and almost certainly a new Chancellor in Germany will provide key players in defining what the meaning of Brexit will actually be for the future of the European Union.

Brexit is NOT just about what happens to Britain; it is about defining the next phase of European development.

It is clear that the European Commission would like to handle the negotiations and protect its position as Britain is walked out.

But this is not a technical or technocrat issue; which is why the European Union is in difficulty.

It is about fundamental choices and strategic options for the other members of the European Union who are facing Brexit like pressures of their own.

If European political leadership does not materialize to deal with the challenge and strategic opportunities provided by Brexit, centrifugal pressures will accelerate on the broader European Union.

To get a sense of the dynamics of Brexit and the potential upside for Britain in the Brexit process, I had a chance to talk with a colleague who lives in London and is a well-respected political economic analyst of global change.

We did this interview on Sunday January 22, 2017 with the forthcoming visit by the British Prime Minister to President Trump anticipated towards the end of the week.

Question: Brexit has largely been focused upon an in and of itself, aberration from European development. My view is that is part of the broader tissue of the next phase of European dynamics and development.

 How do you view Brexit in the broader European context?

Malmgren: Both President Trump and Prime Minister May take the position that the European Union is a fluid and unstable political entity. Voters in the Euro zone are articulating views similar to what led to Brexit. They are saying “no” and asking for access to the single market but less regulation and harder borders.

The British just had the chance to vote first but the rest of Europe is increasingly leaning in that direction too.

That’s why the Italians said “no” to their referendum. That’s why is looks like the hard right is gaining in France. All these are my personal views but I don’t think the current Chancellor of Germany is likely to be re-elected.

In contrast, European officials view their governments as stable. They think Britain will be rendered highly unstable by Brexit.

The Trump team view the British as reliable allies that share core values such as the desire to enhance growth and reduce the interference of government in the lives of their people.

Also, from a defence and intelligence perspective, Britain remains the primary partner to the U.S. in Europe.

Question: The inability of continental Europe to grow has been a clear part of the concern in Britain about Europe.

What role has this played?

Malmgren: The British received more Foreign Direct Investment than any other locartion in the EU before Brexit. It was assumed this flow would fall after Brexit. But, I hear from my clients that they are even more interested in the UK now.

That’s because money is like water. It flows to wherever it faces the least resistance – the lowest tax rates and least regulatory burden. I would challenge the British to end up with more regulation and higher taxes that the EU after Brexit. Frankly, that would take a huge effort!

But the problems on the Continent are deeper than this; The real issue is that the social contract between citizens and governments in the West are being broken. There is always a deal between citizens and their governments. But now governments are defaulting on their citizens because of the debt problem.

They can’t deliver retirement at 65. Now everybody has to work longer.

They can’t deliver the healthcare that had been expected. Frankly they can’t deliver police, fire departments or roads without potholes.

The social contract in the EU is under even greater stress because growth has been so very poor.

The night of the victory of Brexit, the markets attacked Italian banks, not British banks. What did the state in Italy do? They said they’d find 5b Euros to bail out the oldest bank which had lost 98% of its shareholder value. Meanwhile, they can’t find 5 cents for the young who are experiencing over 30% unemployment rates. This breaks the social contract and helps explain the new anti-EU sentiment.

The Europeans are also increasingly uneasy about immigration issues. It was not part of the original deal in the European contract to have completely open borders. In my view, the British are not xenophobic, but want more process around immigration. They want a more secure movement of people within Europe.

The media talks all the time about the proposed Wall by Trump in the US with Mexico, but the reality is there a wall-building spree going on in Europe.

Look at the new walls being constructed between Hungry and Serbia, between Germany and the Czech Republic, as well as new walls in Estonia, Poland and Lithuania are constructing one around Kaliningrad with watchtowers, etc.

Frankly new walls will increasingly be digital. Processing of people will begin well before you get anywhere near what you think the border is. We will pass through borders without realizing we’ve already been assessed.

We are in a period of history where the Europeans are fundamentally rethinking what they want Europe to stand for, the European Union to do, and how to generate economic growth again.

As everywhere else, the public are questioning the establishment because they have failed to deliver on their promises.

Question: How might Brexit trigger positive outcomes, including economic growth?

Malmgren: Before the Brexit vote and after, the main stream media argued that Brexit would only have negative consequences for Britain, but this has not been the case.

Across the board, almost all economic indicators have gone up, except the value of the pound sterling.

The pound had been falling in any case, because the Bank of England had been lowering interest rates and then keeping them low. But, people now blame the entire fall in the Pound on Brexit. Either way, the fall in it’s value has made British prices more competitive.

So, investors are buying goods, properties and businesses in the UK because they are temporarily cheaper.

Manufacturing is returning to Britain.

This is partly because of rising labor costs in China. Wages have risen 5 fold in three years and are on track to rise another 7-10% in 2017. This is driving skilled jobs back to the US and Britain. This means that this trend coupled with the low price for Sterling will see an improvement for the British economy in terms of competitiveness.

Britain could have been a success inside the EU but the EU leadership were making it ever harder.

It’s easier to be an economic success now that Britain will have greater control over their own rules, laws, policies and regulations.

President Trump will Meet PM May on January 27, 2017 welcoming her to the White House as the first official foreign guest. Credit Photo: BBC

Question: What will be the relationship between Britain and the European market or the United States in terms of trade?

Malmgren: The discussion about Britain and its negotiation with the European Union about Brexit is usually presented as a David and Goliath phenomenon. Britain is a small country and there is the European juggernaut with which it must negotiate.

This is incorrect.

Britain is the second largest contributor to the European budget. The loss of Britain as a fee-paying member is significant. The EU will eventually acknowledge that they need the financial contribution.

I am guessing they will eventually permit a new category of membership, especially as other member states demand the same thing.

Also, key European states, like Germany, will seek to shape an effective relationship with Britain as an economic entity for their own self interest. Britain is a big buyer of German goods. Nobody in Spain or Italy is buying Mercedes these days. The British are!

Britain is growing and is dynamic. Europe needs to trade with Britain going forward.

It can be argued that the British need the European Union, economically, less than the European Union needs Britain.

Again, this is my personal view but people worry about losing access to the Single Market because it’s so big. Yes it is.

But it’s not growing. Britain is now free to go cut a new deal with the United States, which is. The US is a far more dynamic economic growth center than Europe.

Now we have President Trump looking to renegotiate NAFTA. This is a clear opportunity to create a new treaty, one which includes Britain and Australia, Mexico and possibly even India and others in a reframed, redone and revised framework to replace NAFTA.

Question: Let us return to the immigration issue which clearly was the hot button issue which pushed the No vote over the top with regard to Brexit.

 How do you view the British stance on European immigration going forward?

Malmgren: The view by some is that the British and President Trump are very xenophobic. I believe that both the British and American Administrations favor ensuring that the best quality migrants come into the country in each income and skill category. For Britain this means they will no longer be restricted to hiring Europeans for skilled jobs.

Now they’ll be able to hire Americans, Indians, Japanese…anybody they like. This will enhance the skill sets available to the British economy as opposed to simply prioritizing Europeans.

Britain will no longer obliged to hire on a European bias point of view.

I did the live coverage of of the third debate between Clinton and Trump for Sky News. President Trump made it clear that the citizenship and work application process for Mexicans was excessively slow. This caused such immigrants to bypass and stalled system and was a major cause for illegal immigration. He argued for process changes that would streamline that process to ensure that the legal process worked faster and more clearly.

Contrary to the popular view, this could help more immigrants become legal citizens. This is not the position of a xenophobe.

I am a free trader in the sense that I support the freest possible movement of human capital, capital and goods across borders.

But that doers not mean that there should be no rules and no process.

Question: What impact will the Brexit negotiations have on key states as they rework European institutions?

Malmgren: Europeans can look at this in a binary way – either you are in my club or you are not – or in a more realistic way of how can I redefine the club and its relationships with friends who allies to the club?

In order to keep the EU club, they’ll need to get along with key players who are not part of it. Clearly, the EU needs to come to terms with the Trump Administration and the British post Brexit.

The real question is whether we can we align our national interests again.

It was assumed for the past decade that Europeans had well aligned national interests. This clearly is not true any longer.

The French and Germans are no longer on the same page. The Northern members are not on the same page with the Southern states.

A realignment is clearly necessary by key nations in Europe. Put another way, Brexit is a catalyst that will inspire significant changes within the EU itself.

Editor’s Note Regarding Dr. Malmgren

Dr. Pippa Malmgren is a trend spotter who advises investors and governments about economic policy and investment strategy.

She has recently been named a Non Executive Board Member of the new Department of International Trade in the UK, advising on Brexit and underscored that views expressed in this interview are her personal views only. She anticipated the Financial Crisis in 2007, the slowdown in China, Brexit, Trump and the return of inflation.

She is also an economist who manufactures, having co-founded a robotics company that makes commercial-use aerial platforms (drones), H Robotics. She is a popular speaker and one of the few economists represented by William Morris Endeavor.

She also serves on the British Ministry of Defence Working Group on Global Strategic Trends and briefs Britain’s top Generals at Sandhurst. She serves on several advisory boards and working groups: She Chairs the Lewis PR Advisory Board (LAB) and is an advisor to Real Vision TV, the Greater London Authority Infrastructure Advisory Board and Indiana University School of Public Policy and Environmental Affairs as well as the Indiana University Manufacturing Initiative.

Dr. Pippa Malmgren 2017 Bio

Additional Editor’s Note: High Court Ruling on UK Parliament and Brexit

According to an article by Eszter Zalan published on the EUObserver on January 24, 2017, the British Prime Minister must have consent of Parliament prior to invoking the article 50 close in the Treaty of Rome which can begin the official Brexit process.

UK prime minister Theresa May will have to obtain the consent of parliament before triggering Article 50, the exit procedure from the European Union, the Supreme Court ruled on Tuesday (24 January).

The panel of judges rejected by eight to three the government’s argument that it had the power to start the exit procedure based on the result of last year’s referendum.

“The government cannot trigger Article 50 without Parliament authorising that course,” Lord Neuberger, president of the court said reading out the judgement.

This means May cannot begin talks with her EU counterparts about leaving the bloc until lawmakers give their backing.

MPs are unlikely to stop the process, although the judgment paves the way for closer parliamentary scrutiny of the negotiations.

The judges ruled that withdrawing from the EU makes fundamental changes to the UK’s constitutional arrangements and removes some existing domestic rights of UK residents, therefore it requires parliamentary legislation.

“The change in the law required to implement the referendum’s outcome must be made in the only way permitted by the UK constitution, namely by legislation,” the court said in the ruling.

Lord Neuberger also added that the judgment is not about leaving the EU or staying in, but about the right of the government to trigger the exit procedure…..

 https://euobserver.com/uk-referendum/136648

We will be doing an interview soon with Dr. Malmgren based on her important book, Signals, to discuss the challenges of understanding the emerging phase of economic and global development.

To be clear, this means that BOTH the Commons and Lords must approve the triggering of Article 50.

For those who would wish to comment on this article, please see the following:

Brexit and Shaping a Way Ahead: The UK, Trump, and the Next Phase of European Development

 

 

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