Wednesday, 29 June 2016

Sitrep - 29 June, 2016

The United Kingdom voted to leave the European Union in a close referendum at the end of last week. Many observers were surprised at the decision and markets across the world, particularly in Europe, fell significantly at the news. Markets have since recovered slightly as the week progresses, but the mood remains dim in many regions.

The decision has not, however, yet been ratified by Westminster. Neither has London submitted the formal departure process to Brussels, both of which indicate there lingering reticence. The EU is also questioning whether the margin (51% to 48%) is wide enough to be a legally binding decision based on EU regulations, and is considering whether it will force a second referendum.

Whether or not the UK vote does decouple it from the EU structure, the scenario last week will spur Brussels into making significant reforms to protect what remains of the bloc. Since the 2008 financial crisis, Brussels has made only incremental reforms that have failed to fix its deep political and fiscal problems, and in many ways have actually exacerbated it.

And quite aside from negatively affecting only the UK, which will now become more nimble than the EU, the British decision could send the union deeper into financial struggles. Greece and Italy both hope the scenario now supplies unexpected bargaining room to ask for more money from Berlin and unemployment rates in Spain, Italy and France will continue to rise as the larger powers concentrate elsewhere.

But what the EU structure became in 2016 is different to its original purpose. It was never meant to offer member states economic well-being. Instead, the bloc is a project binding the powers of France and Germany together. The UK is leaving a continent with a history of vicious internecine warfare, so greater fragmentation of the EU could well usher a re-introduction of this dark fact.

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