EU AND MEMBER STATES POLITICAL EXPOSURE TO BREXIT

Brexit would be a game-changer for the EU. It would be an illusion to think that, the day after such a vote, the EU could continue conducting business as usual among the 28 Member States minus the UK.

Without the ‘unruly’ UK, EU decision-making may become slightly simpler, particularly in areas where unanimity is required such as most taxes and social security. This would not necessarily be a net positive, however, if the decisions taken more swiftly and easily without the UK as an EU Member State were significantly worse than those taken with difficulty and significant delays with the UK as an EU member. Clearly, the weight of the ‘market-friendly/liberal’ block in the EU (whose current core members include the UK, the Netherlands, Sweden, Denmark, and Estonia) would decline, potentially making the EU less market-friendly. The EU budget would also have to do without the € 5 billion or so of net UK contributions (19% of total net contributions to the EU budget in 2014).

But the real political risk is that Brexit would set a new and awkward precedent. It could trigger chain reactions, such as a backlash against any notion of an ‘ever closer union’, even where this makes obvious sense, as in the areas of defence, foreign policy, defending the external boundaries of the EU, and certain aspects of environmental policy. Brexit could also encourage national exit movements elsewhere. The anti-EU mood in many EU Member States, as reflected in the growing strength of nationalist, nativist, and populist parties in the EU, should not be underestimated. There could also be a rise in regional separatism (e.g. in Flanders, Catalonia, the Basque country or Northern Italy. The rejection of any form of supra-nationalism exemplified by the Brexit could also further increase cross-border bail-out fatigue in particular in the Eurozone.

As a result, there would be a material risk that the terms of access of the UK to the rest of the EU following Brexit (as regards the movement of goods, services, capital, enterprises, and labour) would be much worse than those of Norway, Iceland, and Switzerland. This would not just (or even mainly) be because a non-EU member wanting closer relations with the EU is likely to be treated better than a former EU member that has seceded from the EU. The need to prevent the UK’s exit from the EU from creating a precedent would likely produce tough and damaging terms of access of the UK to the rest of the EU. To discourage others, the rest of EU would want to make it abundantly clear that it is not possible for an existing Member State to exit and continue to enjoy most of the benefits of EU membership but none of the costs.

The loss in soft power for the rest of the EU following Brexit would be near certain. Brexit would likely further boost (intra-national and inter-national) political fragmentation in the EU and raise the risk of further EU and Eurozone disintegration. Brexit could therefore have very severe political ramifications for the rest of the EU even if the immediate economic effects remain modest. The EU without the UK would be an even more impaired regional and geo-political player than the current EU, which already punches far below its economic weight as regards regional and global diplomatic, strategic, security, and military matters. The step from soft power to no power could well be a small one.

Member States Exposure

Netherlands : The Netherlands is closely aligned with the UK in many EU policy debates. Both favour less regulation, more liberal markets, and opening up external trade. They have, for example, collaborated closely on the better regulation agenda, with the UK promoting the Dutch model in the face of French, Italian and Spanish resistance. The Netherlands is vulnerable to the potential political consequences of Brexit. Dissatisfaction with the EU has been growing with just over a quarter of the population viewing the EU negatively. The strongly eurosceptic PVV may seek to capitalise on the political fallout from Brexit. The party won over 15% of the vote in the 2010 parliamentary elections, although is support fell back to 10% in 2012.

Ireland:  The UK and Ireland share similar approaches to economic policy, making them instinctive collaborators.

Cyprus: 38% of Cypriot’s view the EU negatively, largely a legacy of Cyprus’ economic crisis and bail-out programme.  Cyprus’ strong links to not just the UK, but Greece, make the country very exposed to the potential contagion effects of Brexit.

Sweden: There is a significant eurosceptic strain in Swedish politics that could be emboldened by Brexit. The far-right Swedish Democrats, who won 14% of the seats in the Riksdag in 2014, want to renegotiate the terms of Sweden’s membership of the EU.

Belgium:  There is a surprisingly strong strain of euroscepticism in Belgium for a country that is so central to the EU. 22% of the population view the EU unfavourably. While it seems inconceivable that the fall-out from Brexit could ever lead to a serious challenge to Belgium’s place in the EU, Belgium would be directly affected if other countries consider leaving, given that so much EU activity is located in Brussels.

Germany: Germany and Britain are often but not always aligned in EU policy debates. However, the absence of the UK would be felt in Berlin as Britain often acts as a counter-weight to France allowing Germany to act as the decisive swing voter in many policy debates. Brexit would pose particular challenges for German foreign policy. Germany might have to do more itself, which would be politically unpopular, or accept that the EU would be much less significant on the global stage, at least in terms of hard power. The political class and the public in Germany have a long tradition of being pro-European, but recently scepticism has risen, with the Alternative für Deutschland party falling just short of the 5% threshold to enter the Bundestag in the 2013 Federal election.

Spain: Spain is only just recovering from suffering one of the deepest recessions in Europe and with still high unemployment and an output gap estimated at 3.5% of GDP this year is in a weak position to absorb any macroeconomic consequences from the uncertainty that might follow Brexit.

France: France, like other countries, would feel the pinch if the EU lost a major budget contributor like the UK, but as a net contributor France is likely to be more insulated than most. Paris would almost certainly welcome not having the UK in the room when European policy is being set, given often deep ideological divisions with the UK, although the French may be concerned if Brexit leads to less defence or foreign policy collaboration with Britain.

Poland: The current government is unlikely to be concerned by the loss of UK influence in Brussels as it is often on the other side from the UK in EU policy debates. However, the main opposition Law and Justice Party is closer to the Conservatives on many issues and the two parties work together in the same group in the European Parliament.

Italy:The biggest risks to Italy from Brexit are mostly indirect. Italy often takes a different position to the UK in policy debates concerning regulation, market liberalisation or trade policy. Even so, Italy may be concerned about the destabilising impact that Brexit could have on the relationships between large member states in Europe and on Italy’s ability to influence outside of Europe. Italy is also exposed to potential political and economic contagion from Brexit both because of the fragile state of the Italian economy - which is only just beginning to recover after a protracted slump - and because the eurozone crisis and the pressure this has put on Italian politics and society has led to a deterioration in attitudes towards Europe, with 28% of the population viewing the EU negatively, only marginally below the proportion in the UK.

States ranked by Exposure

1. Netherlands

2. Ireland

3. Cyprus

4. Portugal

5. Greece, Malta

7. Sweden

8. Denmark

9. Czech Republic

10.Belgium, Latvia, Lithuania

13.Germany

14.Luxembourg

15.Slovakia, Spain

17.Finland

18.Estonia, France, Hungary

21. Poland

22. Bulgaria

23. Austria

24. Romania

25. Italy

26. Croatia, Slovenia