This opinion editorial previously appeared in a longer format, titled “The EU's Path Forward,” in the Hoover Institute’s summer 2016 “Hoover Fellows Weigh In” news article.
Listening to the commentary during the first days after Brexit, it seemed certain that the sky had fallen permanently. But a dark future is not at all certain. What is certain, however, is that Britain will pay a short-term cost. The longer-term effect cannot be known until both Britain and the EU choose their next steps and ultimate objectives. That will test the leadership’s wisdom on both sides.
What becomes clear is that, to those on the left, centralized control by the Brussels bureaucrats is much more desirable than a heroic effort by people to strengthen freedom. None of them mention the EU’s poor prospects; its inability to develop a successful, pro-growth strategy or to control the greedy special interests that especially burden France and Italy; or the waste of time, money and attention dealing with the failed Greek economy.
British growth has surpassed the EU average as a member. If it chooses to increase market freedom, it can improve on its recent performance and ours. Stripping away the hyperbole, the majority of voters included those who remembered that since the Glorious Revolution of 1688, the British have cherished the right of free citizens to have taxes and laws made by their elected parliament. David Cameron’s negotiations with the EU had not regained those rights. Yes, German Chancellor Merkel’s decision to invite Syrian and other refugees to Germany also gave the newcomers the right to settle in Britain whether or not they were welcome. This was just another in a long list of unwelcome decisions that domestic governments could not change. It was not the only reason for leaving the EU. It was one more big reason and evidence of their reduced right to choose their laws.
Although the pound has fallen in value against the dollar and the British stock markets declined, there is no sign of the panic or chaos described in the media. There is no sign of the heralded doom and catastrophe. It is more of an orderly retreat. Market participants dislike uncertainty, but there is no way to avoid it. Fifty percent of British trade is with the countries in the EU, and another large share is with the United States.
The EU has not decided on its negotiating stance. Some call for harsh terms as a way of punishing Britain and warning other members away from following the British course. A punitive program would be a foolish mistake for two reasons: First, it would neglect that all freely negotiated trade agreements benefit both parties. There is no way that EU countries can punish Britain by refusing to renew trade agreements without hurting themselves. Surely, we can count on cooler, calmer heads to make that clear.
Another reason for punishing Britain is said to be necessary to warn the Netherlands, Finland, Sweden and others that their decision to leave would be costly. The better way to strengthen the EU is to encourage all the existing members to remain by removing the most contentious and unpopular reasons for dissatisfaction. These include immigration and the endless stream of regulations coming from Brussels over which the 27 members have no say. These are the same issues that drove British voters to favor Leave. Those sources of dissatisfaction have worked against the EU and helped the Alternative für Deutschland in Germany, the National Front in France, Podemos in Spain and similar groups elsewhere.
That message should be received by the EU’s leaders. A strong leader must see Brexit as an opportunity to remake the EU. The original idea was to join France and Germany in an arrangement that would prevent a future European war and prevent Soviet aggression. That objective led to NATO and has not changed. The change brought the European Union and a broadening of the objective to seek an “ever closer union” and interpreting the new objective to mean common tax rates and common regulations. Despite the original aim of European Union to supply some common collective policies, what economists call “public goods,” it has degenerated into an effort to impose a common set of behavioral rules on a very heterogeneous population. Europeans, like Americans, come from many different cultures. Like us, many Europeans resist common rules of personal behavior, including immigration sent from Washington or Brussels.
Every country has to decide what will be done best collectively and what should remain locally and individually. Europe took a wrong turn when it extended its centralized control to rules that need not be common. The United States chose for centuries to leave matters of personal behavior free of collective control. It is only in recent decades that interest groups learned to impose their rules on the rest of us. In Federalist 10, James Madison cautioned against special interests that impose their principles on the rest of us.
At this stage, we can only hope that Germany will lead Europe to a new agreement for freer trade with Britain and that it can induce its fellow members of the EU to roll back their rules and limit their efforts to providing public goods. That will not be easily done, but it is the path to a more desirable EU. For Britain the challenge is to strengthen its trading arrangements and the rule of law. Long-term growth rises when countries recognize that future income depends on freedom for individuals and for enterprise.
Now after Brexit, the EU has a choice. One path punishes Britain and sustains a relatively stagnant EU. The other is harder, more burdened with hard choices, but leads to a stronger EU and a better world eventually.
Author’s Note: This piece was written immediately after the Brexit election. At the time, the media was dominated by stories emphasizing doom. We can now see that markets adjusted to the change. As Britain heads toward negotiations this winter, a responsible agreement seems likely.