Brexit and King Canute

LONDON – The legend of King Canute describes how an early Anglo-Saxon King showed his subjects the limits of royal power. Canute set his throne by the sea and commanded the rising tide to turn back. When the sea rose as usual and soaked Canute, he told his courtiers: "Now let all men know how empty is the power of kings."

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British Prime Minister Theresa May, whose motto is "Brexit means Brexit," seems to believe that Canute's message was about democracy, not astronomy: he should have held a referendum. Though May opposed the United Kingdom's withdrawal from the European Union, she now has a new mantra: "We will make Brexit a success because people voted for it."

This is nonsense. If Britain becomes the only European country apart from Russia to exclude itself from the EU single market, it will not succeed economically, regardless of how people vote. Democracy would not have prevented the ocean tides, driven by gravity, from drowning Canute if he had stayed on his throne, and a referendum will not turn back the economic tides driven by globalization.

Businesses understand this. That is why Britain now faces what economists call "radical uncertainty," a situation where risks cannot be rationally quantified, making changes in interest rates, taxes, and currency values largely ineffective. As the Bank of England has noted, many investment and hiring decisions will now be delayed until Britain's trading terms are clarified. If Brexit goes ahead, this will take many years.

As Britain's economy sinks into recession, and the government's promises of a quick "successful Brexit" prove unrealistic, public opinion will shift. May's small parliamentary majority will come under pressure, not least from the many enemies she made by purging all of former Prime Minister David Cameron's allies from office. The main decisions on Brexit will therefore be made not in London but in Brussels and Berlin.

In making these decisions, European leaders must answer two questions: Should Britain keep the main benefits of EU membership if it rejects EU rules and institutions? And should some of these rules and institutions be reformed to make the EU more attractive to voters, not just in Britain but throughout Europe.

The answers to both questions are obvious: "No" to the first; "Yes" to the second.

EU leaders should present a clear choice: either Britain remains an EU member after negotiating some additional reforms to satisfy public opinion; or it disengages completely and deals with the EU on the same basis as "any country in the World Trade Organization, from Afghanistan to Zimbabwe," which is how Britain's Institute for Fiscal Studies describes the most plausible alternative to full membership.

By making exit conditions non-negotiable, while offering room for maneuver on the terms of continuing membership, Europe could shift attention to the second, constructive question: Can voters be persuaded to feel positive again about the EU?

Addressing this question seriously would focus attention on the many tangible benefits of EU membership beyond technocratic abstractions about the single market: environmental improvements, rural subsidies, financing for science, infrastructure, and higher education, and the freedom to live and work throughout Europe.

By excluding spurious intermediate options such as the "Norwegian" or "Swiss" models – which May has, in any case, rejected, because they imply free movement of people – the EU could make Brexit's economic implications unequivocally clear. London would cease to be Europe's financial capital because regulations would be deliberately changed to shift business activities into EU jurisdictions. For the same reason, many UK-based export industries would become non-viable.

Facing this prospect, businesses on both sides of the English Channel would be impelled to campaign openly for Britain to keep full EU membership, instead of quietly lobbying for special deals for their own sectors. The media might even point out the constitutional absurdity of a representative democracy treating a narrow referendum majority as permanently binding on parliamentary decisions.

Hard-core nationalists might pay no attention, but enough marginal Euroskeptics would probably reconsider their positions to flip the 52%-48% Brexit majority the other way.

The reversal of public opinion would become near-certain if European leaders genuinely heeded UK voters' message, not by facilitating Brexit, but by recognizing the referendum as a wake-up call for EU reform.

Suppose EU leaders invited the British government to negotiate on the policies that dominated the referendum and are also fueling resentment in other European countries: loss of local control over immigration; the transfer of power from national parliaments to Brussels; and erosion of social models that depend on strong bonds of citizenship and generous welfare states.

Imagine, for example, that EU leaders endorsed Denmark's recent proposal to allow national governments to differentiate between welfare payments to citizens and recent immigrants, or that it extended to all of Europe the Swiss plan for an "emergency brake" against sudden immigration surges. Imagine them easing the counterproductive budget and banking rules that have suffocated southern Europe. Imagine, finally, that the EU acknowledged that centralization of power has gone too far and formally ended the drive for "ever closer union."

Such reforms are considered unthinkable in Brussels, because they would require treaty changes and could be rejected by voters. But voters who opposed previous EU treaties for centralizing power would almost certainly welcome reforms that restored authority to national parliaments. The real obstacle to reform is not the difficulty of treaty change; it is the bureaucracy's resistance to ceding power.

The European Commission remains obsessed with defending the acquis communautaire, the collection of powers "acquired" by the Union, which EU doctrine dictates must never be returned to nation-states. Jean-Claude Juncker, the Commission President, and his chief of staff, Martin Selmayr, have even welcomed Brexit as a chance to "strengthen the acquis" by centralizing power even more.

Juncker, like May, should recall King Canute. The tide of national democracy is rising across Europe, and slogans about "ever closer union" will not reverse it. European leaders must acknowledge reality – or watch Europe drown.

Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics and the author of Capitalism 4.0, The Birth of a New Economy.