The United Kingdom’s departure from the European Union has left the union facing a €55 billion shortfall in the next seven years. As one of the EU’s key contributors, the UK’s exit from the union means it will no longer pay £7.8 billion annually into the EU budget. The remaining member states must now find a source to combat this shortfall.
EU Worries: ‘The Situation Won’t Get Better Over Time’
“The situation won’t get better over time … We face a €60 and €75 billion ($64.7 – $81 billion) gap because of Brexit, we are facing new challenges and new priorities … and member states have a tight budgetary situation, so realism is needed,” an EU official, who did not want to be named, because of their proximity to the negotiations, told reporters in Brussels last month.
German Chancellor Angela Merkel last month demanded compromise on all sides during budget talks in Brussels. Countries in the north: Germany, the Netherlands, Sweden and Denmark, support stricter budget rules to mitigate the Brexit shortfall. Conversely, poorer Eastern European countries, such as Hungary and Poland, are demanding more subsidies, insisting that richer northern countries make up for the shortfall.
The Importance of What Happens in Germany
Speaking on the economic and political future of the European Union, Dr. Stefano Grillini, Lecturer in Economics at the University of Bradford, said: “Political uncertainty in Germany, following the recent resignation of Annegret Kramp-Karrenbauer as leader of the CDU (Christian Democratic Union) has undoubtedly complicated the landscape in Germany.
“The choice of the new CDU candidate will have direct effects on the process of economic and political reforms within the EU, both in the short and in the long term, particularly in case of a victory of the more conservative-liberal candidate Friedrich Merz.
“Despite the timing of political change in Germany, it is not optimal with respect to the upcoming trade negotiations with the UK, and the general slowdown of economic growth within the Eurozone. Any other potential divorces from the European Union are very unlikely both economically and politically,” he continued.
Following the example of Germany, he said: “Germany is one of the core countries of the Eurozone and rising extremism has characterised the recent elections in other European countries. However, moderate voters, while more fragmented in general elections, would defend Germany’s EU membership. This is because the German middle class is well aware of the bloc’s economic benefits.
“Germany is the engine of the EU, but in order to drive a car having an engine is not sufficient. You also need wheels, gears and lights. All member countries serve the political and economic cause. A similar collapse would take place if other countries, such as France, Spain or Italy decide to leave the EU. However, within the EU an even stronger link exists between countries adopting the Euro. For instance, the example of Germany would be very different from the UK. By sharing a common monetary policy and the same currency, repercussions to other members would not only be political or regulatory, but also economic.”
Blaming EU Freedom of Movement
Last month, the Swiss government beseeched voters to reject a referendum proposed by the Swiss People’s Party (a right-wing Swiss party) that would end the country’s agreement with the European Union on the free movement of citizens. Dubbed Switzerland’s “Brexit moment”, the referendum is set to be decided on May 17.
“During periods of greater instability,” Grillini explained, “economic history has witnessed several examples of rising extremism. Although the EU has reacted slowly from the financial and real downturn post crises, current expansionary monetary policy proved beneficial for the Germany economy. However, phases of expansion are usually followed by phases of contraction or, at least, slower growth. Individuals hardly accept natural fluctuations of the business cycle but rather blame unresponsive government policies.
“This scenario can offer an angle to right-wing parties that push on people’s fears by looking at the most obvious but often too simplistic scapegoat to blame. Uncontrolled immigration within the Eurozone is certainly a problem that lacks adequate policy responses. However, addressing the problem of immigration as the main reason for slower economic growth and contraction of the labor market in Germany does not reflect reality.”
Although the Swiss referendum does not call for a complete divorce from the EU, it asks for a renegotiation of the terms of its membership to the group. The right-wing propaganda which blames social, political and economical malaise on immigrants and refugees crossing foreign borders to come to the EU has become a giant threat to the future survival and growth of the union. As in France, Italy, Slovakia and Estonia, Germany’s off-center neoliberal party the CDU is fighting for its relevance and its values under increasingly nationalistic and nativistic values of its people.
‘An Eventual But Highly Unlikely German Exit Would Result in the Collapse of the EU’
“Since the period following WWII the essence of the EU relies on a strong union of countries with heterogeneous characteristics. It can well be argued that an eventual but highly unlikely German exit would result in the collapse of the EU. This is because other countries may follow the example of Germany and the whole meaning of the EU would collapse as well,” Grillini said, adding that “if Germany [and other member countries] leave the EU the effects in the short and long-term could be potentially very different. In the short-term, the trade balance can worsen with real consequences on the labor market. In the long-term equilibrium can be achieved but the social cost and the political implications can be hard to support.”