Thursday, June 23, 2016

Brexit is a wake-up call for the EU

Loss of one of the largest and richest members of the European Union will prompt some serious soul-searching among the leaders of the European Union.

Many economists believe that the European Union committed a huge mistake when creating the single currency, the euro, in the late 1990s. Economic research suggests that eurozone – and mismanagement, "European Central Bank" – in the wake of the financial crisis worsened in 2008. Creating an economic recession in countries like Greece and Spain, which continues to this day.

Federal spending in the United States,/ helps to overcome the economic gap between countries. If prosper of California and Michigan in a recession, the Federal Government uses tax revenue from Silicon Valley millionaires pay unemployment benefits and social security benefits for people in Michigan.

But the European Union doesn't have anything like that. The European Union does not have independent authority to collect taxes; social spending occurs at the level of national Governments. That means Governments affected by recession-like Greece and Spain and Italy after 2008 – getting hit from reduced tax revenues at the same time that the demand for welfare benefits rise. Inflate stagnation – which is why unemployment rates in Greece and Spain remain above 20 percent.

So can wind up Britain's exit is useful in two ways. First, it can be shocking to the other European Union of 27 members to get serious about the ambitious reforms that will be required for the European Union to act as one integrated economy.

Secondly, Britain was one of only two EU countries that refused to join the euro (Denmark). Within the European Union but outside the eurozone, Britain would have felt less urgency on deepening economic integration, so it can become a major obstacle to reform. With the British gone, it might be easier to corral the rest of the European Union to closer Union.

But it may still be very difficult. The same populist forces that drive the EU Brexit also work in other EU countries. We don't know which country will consider ending the EU next, but a referendum in Britain is unlikely to be the last you'll see of the European Union. Even Brexit can lead to a more integrated European Union, or it could be the first step in breaking apart slowly.