Brexit – The EU Is In A Legal Battle That Will Define Its Future by John Mauldin, Mauldin Economics

I spent considerable time last week discussing Brexit with my good friend George Friedman.

George’s opinion is invaluable to me because he is the most dispassionate person I know. He analyzes geopolitics by looking at facts and following them wherever they lead.

George is no one’s cheerleader or nemesis. He calls the shots exactly as he sees them, and he’s usually right.

(If you haven’t done so already, subscribe to his free column, This Week in Geopolitics, at Mauldin Economics)

As for Brexit, George says it is the logical consequence of the European Union’s decisions in recent years. Some country was going to take this step. As it turned out, the UK was first, but it would have happened somewhere eventually.

Who’s in charge of the EU?

George was not at all surprised to hear the EU bureaucrats in Brussels instantly take a hard line after the vote.

Of course, they say they’ll treat the UK harshly. Bureaucrats, and especially those of the EU Commission, always resist when someone tries to escape their grasp.

The important point to remember is that the EU Commission, which is the executive body that implements policy, is not in charge of the EU. The leaders of the member states, collectively called the European Council, are the real power.

And within the European Council is a smaller group of powerful states that usually gets its way. Their opinion is what counts. So what did they think of Brexit?

The foreign ministers of the so-called “EU 6” original members (Belgium, France, Germany, Italy, Luxembourg, and the Netherlands) issued an unusual joint statement shortly after the Brexit vote.

For Europe, that is a lightning-fast move. The statement leads off with the usual platitudes about the EU’s magnificent achievements then expresses regret at the UK’s decision to leave.

But then we see reality begin to seep in. These Inner Six countries basically said, “Okay, we get it, some people are justifiably upset. Maybe we haven’t run this railroad quite as well as we should have. We are going to listen to you and change.”

Now here’s the key paragraph of this short statement (emphasis mine):

It is to that end that we shall also recognize different levels of ambition amongst Member States when it comes to the project of European integration. While not stepping back from what we have achieved, we have to find better ways of dealing with these different levels of ambition so as to ensure that Europe delivers better on the expectations of all European citizens.

This is a big deal. The Brexit vote made it inevitable that smaller and less wealthy members will try to follow the UK out. The EU 6 have little choice but to drop their hard line and look for compromise.

George and I both read that statement Saturday afternoon, and we came away with the same “aha!” moment. The acknowledgement of “different levels of ambition” was a message to those less-advantaged countries, essentially saying, “Don’t go away. We can negotiate.”

But that wasn’t the end of it.

The full European Council met to discuss Brexit, with the UK’s David Cameron leaving the meeting early as the other 27 countries pondered their next moves.

Their statement reads much like the earlier one from the EU 6.

Here is the key part, again with my bold highlights.

  1. The outcome of the UK referendum creates a new situation for the European Union. We are determined to remain united and work in the framework of the EU to deal with the challenges of the 21st century and find solutions in the interest of our nations and peoples. We stand ready to tackle any difficulty that may arise from the current situation.
  2. The European Union is a historic achievement of peace, prosperity and security on the European continent and remains our common framework. At the same time many people express dissatisfaction with the current state of affairs, be it at the European or national level. Europeans expect us to do better when it comes to providing security, jobs and growth, as well as hope for a better future. We need to deliver on this, in a way that unites us, not least in the interest of the young.
  3. This is why we are starting today a political reflection to give an impulse to further reforms, in line with our Strategic Agenda, and to the development of the EU with 27 Member States. This requires leadership of the Heads of State or Government. We will come back to this issue at an informal meeting in September in Bratislava.

Strip away the banalities and we again see the EU leaders recognizing how the game has just changed and acknowledging that they need a different approach to governance.

The conclusion of the statement is important, too. They will “come back to this issue” in September.

A battle for power

What happens between now and then? Probably, a series of informal, closed-door meetings among the members. Factions may form as they each set priorities and seek allies.

We’ll probably hear a lot of conflicting rumors in the coming weeks. However, pay very close attention to whether it is the EU Council or the EU Commission that gets to take the lead role in negotiating with Britain.

This point is already the subject of a very acrimonious debate in Europe. If the Commission (basically the Brussels bureaucracy) wins, it will want to punish Britain.

If the EU Council gets the right to be the lead negotiator, it will want to try to figure out a way to make it all work, especially trade and commerce.

The lawyers from both sides are arguing forcibly that it’s their team that should be responsible for the negotiations. This is a legal battle with real consequences.

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