I am now going to say something that will astonish you. The first step in the re-creation of the European Family must be a partnership between France and Germany. In this way only can France recover the moral and cultural leadership of Europe. There can be no revival of Europe without a spiritually great France and a spiritually great Germany. The structure of the United States of Europe, if well and truly built, will be such as to make the material strength of a single state less important. Small nations will count as much as large ones and gain their honour by their contribution to the common cause.
Winston Churchill, Speech at University of Zurich, 19 September 1946

Europe must now face the facts and rebuild its foundations to convince all Europeans that a united Europe can and will contribute to provide peace, stability and welfare to all its members. Most arguments have been exchanged in the past months. Therefore just a short wrap-up with some links to insightful and thought-provoking recent analyses.

First, it is clear the Brexit will bring self-inflicted harm on the British economy. Paul Krugman has summarized the major points. However, a majority of British people seems to be willing to accept welfare losses in exchange for more hoped-for national sovereignty. So Brexit is mainly about governance. And it is the governance issue that the EU minus UK must now address seriously.

Second, in a world of highly integrated markets, especially with respect to financial globalization, the concept of national sovereignty is illusive. As Dani Rodrik has argued forcefully, that the world economy is facing a political trilemma. Without rolling-back (financial) globalization, going the national route would submit the society only to the “golden straitjacket” of global market forces and will thus limit, not enhance sovereignty.

Democratic legitimation of effective decision-making would thus require handing-over sovereignty to supranational bodies, which – in turn –need democratic legitimization. The EU has been and still is often viewed as such an attempt. Unfortunately the performance of the EU in terms of democratic legitimization and economic decision-making to promote welfare in all member state is increasingly not convincing both the electorates and scholars. In the view of the Brexit-debate Dani Rodrik writes now:

I viewed the EU as the only part of the world economy that could successfully combine hyperglobalization (“the single market”) with democracy through the creation of a European demos and polity. … But I now have to admit that I was wrong in this view (or hope, perhaps).

And he blames in particular the way Europe has been dealing with the Euro crisis:

The manner in which Germany and Angela Merkel, in particular, reacted to the crisis in Greece and other indebted countries buried any chance of a democratic Europe.

In fact, Euro-area crisis governance has brought serious asymmetries into a union that was thought of as a union of equals (see also my take on the threatening impact the overly intrusive conditionality in Greece for the European project).

Third, the impact of Brexit on the future of the EU is unclear. Much depends on how strong European politician will react.

On the positive side, Brexit can be regarded as a wake-up call and a forceful push factor to renew leadership and bring new visions to the EU – not least to contain dangerous nationalistic and populist movement in Europe. LSE professor Paul De Grauwe views Brexit as a chance for Europe:

I  conclude that it is not in the interest of the EU to keep a country in the union that will continue to be hostile to “l’acquis communautaire” and that will follow a strategy to further undermine it.
I therefore also conclude that it will be better for the European Union that the Brexit-camp wins the referendum. When Britain is kept out of the EU it will no longer be able to undermine the EU’s cohesion. The EU will come out stronger.

On the negative side, however, the demonstrated willingness of European politician for a big leap forward even is severe crisis has been very low – if not nil. And the major elections coming up in Germany and France next year may not increase the appetite of politicians for major reform projects.

Fourth, what about domino effects? To start with, the way the EU-UK negotiations will be conducted will send a signal to others contemplating about exit. The EU will therefore make sure that such negotiations will lower the appetite for leaving the union. Moreover, by leaving the EU, Britain and – even more so smaller countries who want to follow the example – will be weaker not stronger. All decisions taken by the EU will remain to have an important impact on the British economy and Britain will have to re-act to these decisions without having a say in these decisions anymore.

Before following the British example, other countries should therefore think twice and reject the rhetoric of their populist politicians. Instead of losing influence on Europe by contemplating an exit, they should contribute making Europe work better and more democratic. In the words of Nobel laureate Michael Spence (written before the decision):

Regardless of the outcome of the Brexit referendum (…) the British vote, along with similar strong centrifugal political trends elsewhere, should bring about a major rethink of European governance structures and institutional arrangements. The goal should be to restore a sense of control and responsibility to the electorates.