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Will the European Union Break Up After Brexit?

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Less than a year ago, the EC commissioned a study and found that the majority of Europeans felt that the EU as an institution would not be around within a generation.

Only three countries had a majority of people who felt that the block would last beyond the next two decades.

The survey was conducted in the middle of Brexit deliberations, and it’s understandable that it might have thrown into relief the issue of the union’s stability.

There have been increasing populist movements across Europe, with a decided anti-EU perspective. But the survey also showed that a majority of European citizens had a positive view of the block. In fact, the highest support in decades!

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What About the Money?

The political issues around the EU aside, it’s undeniable that Brexit will have an impact on European finances, on both sides of the channel.

Each side of the leave/remain question touted (and perhaps exaggerated) the financial benefits of their preferred option. But, like all things EU, the financial relationship between the UK and the continent is a bureaucratic mess and practically complicated.

In non-bureaucratic terms, the UK contributed €19.4B to the EU budget in 2016 (when the process started). Or 13.4% of the total to be spent. This is not counting the budget shortfall, because we’re trying to not complicate things. That’s is about the size of the UK’s participation in the European project. And it’s comparable to population, budget and seats in parliament.

Where’s that Money Going to Come from Now?

Well, the UK got some of that money “back” in the form of subsidies and other EU spending on the Isles.

However, the UK was a net contributor to the EU. This means that adjusting for the loss of income and the decrease in spending, the EU will get 5% less income. Of course, that’s pending the “divorce payment” following the completion of Brexit negotiations. But again, let’s not complicate things. 

For the current budget being discussed, that means the EU would be short €8.4B.

The shortfall could be met with increased deficit spending. But that wouldn’t look good for an EU trying to get many of its members to keep a lid on blowing out their budgets.

More practically, the block would likely have to adjust some of its priorities. It would likely have to cut some spending, and – here’s the complicated part – ask for more contributions from other countries.

Germany vs Italy

Germany is likely to have to pick up at least €2.5B of that tab, something that isn’t going to go down well in the fiscally conservative Berlin.

Italy and France, however, are already running budget deficits. They argue that Germany should be doing more to help the economy by increasing spending. The EU does not have the authority to levy taxes directly on its citizens. So, it’s stuck negotiating with the member states to increase their budgets and contribute more to Brussels

Up until Brexit, Britain had sided with the more liberal “north”. This includes Germany supporting fiscal austerity and open trade.

Without the UK, the center of fiscal gravity shifts south, supporting more fiscal liberalism and protectionism. The prominent example of this is Italy. Recently, the country elected leaders largely skeptical of the EU. This prompted speculation that should the UK do well on its own, Italy might follow suit.

Lack of Funds Likely to Heighten Tensions.

Part of the motivation to seek a harsh deal with the UK would be to discourage other countries from leaving.

However, that would come at an economic cost for the EU block which is teetering dangerously near a technical recession. Rather than foster support for the EU, it might have the opposite effect. Already there is a strong view among Italians and Spanish that their economic situation has worsened over the last couple of decades.

Of the remaining countries in the EU, however, only one has a majority of citizens who support leaving, and that’s Greece. Arguably, the chance of a breakup has increased with Brexit.

But, since we haven’t seen the effects it will have on both the UK and the EU, for now, the Union seems to be firmly in place.

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