Could the EU survive a Brexit?

If Britain were to leave the EU, it could lead to the bloc's collapse. Yet the EU's leaders aredangerously complacent, says Alexander Rankine.

The year 1986 was an important one in economic history. In London, Margaret Thatcher's financial deregulation efforts triggered a Big Bang that saw the City grow to become the world's top financial centre. In Luxembourg, her government signed the Single European Act to create a single market in Europe. In Brussels, the circle around European Commission President Jacques Delors drew up plans for what eventually became the euro.

It was also the year that Mikhail Gorbachev stood before the 27th Congress of the Communist Party of the Soviet Union and delivered a speech extolling the virtues of "Glasnost" and "Perestroika". The USSR had problems, admitted the experts. Growth was sclerotic and the system had glaring structural flaws. But there was no way it could come tumbling down. The costs of a break-up were just too high. Very few expected to see the end of the USSR in their lifetimes. A few years later, a global superpower had disappeared.

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Two big challenges

Sometimes the impossible becomes inevitable. Common wisdom has it that the EU just like the USSR cannot possibly disintegrate. Yet the EU faces huge challenges. Yes, things may well rub along in today's ramshackle state. But the risk of disintegration is real and investors should recognise the dangers. Of course, the EU is nothing like Soviet Communism.

But, as Bulgarian academic and journalist Ivan Krastev has been arguing for some time, both share one dangerous similarity: the very fact that the elite thinks break-up is impossible makes disintegration more likely. Just as Gorbachev pushed Perestroika without considering the possibility of the whole system unravelling, Germany has forced austerity on the periphery, convinced they have no choice but to accept.

Eurozone growth remains weak, jobless rates eye-wateringly high and, as we noted last week, the banking system is far from fixed. The European Central Bank (ECB) can stave off crises for a while by buying bonds, but German opposition to dealing with national debts via monetary policy means that even the ECB cannot plaster over structural weaknesses. Brexit campaigner Jim Mellon notes that even states as significant as France or Italy could yet have a debt crisis, which would make 2015's Grexit panic pale by comparison.

The second big challenge is the migration crisis, which the World Economic Forum called "a clear testament to the loss of state control" in its latest report. European states that were supposed to have torn down border posts for good are imposing "temporary" controls. The Schengen agreement may not be dead, but it is on life-support. It remains to be seen whether a collective European response can be agreed against the caterwauls of competing national interests, but we're not holding our breath.

So the Brexit deal comes as European institutions are already mired in a crisis of legitimacy. Cameron's demands though modest have opened a can of worms. If Britain can get its way on benefits and eurozone rules, why can't Poland shut out refugees? Why can't France curb a common market it finds too "Anglo-Saxon"? Why can't Spain get extra latitude on its austerity measures?

The great unravelling

On this analysis, the real damage has been done: Cameron's deal creates the perception that a member state can get special treatment by threatening to leave. That alone could make future sessions of the European Council feistier affairs. But that is nothing compared to the damage a vote for Brexit could do. Deutsche Bank's chief economist warned recently that "if Brexit were to occur, continental Europe will be relegated to second-rank status". The blow to Europe's prestige from the departure of its third-largest and fastest-growing major state could prove fatal to integration.

In northern Europe other wealthy states could look to follow Britain, with traditionally eurosceptic Denmark in the lead. Eastern Europeans are still too reliant on community funding to pull the plug. The risk is that, instead, several would follow Hungary's slide into authoritarianism. States in the old eastern bloc could end up ignoring Brussels while taking its money. The European project would then only truly survive as a Franco-German motor driving the likes of Italy and Spain off into an uncertain future.

A renewal of the euro-crisis could see left-wing populists take power in Spain or Italy this time unwilling to swallow a humiliating austerity package, Syriza-style. If the only alternative to further decades of grinding austerity is leaving both the euro and the EU, their choice would be clear.

This is just one scenario, of course. The EU has weathered countless past crises: in the 1960s, Charles de Gaulle boycotted it for six months, and in the 1970s, "Eurosclerosis" saw people question the project again. That said, there are now a lot more member states to be corralled into agreement than back then. Even if the EU doesn't disappear, there is a danger of the project dying in all but name.

It's not up to Britain to save the EU from itself its failings are a result of its structure and overreach, rather than the fault of any one member. Brexit could even do the edifice a favour by shaking it up, rather than leaving it to stagger on. But de Gaulle once spoke of having "une certaine ide de la France". As borders close and countries compete to turn the EU's laws into a pick n' mix, a certain idea of Europe could also be on the wane.