Brexit and a Hanseatic League

David Cameron, Britain's Prime Minister, has negotiated terms with the other EU member states, which he feels justified to put to voters in an in/out referendum called for 23 June.

At this early stage in the campaign, the terms are not sufficient to give a clear lead in favour a vote to stay, contributing to a slide in sterling on the foreign exchanges. However, if voters do vote to leave the EU, it won't be just sterling which suffers, but the euro will face considerable challenges as well.

It is thought that arranging for the referendum to be held at the earliest possible date will limit disaffection with the EU. Within this time-scale, the strategy is to emphasise the dangers of Brexit, highlight the advantages of being able to influence EU policies from within, and to emphasise the security benefits of being in as opposed to out. It is essentially a weak and negative campaign strategy designed to scare the electorate against change. Negative campaigns are a weak strategy, which tend to wane through repetition.

There is an elephant in the room that might also trip up the planned outcome, and that is a material and growing risk of financial instability in the Eurozone. While it is probable that no major problems will surface before June, there is a significant possibility they will. The Eurozone's banking system is somewhere between insolvency and bankruptcy with the Italian, Greek and Portuguese banks in intensive care. Eurozone government bond prices, many so over-priced they have negative yields, are certain to fall significantly at some stage, leading to an inevitable Eurozone debt crisis.

Add to this the refugee problem, and we have the makings of an all too obvious Eurozone bust-up. Furthermore, it is reported that the Czech Republic's prime minister, Bohuslav Sobotka, has warned that if Britain decides to leave the EU, the Czech Republic may follow. Furthermore, there is pressure for a similar referendum in the Netherlands. Disaffection with Brussels is widespread, and it will not be just a British rat abandoning the sinking EU ship.

So far, this has been criticised as alarmist talk, but it is interesting that the financial problem faced by the EU is already becoming an issue. George Osborne, in Shanghai for the G20 meeting last weekend, said that "fellow finance ministers and central bank chiefs had unanimously concluded that a vote to leave the EU by Britain would be one of the biggest economic dangers this year". The draft G20 communique noted "the shock of a potential UK exit from the European Union." These statements surely amount to an admission that the EU rather than the UK is the concern, and that Britain's departure could well tip it over the edge. It is also a plea for Britain to sacrifice her own interests in favour of the common good.

The EU bogey-man is no longer just a figure in the imagination of doomsters and conspiracy theorists. Its problems are now officially frightening. With its intractable debt problems, the Eurozone and the euro could easily be early victims of deteriorating global economic and financial conditions, and the risk is real enough for Britain's electorate to go off-message. So it is time for the authorities to take out insurance against Brexit and devise a Plan B. I discussed this possibility recently with a close contact who has a practical familiarity with the machinery of government, and we concluded that it is almost certain that there is already a team in Downing Street working on a contingency plan. This would involve senior civil servants from the Treasury, Foreign Office and possibly the Department for Business.

The team is bound to contact its opposite numbers in the other major European states to feel its way through the issues raised by Brexit, so that if the worst happens and the referendum goes the wrong way, the transition to British independence will be managed with as little fall-out as possible. Beside the problems posed for the UK itself, an important issue that would naturally arise from this exercise is what would be the consequences for the remaining EU members, and the interests that would drive their responses.

The gulf between the relatively responsible northern states and the profligate south would almost certainly be re-exposed, with policy responses from the northern countries differing sharply from the Mediterranean countries, including France. It is hard to see the latter group coming up with any positive input, in the face of what for all of them would probably be a first step to the rapid disintegration of the political union which they have milked so successfully until now. The northern group is more interesting, and is likely to adopt a constructive approach.

In the run-up to the Greek crisis, there was significant domestic political pressure for Germany to abandon the euro and to cut her losses. Therefore, if Britain upsets the European applecart with a Brexit, Germany might be open to negotiations. And together with Germany, we can probably add The Netherlands, Finland, and it seems the Czech Republic.

This is where the comment by Mr Sobotka gives us a steer. The Czech Republic manufactures capital goods of the highest quality, and is even reckoned by many Germans to be better at engineering than Germany itself. Its EU experience has not been all that happy. Its government had to abandon plans to join the euro, because of strong public opposition. Its open-border policy under the EU Schengen Agreement exposed the country to unwanted refugees from Syria, Iraq and Afghanistan. EU sanctions against Russia have restricted trade with a natural market of greater long-term potential than the EU itself. And lastly, her energy security has been threatened, not by Russia, but by Brussels.

The Czech Republic is in a similar position to Germany on the question of immigrants and Russian sanctions. Germany has suffered the added setback of having sacrificed her own currency, and being committed through the euro to funding high-spending states. The desire in certain quarters to split from the Eurozone and to form a separate hard currency zone remains, though currently it is out of the news headlines. Germany's dilemma is political: she is still atoning for two world wars in the last century, and dare not be responsible for ending the European experiment.

However, if the UK votes to leave, Germany's position changes significantly. She could well be attracted by the freedom to re-issue her own currency and to make her own trade agreements as well. There can be little doubt that splitting from Italy, Spain, France et al will involve having to write off some or all of the massive debts owed by them to Germany. Alternatively, continued membership of the Eurozone, and therefore of the EU, will eventually render her bankrupt, for the third time in one hundred years.

It is a difficult choice, but the fear level is already high, as evidenced by the G20's concerns, so the members of the Plan B team in Whitehall will find a ready basis for discussion with their opposite numbers in Berlin. As the process of planning a Brexit contingency progresses, the fragility of the whole EU and Eurozone will become increasingly apparent to all involved. If a Brexit happens, contingency planners are likely to agree it will mark the beginning of the end of the European experiment and of the euro as a viable currency. The relative stability of Germany, the Czech Republic, Slovakia, Austria, the Netherlands, Finland, Poland and the Baltic states would be best secured under new arrangements, in line with today's geopolitical realities. The logical solution, assuming going down with the euro ship is recognised as not an option for these states, would be to negotiate a new trade alliance with the UK, a twenty-first century version of the Hanseatic League, based on commerce rather than politics.

This solution would also disrupt NATO relationships, because free trade with Russia and Asia would become the eventual objective. Britain has already shown that commerce has primacy over defence partnerships, when she became the first NATO member to support the Asian Infrastructure Investment Bank, an institution whose prime movers are China and Russia. That was an important signal, because it marked a shift in British relations with Russia, compromising Britain's special relationship with the United States. So not only has Britain positioned herself to benefit from future developments in Asia, but she has ever so slightly turned her back on established defence treaties already.

Therefore, if the British electorate votes for a Brexit, there is a viable option for Britain outside the EU. The cost will almost certainly be the disintegration of the EU itself, and that is something the British Government will not want to precipitate. It is hard to see how the Eurozone's banks will survive it. This is why David Cameron is working hard to avoid a Brexit, having previously shown some support for the idea. After all, he committed the government to a referendum in the first place.

The eurocrats in Brussels are also aware of the danger. In signs of panic, they are even deferring minor regulations thought to potentially upset British voters, such as limiting the power consumption of kettles and toasters (Daily Telegraph, 28th February). And one wonders whether Germany's banking regulator dropped three major enquiries into Deutsche Bank's dealings, because of the potential effect of adverse publicity during the referendum campaign. What Brussels and David Cameron needs desperately is something positive and believable to say about remaining in, but it is hard to see what that might be.

In conclusion, the G20 finance ministers and central bankers have good reason to be concerned about Brexit. The campaign to prevent it will involve a considerable propaganda effort, which has so far not been deployed from a position of strength. Successful referendum campaigns are usually about persuading the electorate with a positive story, not threatening them with the consequences of voting against the status quo. In which case, we can only hope that a Plan B is being put together, and is a viable alternative to a failing super-state.

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