How Europe can contain damage from Brexit

June 24, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Europe can contain the damage from the UK’s vote to leave. The key is to avoid copycat referendums, which have been threatened by politicians in the Netherlands, France and Italy. One way is to doggedly insist that free movement and free trade are inseparable. The other is to flex that ideal. Doing so could neutralise populism and might avoid a breakup of the euro zone.

Donald Tusk, president of the European Council, has already spoken of the bloc as having 27 members, not 28. How long will that last? Bond investors are already driving up yields in southern Europe, suggesting they see increased risk in countries like Italy and Spain.

One option is tough love. The UK Brexit camp has promised voters what it cannot deliver: free trade, and an end to immigration. By sticking to its principles and offering the UK only politically unpalatable deals, the European Union would show that loose talk does not deliver results. It could then focus on stimulating growth. The euro zone’s fiscal rules need to be redrawn to enable governments to invest. Over-indebted countries need to restructure their borrowings. The euro zone’s unfinished banking union needs completing with a real deposit guarantee scheme.

There is another path, though. That’s to refine the idea of free movement of people. That would be a big step for Europe, as common trade requires some degree of free movement to help economies adjust, particularly in a single currency zone. Yet the issue, if left unaddressed, could become a lightning rod for further debates. Just suggesting that the topic could be open to discussion in the coming months or years might knock the wind out of populists who argue that the EU has become unfeeling and inflexible.

It might even be enough to save the relationship with Britain. Outgoing British premier David Cameron has said that it will be for his successor to start the official exit process, which potentially leaves three months or more for tempers to cool. A new leader of the UK might just rethink leaving if Europe is prepared to rethink its most treasured principle.

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