It’s been more than three months since a majority of the British people voted to divorce from the EU, and the economic consequences are getting clearer. Immediate market reactions after the referendum weren’t encouraging for the European economy, or for the rest of the world. Stocks plunged globally and the pound sterling hit its lowest value in three decades. This shouldn’t have come as a surprise – the economic uncertainty that Brexit was likely to cause had been widely predicted before the referendum.
Brexit is creating shockwaves, and confidence in the British economy has suffered substantially – although the longer-term implications for the economy will be known only when Britain’s future relationship with the EU is defined. The Bank of England has rightly extended quantitative easing measures, but it remains to be seen whether they will be enough to meet the challenge.
One thing is particularly noteworthy, however: the eurozone seems to be more resilient than expected. True, in its first post-Brexit Economic Outlook, the European Commission noted that the outcome of the referendum has the potential to damage the economic recovery of the EU. Growth prospects for 2016 and 2017 have been reduced. But growth forecasts have been revised only
slightly downwards, and in July the purchasing managers’ index indicated continued recovery.
The eurozone went through several economic governance reforms after the financial crisis in 2010-12. These reforms were necessary to correct the defects of economic and monetary union (EMU) and to restore confidence in the euro.
But Brexit changes the game. Past reforms won’t be sufficient, and additional changes need to be made to stabilise EMU. Steps towards further solidarity should be matched with enhanced responsibility for member states. The conclusion of the Banking Union is the most pressing task now. But we shouldn’t forget the Capital Markets Union, which will be important for businesses’ access to finance, especially for SMEs.
These institutional reforms are important. But we should also focus on the real economy to reinforce the still-fragile recovery, and I see three issues as particularly important. First, member states should commit themselves even more seriously to economic reforms. The experiences of Spain, Ireland and Latvia provide empirical evidence of how to pursue difficult reforms successfully. Second, the European Central Bank should continue its unconventional measures to support the eurozone economy. Third, eurozone surplus economies should boost domestic demand and investment to support economic activity in the EU.
Britain will remain a close ally of the EU, and its future trading relationship can be made mutually beneficial. The question of Britain’s access to the single market will be at the core of negotiations
over its future links with the EU, not least for its financial services industry. But we cannot water down any of the EU’s four freedoms.
Brexit also calls for bold action by every member state to boost economic competitiveness. One of the EU’s undeniable success stories, and the core of its integration process, is the single market. With Brexit, we lose one of its best advocates. And for an open, export-orientated economy like Finland, it’s of paramount importance to continue ambitious efforts to remove remaining barriers, particularly in the Digital Single Market. The same goes for energy and services. Moreover, it’s important that the EU continues to work for the competitiveness of its industries and for new free trade agreements.
In Finland, which was in a slow-motion economic decline for too many years, we practice what we preach. We’ve made a broad-based national effort to restore our competitiveness through a
social contract with trade unions and employers’ organisations. Our Competitiveness Contract will reduce unit labour costs by four percent in one go, implying no wage increases for two years. Structural reforms include a major move towards company-level local agreements for negotiating working hours and other conditions of work, the liberalisation of shopping hours, and a branch-and-root reform of healthcare and regional government. At the same time, we are investing more public funds in future industrial priorities, such as the bioeconomy, clean solutions, health-tech and digitalisation.
The motivations for establishing the EU – peace and stability among nations, and the freedom and wellbeing of citizens – haven’t disappeared. On the contrary, in a globalising world in which competition gets harder and challenges such as climate change and growing instability in our neighbourhood are crossborder by nature, we need a reformed and well-functioning EU more than ever.
We in the EU, and especially in the eurozone, must minimise the harm caused by Brexit and keep the EU on the road of reform to reinforce sustainable growth and strengthen its legitimacy. The
reformed EU must focus on the essentials: safeguarding peace and security and ensuring the right conditions for jobs and growth. Most importantly, Europe must not be allowed to slide into a painful decade of political and economic turmoil due to the British vote.
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