EU Chancellor and German Prime Minister Angela Merkel is in quite a predicament. Though facing intense pressure from global investors to negotiate favorable terms for a Brexit, she is reluctant to send a message that would ultimately lead others to follow the United Kingdom (UK) out of the European Union (EU).
One of the prime benefits of being a member of the EU is its ease in facilitating global trade. Since its establishment in 1993, Europe enjoyed great economic prosperity as global investors flocked to a region where rules crossing country lines were consistent.
For instance, British banking systems were able to provide financial services throughout the continent. Now by divorcing themselves from the EU, will they be prohibited from doing so? If that is true, then the loss of significant deposits from the Eurozone would severely compromise capital levels and impair their lending functions.
Of course, these concerns could be ameliorated through favorable divorce terms out of the EU. That means allowing British banks to continue offering financial services throughout the continent. Certainly, global investors would support these measures, but it’s highly unlikely that other EU member-nations find that acceptable.
They would wonder how can the UK maintain the benefits of their previous alliance and avoid the costly politics behind liberal immigration policies. This sort of free lunch would surely lead other European leaders to ask, “What’s in it for me?”
If Merkel and the EU cave in to the demands of the British, wouldn’t they risk even greater contagion? If they do, it’s time to set into motion actions to extract themselves completely out of the European Union and the Euro. The financial and legal costs of such maneuvering would be mind-boggling, but they would have no other choice.
The consequences of such action would make the Great Recession feel like a pebble in an ocean.
If the objective is to keep the EU and the Euro together, Merkel can only extract herself out of this pickle by standing firm.