Europe after Brexit: Changing Geopolitical Dynamics

06 Jul 2016

Europe after Brexit: Changing Geopolitical Dynamic...

By Arthur Snell, Managing Director at PGI Intelligence

The result of the 23 June referendum on the UK's membership of the European Union (EU) was a shock, even to leaders of the Leave campaign, exposing a lack of planning for the UK's new relationship with Europe. In the subsequent debate, dominated by the turbulence that has engulfed Britain, less attention has been paid to the effect of Brexit on geopolitics. But on the key issues of Russia, Syria, China and trade, the Brexit result will have direct and significant impacts.

Russian President Vladimir Putin's purported desire for Britain to leave the EU was a debating point during the referendum campaign. Whilst Putin's public statements on the outcome suggest mild approval, private sources with access to the Kremlin have said that there is “extra-jubilation” in Russia's leadership. The UK had played a leading role in pushing the EU towards a hawkish line on sanctions against Russia in response to its actions in Ukraine. In the short term, there is unlikely to be any change, but the continuation of sanctions had already been called into question by Italy (who recently delayed their extension), German Foreign Minister Frank-Walter Steinmeier (who has called for them to be phased out) and France (whose parliament passed a non-binding resolution to lift sanctions in April), among other countries. Several EU members, including Sweden, Poland, and the Baltic states want to maintain a tough line with Moscow, but the balance of opinion on this issue will swing to Russia's advantage with the UK out of the picture. With Russia aware of the increased prospect of the sanctions being lifted, its incentive to withdraw support for separatist forces in Ukraine and implement the Minsk agreements has diminished. Putin’s domestic popularity has not been affected by the country’s economic deterioration since 2014 and Moscow’s strategy is likely to focus on holding out until the sanctions regime collapses.

Another key plank of Russia's foreign policy, its support to President Assad of Syria, will also see a boost. The UK has been among the strongest EU voices insisting that Assad has no future as leader of Syria and on calling for Russia to scale back its military commitments there. The UK’s absence will grant space to figures who are more open to Russian involvement, such as Italy’s PM Matteo Renzi, and to those who feel that, on balance, keeping Assad in place represents the lesser evil. This policy is widely supported in leading think-tanks across Europe and already has the endorsement of many of Britain's pro-Brexit politicians. Therefore, an outcome that sees Assad remaining in power heavily buttressed by Russian support now seems more likely.

Brexit has no immediate implications for NATO, whose biennial summit takes place in Warsaw on 8-9 July. We can expect a forced show of increased unity as Europe's key military alliance seeks to make up for the chaos that has engulfed the EU: watch out for announcements on a range of measures to shore up NATO's eastern flank in the Baltic states and Poland, where members feel under particular threat from Russia. We can also expect an aggressively-worded Russian response. But whether or not there is a long-term Brexit impact on NATO will depend in part on the UK economy; whilst most of the pro-Brexit political leadership has called for greater engagement with NATO, the economic consensus is that the UK's economy will grow less quickly outside the EU. This suggests that it will be a struggle for the British government to deliver on plans to expand the defence budget.

The bigger military impact will be felt within the EU itself. The UK has long been sceptical of plans by the EU to develop its own defence capability, seeing it as unnecessary duplication of NATO's role. Some pro-Brexit campaigners have talked darkly of the EU being “out on manoeuvres” to create its own military force at NATO's expense. In practical terms, the EU's limited military capability has hitherto been used largely for humanitarian purposes. The release of the EU's recent global strategy was overshadowed by Brexit, but the details speak of the need for “full spectrum defence capabilities” and the need for the EU to be able to “act autonomously”. However, in spite of talk of an 'EU Army', it is clear that the strategy is based on combining individual EU member states' defence capabilities. Take the UK, the EU country that spends the most on its military, out of that combination and the remaining military posture of the EU is over-reliant on France and unlikely to be able to act autonomously. Therefore, whilst Brexit means that the remaining 27 EU members are more likely to reach agreement on common military structures, without the UK’s contribution, the capabilities of any force will be debatable.

Brexit's impacts are not just in the security field. Beyond the debate about how the UK might access the EU’s single market in future, the wider impact on global trade will be significant. Brexit represents a vote against globalisation, reflecting industrialised nations' falling competitiveness in a period of highly mobile goods and labour. China, the country that has gained the most from globalisation, may therefore be disproportionately affected. The value of recent Chinese investments in the UK (with President Xi Jinping having announced USD 57 bn in deals during his visit to UK in 2015) is likely to fall as the UK economy is expected to drop into recession in the coming months. China's exposure to the UK was reflected with the renminbi suffering its largest one-day decline since being devalued in August 2015, amid fears over exports, capital flight and investments already made in the UK. With that, China’s plans to use London as a base for internationalising the renminbi will need reappraising, as many major banks may move capital market operations outside of London, undermining the city’s status as a financial hub. The uncertainty entailed by Brexit will leave leaders in China wary and will also empower European leaders who have urged a tougher line against China’s dumping of steel into the European market, something the UK opposed. The UK has recently played the role of enthusiastic cheerleader for China within the EU, something which the Chinese foreign ministry made explicit when calling on the UK to Remain in October 2015, saying: “Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties”. With the Brexit result, the UK’s utility to China has been reduced.

Perhaps the biggest impact of Brexit will be on global trade itself. The Transatlantic Trade and Investment Partnership (TTIP), an attempted free trade deal between the US and EU, was estimated by the London Centre for Economic Policy Research to have the potential to boost world trade by over USD 200 bn annually. TTIP has garnered controversy across Europe but was enthusiastically promoted by the British government, with David Cameron saying he wanted to “put rocket boosters” under the deal to get it concluded. In stark contrast, President Hollande of France threatened to block the deal in May 2016. Since the UK’s referendum, numerous European politicians have come forward to express doubts over the direction of the deal. Expectations of reaching a deal before President Barack Obama leaves office in January 2017 are now low. His likely successors, either Hillary Clinton or Donald Trump, are both – in varying degrees – critical of TTIP and unlikely to make it a priority issue.

With the UK in a state of parochial febrility over the leadership contests in the major political parties, little thought is being given to the global impacts of Brexit. But with the UK having taken the decision to get ‘Out – and Into the World’, getting the geopolitics right may be the most important priority for whoever replaces David Cameron as Britain’s Prime Minister. 

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