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November 09, 2016

Brexit all over

It's two out of three, and one to go - the Italian referendum that would complete the annus horribilis for the western, global, liberal establishment. And there is more to come next year. After Donald Trump's surprise victory, intelligent people will finally stop listening to opinion polls and political analysts - at least for a while. These so-called experts have persistently, and significantly, underestimated the nature and scale of the insurrection against the western liberal policy establishment. Political journalism has failed to capture what is going on, and consistently overplayed Hillary Clinton's chances all the way to the end. They are just as ignorant as economic forecasters, who have been complacent about the implications of the financial crisis on the economy, year-in, year-out. Liberal democracy is failing because of its innate complacency. They didn't see it coming. And many are still in denial.

As we write this, Trump is on course for a historic victory. Our focus here at Eurointelligence is the impact of a Trump presidency on our part of the world. The most immediate issue for us is the Italian referendum. We have heard the theory that a Trump victory might scare the Italians into rallying behind Matteo Renzi at the constitutional referendum. We doubt that. Matteo Renzi has made so many enemies, especially within his own party, that he would need a miracle to turn this around. We think that a popular anti-establishment insurrection is under way in all of Europe, perhaps not quite on the same scale as in the US. This is most likely to be expressed in referendums than elections, where coalition politics discourages extreme swings (see also our separate story on the debate in France, below). What's gone wrong in Italy is in many respects symbolic for the rest of Europe. Renzi's priority was not to solve the actual problem - which is the country's lack of sustainability in a monetary union. Instead he favoured political reforms to cement his personal power. The left, right and centre of Italian politics are now united against him. He could easily lose the referendum by 60-40, which would be the end of his premiership. He may hang on if he loses by a small margin - but that would our most optimistic scenario (optimistic for Renzi, that is).

While the Italian referendum is the most imminent issue, the future of European security is probably the most serious. Ursula von der Leyen, Germany's defence minister and prospective successor to Angela Merkel, said the result came as a shock. The EU will need to rethink its defence policy from the ground up when confronted with a US president who, during the campaign, explicitly threatened to revoke the Nato Article 5 security guarantee. We expect him to walk back on this specific threat as he confronts the realities of office, but there can be no question that the EU will no longer be able to rely on the US for its collective security as it has done in the past. Expect more talk about security co-ordination at the EU level, and hefty increases in security spending, as is already beginning to happen in Germany. This is not the infrastructure programme we had in mind when we were talking about more investment. Jan Techau (@jan_techau) predicts a debate in the EU about nuclear weapons. We, too, think this is likely. And this would all of a sudden give the UK a renewed role in Europe. It is one of two nuclear powers in western Europe, and one of two members in the UN Security Council. The promise of security co-operation with the EU could become very important during the Brexit negotiations. The idea that the EU would penalise the UK over Brexit is ridiculous in view of the geopolitical implications of a Trump victory.

The impact on relations with Russia is more complex. Trump will disengage from Syria, which would strengthen Russia's role in the region. On the other hand, we would expect China to increase its strategic investment in the EU. It is our expectation that the EU will confront a moment where it decides whether to integrate further - on foreign and security policy, and economic union - or allow full-scale disintegration. The Trump victory force the EU to act - something its leadership has been constitutionally incapable of doing.  

What will Trump mean for trade? TPP and TTIP are now both dead. Of the big European trade deals currently under negotiation, only Ceta hangs on by the skin of its teeth, but that deal is now under threat from the Netherlands, where a referendum is being organised right now, and from the German constitutional court, which we believe may well strike out the one substantive part of the agreement - the investor tribunals. Trump said that he would favour a free trade agreement with post-Brexit Britain. President Barack Obama threatened that the UK would be at the back of the queue, while Trump said he would jump the UK right to the front. So we could end up with a TTIP-like bilateral trade agreement between the US and the UK. The UK's trade with the EU vastly outweighs the trade with the US, but such a trade agreement could go so some way to compensate for any market access loss the UK might suffer as a result of Brexit. Our conclusion is that the Trump victory will make a hard version of Brexit - of which there are several - relatively more likely simply because it would become economically more viable. But this scenario could be counteracted by the increased likelihood that the EU may end up offering the UK a softer deal. The Trump victory really kills the theory that the EU has to be tough on the UK especially if it makes a hard Brexit economically more viable. And don't forget that defence, too, will play an important consideration.

There can be no doubt now that liberal, global democracy is under threat. The first thing our leaders will need to do is stop doubling down immediate with the policies and the narratives they have grown so used to over the last 20 years. We heard a lot of commentaries by people who can't understand how 'irrational" positions - as those in support of Brexit or of Trump - can possibly be winning out over "rational" ones. Irrespective of whether such statements are true, or not, it is electorally disastrous to cast pro-liberal-establishment positions as rational. This is a sure-fire recipe of how to lose.

So when Jyrki Katainen says at a meeting in Brussels that the only way to defeat populists is through "difficult and responsible" solutions, as opposed to quick fixes, he is really making it worse. The electorate is reacting against a class of solutions that have been tried for 9 years - since the original outbreak of the financial crisis - and which have all been cast as "difficult and responsible". The political establishment needs to stop screaming at the populists and start to address why their policies have not worked for sufficiently large proportions of the electorates.

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