The European Union has grown in confidence during its handling of Brexit, its member nations standing firm as the UK moves towards its departure from the EU. But the mood is so buoyant that there is a danger that the forthcoming split will be mishandled. Should this happen, Europe is in line to suffer an unexpected economic shock.
And, as we all know, financial injuries hurt the most when unanticipated or self-inflicted.
Foisting an unpalatable settlement on the UK is the surest way to end up with an acrimonious divorce. It would take bravery to argue that the consequences of a no-deal Brexit could be worse for Europe than for Britain. However, it is more of a lose-lose scenario than many appreciate.
It is true that the optics of Britain’s negotiations with the EU have been terrible. The latest EU summit provided several images that underline the resolve of the 27 remaining members against Britain.
One photograph showed a fist-bump between Mark Rutte, the Dutch prime minister, and Charles Michel, the Belgian leader, with Britain's Theresa May in the background. Both men were later reported to have worked together to remove concessions to the UK from a summit document.
On Friday morning, Mrs May was captured on camera having a robust exchange with Jean-Claude Juncker, the European Commission president. And no one has forgotten how badly the sight of blue-suited European leaders walking past Mrs May at another meeting in Salzburg played a few months ago.
Britain is not the manufacturing powerhouse of Europe but European regions – such as northern France, where 15 per cent unemployment is not untypical – are vulnerable to any kind of trade shutdown. More importantly, the City of London is the financial heart of Europe and this is not a good time for it to stop beating.
The European Central Bank (ECB) last week ended the stimulus programme that has printed money to soak up government bonds since 2015. Although launched long after the financial crisis pushed economies, such as that of Greece, into collapse, the ECB’s Quantitative Easing (QE) programme was a lifeline for the Eurozone economy.
It is ending at a time when growth in the Eurozone is slowing. Economists believe that the ECB itself is poised to cut the 2019 growth forecast to just 1.5 per cent.
Inflation remains just above 1.1 per cent, despite four years of printing money, an indication that deflationary pressures remain.
At the same time, European governments are increasing deficit spending. Italy succumbed to a wave of populism in elections earlier this year. Its new government has entered into a showdown with Brussels, as it increases its budget deficit. Without the ECB to buy up the bonds, Rome needs to sell its debt, mostly through London. Just as vital for Rome is continued access for its banks to the money markets to sustain any upturn.
After weeks of protests in France by the gilets jaunes, Paris turned to debt-backed spending by cutting taxes and raising the minimum wage, in order to assuage the demonstrators. That announcement was the death knell to President Emmanuel Macron's efforts to build a common European budget with German backing.
Lack of preparation for Brexit will affect millions of contracts used by European businesses to offset commercial risks. London is the most important centre in a global derivatives market worth an estimated £45 trillion. No one is suggesting EU firms are barred, but contracts written in EU law must now roll over into British law. That could have implications for European-based firms, and there is no market of sufficient depth in Europe to provide the services based in London.
Mervyn King, the former governor of the Bank of England, has taken issue with the Brexit gloom-mongering that hangs over sterling and has slowed annual growth. In an editorial earlier this month, he wrote that leaving did not represent an economic crisis for Britain but had triggered a political breakdown.
Fed by months of alarmist headlines, many in Britain have steeled themselves for disaster. The latest was that the government could introduce emergency powers to pharmacists to block prescriptions or substitute alternative medicines without consulting a GP in the event of Brexit-related drug shortages, after a statement by health secretary Matt Hancock.
Europeans who look at Britain’s prospects only through the prism of movement of goods and people across the English Channel may wrongly assume that the harm only lies on one side.
Disruptions to growth would feed the political divisions across the continent. In France, support for Marine Le Pen’s far-right Rassemblement National party is rising again. The Belgian government lost its parliamentary majority after a row over migration earlier this month. Sweden has rejected proposals for its caretaker Prime Minister Stefan Lofven to form a centre-left government, more than three months after elections that left the nation in a political no-man’s land.
The pinch points across Europe are growing and the vulnerability of Europeans to an unexpectedly rough Brexit is greater than many appreciate.
