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With the UK leaving, Europe will need to quickly carry on

Yesterday’s vote for Britain to leave the Union places the EU before a stark challenge, in the midst of trying times writes Daniela Schwarzer. The fundamental challenge to the European Union comes at a time at which multiple, interlinked crises have already shaken much of what the EU was at what now seems to be the peak of integration following the implementation of the Lisbon Treaty. Although the shock goes deep, now is the time to keep a cool head, be pragmatic, and refocus on European ambition.

The immediate effects of yesterday’s vote are troubling. Remain was priced into the market, and the pound fell significantly in the early morning hours. It is likely that the eurozone will be affected as well, by speculation and a crisis of confidence in the whole integration project. Market pressure may be particularly high on the Southern periphery where sovereign debt is reaching unsustainable levels and instabilities in the banking sector persist. The situation is particularly fragile as Portugal, Spain, Italy and France all have weak leaders or face political instability.

The Bank of England and the European Central Bank have prepared to counter this kind of financial turbulence. Political leadership and strong political communication is now also key. A Franco-German initiative that demonstrates that the two largest countries of the eurozone stand ready to keep the monetary union and the EU together and to launch a forward-looking initiative is crucial. In order to be credible, they must make concrete proposals about what people seem to worry most about: security, welfare, and migration.

In the relationship with the U.K., pragmatism should reign. Political turbulence is likely to be significant in the United Kingdom for the months to come. Britain must expect to be hit by a recession, with unemployment rising over the months to come.Within a year, the country may even face internal division as Scotland, where 62 percent of the voters wanted to remain, may be tempted to again pursue independence.

While these developments are certainly self-inflected, it is still in the interest of continental Europe to keep close relationships with the U.K., and to help avoid substantive weakening of a country that used to be known for its healthy pragmatism. Participation in the single market lends itself to cushioning a formal exit of the EU’s second largest economy by building a close future relationship with it soon outside of the EU. The U.K. will, however, have to adapt to the fact that it has voted itself out of any decision-making role and will forthwith be at the receiving end of Community verdicts.

Foreign policy and defense cooperation, which in any case has largely taken place outside EU institutions, should be strengthened if there is a reliable political counterpart in London. NATO could even experience resurgence. The U.K. may be very interested to partake in new initiatives and show stronger international engagement, in order to demonstrate its relevance vis-à-vis Washington. In particular if the next U.S. President adopts a foreign policy that is less engaged with Europe and its security concerns emanating from its Eastern and Southern neighborhood, the EU will have an increased interest to explore options here, including in the field of intelligence on terrorism.

Governments will have to tread a thin line of minimizing costs of the Brexit-vote, and making sure that the British example does not spread in an uncontrolled way. The Brexit referendum has proven that a retreat from the EU is possible and that EU membership has become re-negotiable. This will create copycats and it will be hard to tell other countries that the right to renegotiate its membership and, now, the decision to withdraw, is for Britain only. This is why the costs of leaving the EU will have to be visibly high for the U.K.

Meanwhile, the remaining countries will move toward an EU that is likely to be more differentiated than it has ever been. In this more stratified EU, Berlin, already the center of gravity, will gain even more importance as the U.K. withdraws. Despite the fact that Chancellor Merkel also has to contend with a right-wing populist, euro-skeptic party, she is better placed than most of her peers to be able to pursue a determined approach to EU affairs. One of her missions will be to make sure that the two cores of the EU, the euro area and the single market, hold together. A second one is to help make the EU institutions and the Brussels decision-making system more credible, transparent and legitimate again.

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