The British government has embarked on unprecedented and hugely complex negotiations to leave the European Union in March 2019. It now seems inevitable that the UK will pay tens of billions of pounds and have to negotiate and structure a complex series of transitional provisions, which could last years, to escape the oversight of Brussels.

Or so it seemed, until this week: what appeared to be a done deal on the Brexit “divorce bill”, and the maintenance of a free border between Northern Ireland and the Republic of Ireland was scuppered at the last minute by the objection of Theresa May’s political allies the Northern Irish Democratic Unionist Party (DUP). The DUP fears that Northern Ireland will be forced into accepting the regulation of the EU, and therefore the regulation of the Republic of Ireland, by default, if an open border between the two is to be maintained. The DUP’s fear is that this would bring about a united Ireland, and potentially an Ireland independent from the UK, nearly a century after Britain had ceded most of the island of Ireland to create Irish Free State. The events that led to that partition of Ireland themselves have their origins in the religiously fuelled British civil wars of the 17th century.

The efforts of the UK government to leave the EU, with the associated problems, however appear less determined than the overwhelming desire by European politicians to prop up the EU, at whatever cost. This comes to the heart of the misunderstanding that led the UK to join, and now leave, the European Union. The EU is a self-avowed political project, and always has been. The forerunner of the EU, the European Economic Community, was founded by the Treaty of Rome in 1957, in order to “preserve and strengthen peace and liberty”. Its overriding aim was to prevent another destructive European war.

The EU was formerly created by the Maastricht treaty in 1992, with the explicit objective of continuing the process of creating an “ever closer union” among the peoples of Europe. It was also intended as a coherent group of similar cultures and social and religious values; it was essentially designed as a Christian club, which is why Turkey, a NATO member and Europe’s sixth largest economy, has been denied membership for decades, partly on the grounds of its human rights record, yet at the same time Croatia, Romania and other countries with far from perfect human rights records have been swiftly included.

The British, meanwhile, had convinced themselves that the EU was about economics. The EU, and more to the point the Euro, has indeed had a very positive effect on the larger economies in Europe, notably the EU’s largest exporter, Germany. Even the UK in its Brexit negotiations are likely to seek to retain as much free trade access to the EU as it can from the outside. The UK’s financial powerhouse, the City of London, which still ranks as the top financial centre in the world, has benefitted from easy access to clients and assets in the EU, and it will be a significant challenge to leave.

While there are risks to the UK as a result of Brexit, they should not prove fatal to its continued financial dominance. The UK is the world’s fifth largest economy, London did not become the financial capital of Europe because of the UK’s EU membership, and the City will not lose its status because of the UK’s decision to leave. London has a history of modern finance, world-class infrastructure, an independent and competitive currency, a natural geographical bridge between Asia and the US, and an international workforce brimming with talent and innovative ideas.

There is of course still economic and political risk for the UK in the exit process, not least in Northern Ireland, and yet the challenges for the EU are potentially more significant; the recent attempts by the Catalan regional government to declare independence from Spain, the loss of one of its largest members, the UK, and the political rise of the nationalist AfD in Germany’s recent elections. Germany’s Chancellor Merkel and French President Macron knew that the EU had lost popularity, but had underestimated the increasing skepticism for the European project. This itself comes on the heels of a near financial collapse in Greece and ongoing concerns about the resilience of the banking sector in Italy. The stated objective of “ever closer union” for the countries of Europe appears to be a greater challenge than any time since its creation.

The narrative of the EU has always recalled the distantly echoing glory of the Roman Empire; which is not new. In the Dark Ages, this nostalgia led French warlord Charlemagne to travel to the crumbling Rome, centuries after its fall, to be anointed “Emperor” by the Pope amidst the chaos of the 8th century; a process repeated by the German warlord Otto in the 10thcentury. It will remain to be seen if the EU’s “New Rome” survives the troubles that now beset it.

Duncan Wales is CEO of Exotix Capital, the leading emerging and frontier markets investment bank.


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