28 June 2016 10:22:29 IST

A management and technology professional with 17 years of experience at Big-4 business consulting firms, and seven years of experience in high-technology manufacturing, Rajkamal Rao is a results-driven strategy expert. A US citizen with OCI (Overseas Citizen of India) privileges that allow him to live and work in India, he divides his time between the two countries. Rao heads Rao Advisors, a firm that counsels students aspiring to study in the United States on ways to maximise their return on investment. He lives with his wife and son in Texas. Rao has been a columnist for from the year the website was launched, in 2015, and writes regularly for BusinessLine as well. Twitter: @rajkamalrao

Why the Brexit vote was not a surprise

The warning signs had been there all along — including in 'Yes Minister'

Liberal pundits around the world are decrying last week’s Brexit vote as though the end of the world is near. These elites, including many in India, appear to have been inspired by John Lennon’s vision in his memorable 1971 hit, ‘Imagine’.

Imagine there’s no countries

It isn’t hard to do

... ...

Imagine all the people

Living life in peace...

You may say I’m a dreamer

But I’m not the only one

I hope someday you’ll join us

And the world will be as one

The EU was indeed the first, bold experiment to implement Lennon’s dream by pushing for open borders without seriously thinking about consequences. The Brexit vote simply showed the limits of Lennon’s dream.

Humorous warning

But the first warning sign came nine years after Lennon’s mega-hit, via the classic BBC political satire, Yes Minister . In season one, episode five, The Writing on the Wall (1980), the wily Sir Humphrey Appleby tries to talk Minister Jim Hacker into not accepting a role on the European Commission, as he explains Britain’s motivations in the EU.

Sir Humphrey: The [British] Civil Service was united in its desire to make sure that the Common Market didn’t work. That is why we went into it.

Hacker: [shocked] What are you talking about?

Sir Humphrey: Minister, Britain has had the same foreign policy objective for at least the last five hundred years: to create a disunited Europe. In that cause, we have fought with the Dutch against the Spanish, with the Germans against the French, with the French and Italians against the Germans, and with the French against the Germans and Italians. Divide and rule, you see. Why should we change now, when it’s worked so well?

Hacker: That’s all ancient history, surely?

Sir Humphrey: Yes, and current policy. We ‘had’ to break the whole thing [the EEC] up, so we had to get inside. We tried to break it up from the outside, but that wouldn’t work. Now that we’re inside, we can make a complete pig’s breakfast of the whole thing: set the Germans against the French, the French against the Italians, the Italians against the Dutch... The Foreign Office is terribly pleased; it’s just like old times.

Hacker: But surely we’re all committed to the European ideal?

Sir Humphrey: [chuckles] Really, Minister.

Hacker: If not, why are we pushing for an increase in the membership?

Sir Humphrey: Well, for the same reason. It’s just like the United Nations, in fact; the more members it has, the more arguments it can stir up, the more futile and impotent it becomes.

Hacker: What appalling cynicism.

Sir Humphrey: Yes... We call it diplomacy, Minister.

Political humour aside, the EU has been a creation which defies logic. France, Spain, Portugal, the Netherlands and Great Britain collectively colonised the rest of the world for over 500 years. Germany and Italy literally brought the world to its end during two consecutive world wars, with over 10 million killed or displaced. Each country speaks a different language and is intensely proud of it.

Each country’s culture dates back nearly two thousand years. How in the world did the EU’s founders even think that a loose, open-border union of all these countries, where ego reigns supreme, was even possible?

EU financial management

To placate various self interests, the liberal EU elite crafted a set of rules for 320 million people and 28 member states, that wouldn’t work in a kindergarten classroom of like minded kids. There was no national symbol which united everyone, so the EU let each country be sovereign in its own sense — have its own national anthem and flag. It permitted each country to have its own fiscal policy, so taxes and spending decisions were made independently within the capitals of the 28 nation states.

But the EU imposed a single monetary policy through the European Central Bank (ECB). (Give credit to the Brits, though. They saw this near-fatal flaw of the Euro construct where the fiscal policies of individual countries are misaligned with the single monetary policy of the ECB. So they wisely voted to stay out of the Euro and retain the Pound).

Exactly how did EU financial management work? Well, so far, it has been a terrible failure. While Germany and other conservative nations kept their individual budget deficits to under 3 per cent of GDP as demanded by the EU, the PIGS (Portugal, Ireland, Greece and Spain) countries routinely busted their budget caps. In some years, Greek budget deficits exceeded 10 per cent of GDP. Greece is so indebted today that its total debt as a percentage of its GDP is 178 per cent — the world’s highest debt/GDP ratio.

Because the Euro was established as a common currency, the ECB was forced to adopt monetary policies which made little sense. It kept driving the Euro’s value down hoping that exports would give a boost to its member states. From mid-2014 to now, the Euro has dropped nearly 20 per cent against the dollar: hardly a vote of confidence for a currency which was supposed to take the mighty dollar head on.

Start of nationalist movements

When devaluation didn’t help, the ECB began to demand that wealthier EU nations aid the poorer states, first through a direct injection of cash and then through massive loan forgiveness programmes.

Both moves gave rise to nationalist movements across the EU. In France, Marine Le Pen led the right-wing National Front party to impressive regional victories. In 2012, she was third in the presidential election, securing 17.90 per cent of the vote. In Austria, Norbert Hofer, EU’s first far-right politician, came within 31,000 votes to become head of the State.

And then, there’s immigration. More than a million migrants and refugees crossed into Europe in 2015. While the elites demanded that the EU do even more, ordinary citizens were moved by the nationalist propaganda that the refugee influx was more of an invasion.

In a region with chronically high unemployment, these new immigrants either took away jobs or added to the public burden, both of which taxed residents even more. With the terror attacks in Paris and Brussels, fault lines had appeared and the writing on the wall was clear.

The EU is an ungovernable mess. An open borders policy that is at odds with economic and demographic realities within the 28 member states cannot survive for too long.

No utopia

The Brexit vote has put an immediate end to John Lennon’s utopian vision — ‘Imagine all the people... sharing all the world” — that has been at the heart of the EU’s reason to exist. You cannot share things when the world around you is crumbling and there is too little to share to begin with.

Emboldened nationalists are bound to push a 'put country first' vision in the coming elections. Expect to see many more states exiting the EU in the coming years.