August 2013

A Wikistrat Crowdsourced Simulation

Simulation Background

Editor’s note: This report summarizes a 10-day crowd-sourced simulation in which over 80 analysts from around the world collaboratively explored scenario pathways for Britain exiting the EU.Compiled by Jeffrey Itell, Senior Analyst.

As continental Europe remains embroiled in the Euro-crisis, British doubts regarding its future in the European Union have increased. Pressured by the rise of the United Kingdom Independence Party on the right as well as Euro-skeptic members from his own ruling party, Prime Minister David Cameron has announced an “in-out” referendum on the island nation’s EU membership after the 2015 election. By that time, he hopes to have achieved ample treaty changes that will allow Britain to opt out of far-reaching European economic and !scal integration plans, thus convincing British voters that their future is still in the EU.

Cameron’s gamble might not pay off as other countries are tiring of British demands for special treatment. Germany prefers to avoid a British exit as it could tilt the balance of power in Europe in favor of the Mediterranean bloc, but is not prepared to concede much in the way of social, labor-market or banking regulation. The French reject an “à la carte Europe” and might prefer a British exit for the same reasons the Germans fear it - more EU power for France.

In May 2013, Wikistrat ran a ten-day crowd-sourced simulation, exploring possible scenarios for Britain’s exit from the European Union, focusing on what could cause Britain to leave the European Union after the year 2015, when general elections are due, and how exiting would affect Britain’s standing in the world over the subsequent decade.

In this simulation, Wikistrat analysts prepared 26 scenarios, in which they considered four issues: (1) the driving factors that would cause the British public to vote favorably on a post-2015 referendum calling for EU withdrawal and the British government to honor the results of the referendum; "(2) Britain’s options for when and how it would leave the EU; (3) the implications of a British withdrawal from the EU - how key member states would react and how Britain’s withdrawal might change the EU institutionally; and (4) the economic and security implications of withdrawal on Britain and how Britain would reinvent its role in the world.

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Overview of Master Narratives

The analysis provided in the 26 scenarios gives evidence to support"four “Master Narratives,” (MN) built around two questions:

1) First, to what extent does Britain exit because of actions taken by other EU members or because it wanted to make its way in the world outside the EU framework?

2) Second, after withdrawing from the EU, to what extent does Britain form new alliances or become isolated?

The X-axis (question 1) represents the primary driving factor: to what extent did the British electorate and government decide to leave the European Union because of internal factors (joining the EU never really made sense) or because of external factors (such as European policies hostile to British interests that seemingly cost more than the bene!ts of membership). The right side of the X-axis represents Britain’s strongest position, exiting the EU for its own reasons, while the left side represents Britain leaving because of actions taken by the EU.

The Y-axis"(question 2) addresses the results of Britain’s decision to leave the European Union: to what extent does freeing itself from EU rules enable it to !nd stronger economic and security relationships in the world, or does cutting itself free lead to isolation and decline? A Britain that develops strong alliances will rise to the top of the chart, while one with weak alliances will reside at the bottom.

These axes, master narratives and relationships are represented on the chart below.

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Supporting documentation not included in this report also analyzes the various ways Britain can choose to leave the European Union and the effect that leaving will have on key member states and the EU as an institution.

The four master narratives chart four distinct futures for the United Kingdom if it withdraws from the European Union. Departure could be bring the U.K. great rewards, but at great risk of isolation and irrelevance. The best case scenario (Master Narrative 1) is when Britain af!rmatively decides to leave the European Union of its own accord to pursue tighter integration with American, Western and Asian alliances. Rather than being tied down Lilliputian-style by EU entanglement, Britain reenergizes itself with new alliances in the dynamic markets of Asia. The worst case scenario (Master Narrative 3) is when Britain has no alternative but to leave the European Union because of incompatible policies, but then !nds itself not only isolated with few strategic partners and little to offer, but facing the economic and legal hostility of its former cohorts and neighboring countries.

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Master Narrative 1:

Back to the Future

Internal Reason/Strong Alliances

Never quite European, Britain decisively chooses to leave a failing EU and form alliances with stronger, more dynamic societies.

Unlike the countries of continental Europe, whose land borders require cooperation or confrontation, Britain chose to join the European Union out of self-interest, not necessity. Buffered by the English Channel, Britain could at times throughout history choose to distance itself from the day-to-day affairs of continental Europe. Joining the European Union (and hedging its bets by keeping the Pound Sterling) was a choice, not a necessity. This master narrative suggests ways that Britain could improve its lot by freeing itself of the EU yoke and reinventing itself on the world stage by forming alliances with stronger partners.

Britain could stage its EU exit off the back of a surging economy. Although austerity measures make a double-dip recession possible, Britain’s currency #exibility provides policy options that could lead to a British economic rebound while Europe continues to #ounder. Even under a mild recovery, Britain could tire of waiting for visionary leadership to emerge in Europe and, instead, chart a credible set of independent policy options for a prosperous British future.

If its economy remains stagnant, Britain’s ruling class and public could still conclude that compared with other opportunities, partnership with Europe through the EU mechanism provides insuf!cient opportunities for economic growth and stability. Instead, Britain could jettison its relationship with a persistently confused Europe for stronger economic ties in the world’s growth sectors in America, Asia and Latin America. Britain could execute this strategic shift in a variety of ways, leveraging its core strengths: !nance, defense ties to America, English and its Commonwealth relationships.

For example, Britain could emulate Australia’s approach to economic engagement in that region by forging closer bilateral ties with the United States, Canada and India to take advantage of growth opportunities in a nimble fashion that would not be possible if it remained tied down by the bureaucracy in Brussels. Or, rather than going alone, it could attempt to piggyback on the U.S. strategic pivot to East Asia, contributing militarily and diplomatically to that effort and gaining economic advantage in return. In essence, Britain could hitch its destiny to America, with which it has maintained a long-standing security alliance. London could also accomplish this goal by joining NAFTA, thereby anchoring itself to the more economically liberal and !scally sound English (and Spanish)-speaking North Atlantic, and through America to fast-growing Asia and its four billion consumers, many of whom are becoming part of the middle class.

If Britain wanted more independence from American policy, it"could “rebrand” itself as one of the leaders of the English-speaking world (in contrast with dealing with countries as a leading EU member). It could also use these advantages to rekindle relationships with Commonwealth partners, former colonies and Middle Eastern countries, with which it has historic ties.

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The U.K. could also exercise the option to turn its attention northward to realize the vast potential of oil and gas reserves in the Arctic made accessible through climate change. The U.K. could maximize its position as a Permanent Observer within the Arctic Council, offering itself as the principal !nancial hub of all resource-endowed Arctic Council states and Arctic investors, showcasing its new-found freedom from EU regulations. Furthermore, the melting polar ice caps provide the U.K. with an opportunity to become a principle transshipment hub between Asia and continental Europe, strengthening ties with Asian Commonwealth members, supporting the U.S. Asia Pivot and tying into a burgeoning Transatlantic Trade and Investment Partnership.

Regardless of which strategy it choses, leaving the EU would provide Britain unfettered access to Asian markets, which would provide economic growth opportunities unimaginable in Europe. Nevertheless, the shift in the Churchillian three spheres of U.K. foreign policy away from Europe towards the Commonwealth and the Transatlantic relationship still requires an ongoing amicable relationship with continental Europe and its enormous market, which accounts for most of Britain’s current trade. Therefore, following a British exit from the EU, much of the U.K.’s diplomatic energy and effort would be spent ensuring that Britain still sees the value of a close relationship with European member-states.

One option would involve joining and reinvigorating the European Free Trade Association (EFTA), which Britain helped found in 1960. Joining EFTA would enhance Britain’s trade dynamics with the Commonwealth, strengthen bilateral ties with America and maintain continued access to the European markets. Thus, an EU-exit for Britain would not mean isolation in Europe, but an involvement in regional integration dynamics, which would both appease Britain’s internal idiosyncrasies and European traders. While the U.K.’s shift from EU to EFTA status would have both advantages and disadvantages, if executed gradually and with the cooperation of EU member states, it would re#ect Britain’s relationship with Europe better to the advantage of all parties.

In addition, a British exit from the EU could precipitate an intense north-south debate fostered by the inability of the northern nations (which no longer include the U.K.) to stem demands for support by southern nations. This dynamic could create new opportunities for Britain if the northern countries - Germany and the Netherlands - strengthen their relationships informally and institutionally to effectively deal with southern “beggar” states. Under suf!cient duress, Germany could lead an effort to partially disengage economically and !nancially from the south, resulting in a two-speed EU. Such an arrangement would be more amenable to British interests, as the U.K. could reorient its relationship with Europe by focusing primarily on strong northern block members.

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Internal Reason/Weak Alliances

Never quite European, Britain decisively chooses to leave a failing

In the previous master narrative, skill and a bit of luck lead to an improved position for Britain. This master narrative illustrates what occurs when Britain decides to engage the world alone, but bad decisions and misfortune cause Britain to struggle in !nding its place in the world order, leaving it at odds with its continental neighbors and unable to make new alliances.

Public opinion against EU membership is the common driving force in the following pathways. Although the rationales for leaving the European Union are plausible in these examples, greater consideration could have been given to the downside risks of exit.

A weak economy, unrelenting immigration, Islamic non-assimilation and unemployment, which take its toll on the British psyche, could force an inward-looking U.K. to vote to exit from the EU. So could a populace foreseeing the European Union becoming an increasingly federalized nation, which is not the deal Margaret Thatcher signed up for. Although a more skeptical governing class would be more cautious about leaving the EU, intense public sentiment and special interest lobbying could compel the governing class to honor public sentiment.

Given a high level of public sentiment opposed to EU membership, even a misplayed hand could result in Britain on the outside looking in. For example, leveraging the threat of the emerging U.K. Independence Party, Prime Minister Cameron could seek treaty revisions and lower !scal demands from the European Union ahead of Britain’s EU withdrawal referendum. If Cameron overplays his hand and Germany and France miscalculate the Eurosceptic sentiment in Britain, the U.K. could !nd itself “accidentally” on the outside, against every European leader’s wishes.

Bankers, labor and the surging U.K. Independence Party could also force British politicians to lead the U.K. to exit and isolation. Responsible for 40 percent of Europe’s !nancial services, London’s bankers, who have never been happy with EU banking restrictions, could advocate a British exit in order to inoculate themselves from increasingly stringent measures. Leveraging resentment against unrelenting Romanian and Bulgarian immigration, Labor could also call Cameron’s bluff by af!rming the government’s referendum to leave the EU. A strong campaign by the U.K. Independence Party and lukewarm EU support from other parties could result in a similar outcome.

Under each of these conditions, Britain could decide to leave the EU hastily in response to public opinion without adequately considering the risks. If it cannot improve its ties with Asia, the Commonwealth countries, and Asia - and as an independent country with an economy dwarfed by the EU, the U.K. would be disadvantaged in negotiating new alliances - then Britain could !nd itself honing its trade relationship with Europe, but from the outside, subject to all the rules but without a seat at the rule-making table. For example, Britain could negotiate an exit in exchange for U.K. common market access, which would require adherence to EU trade rules. Or,

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Master Narrative 2:

Alone Again, Naturally

if Britain’s government was taken by surprise with the result of the referendum, it would likely scramble for membership in the European Economic Area to provide it access to the European single market. Doing so would subject the U.K. to all but the agricultural regulation it sought to escape, while losing its clout to affect EU rule-making. Britain could also opt for the Norway model, but contributing to the EU’s budget on the heels of withdrawal will be a tough sell among the British political class and electorate.

These three outcomes are prefaced on Britain skillfully defusing continental animosity to its withdrawal. Retaliation by the EU and its member countries, though, is just as likely. Upon exiting the EU, Britain’s economy would likely experience immediate shocks: companies relocate to the continent, foreign workers leave, British workers return (without jobs) and Scotland leverages its desire to remain in the EU for a better deal with England. Britain would do best to build stronger alliances with Commonwealth members to offset these losses, but cutting ties with its closest trading partners would leave Britain disadvantaged for the foreseeable future.

Worse, the EU could retaliate by restricting British employment and trade opportunities on the continent, further weakening Britain’s economy and exacerbating unemployment within immigrant groups, creating a non-virtuous cycle of isolation, xenophobia and poor economic performance. Although exiting the EU might be an advantageous and lucrative short-term move for London’s banking sector," lack of an external regulatory constraint could drive business to better regulated, less risky banking sectors in the United States, Japan and Germany.

A precipitous exit could also complicate Britain’s relationship with the Republic of Ireland, still an EU member, putting the fragile peace in Northern Ireland at risk. Ireland and Britain need to resolve dif!cult customs, trade, travel and (especially) immigration issues upon Britain’s exit. Britain’s commitment to the Northern Ireland peace process would be questioned unless non-restrictive travel and trade agreements are negotiated. Relations with Scotland would also be complicated, especially in light of Scotland’s pending independence referendum. (More details below.)

Britain’s departure (along with its signi!cant contribution to the EU’s overall budget) could also transform the EU, turning it into a mere economic trade union. Ironically, Britain could then !nd itself increasingly dependent on continental Europe for trade while carrying the burden (and punishment) for being the country that sank the uni!ed Europe experiment.

Having lost its say in the rules upon which it must abide and unable to compete with a uni!ed Europe for alliances elsewhere in the world, Britain could very well experience its swan song on the world stage.

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External Reason/Weak Alliances

Battered by incompatible EU policies, Britain is forced to leave

While the EU may be an imperfect union that takes actions that exasperate the British public and business community, Britain may learn that the world is more interested in dealing with an U.K. inside the EU tent than outside it. In this master narrative, the European Union adopts policies that are incompatible with the U.K.’s national interests, accelerating British support for an ill-advised EU exit. Rather than working within the EU for improvements, Britain opts out precipitously, learning afterwards that a bad situation can quickly become worse.

Three primary issues could force Britain to leave the EU: centralization of power in Brussels that usurps too much U.K. sovereignty, the EU’s inability to resolve the !scal demands of the southern debtor nations and the failure of the EU to defend itself against encroachment by foreign powers.

EU demands for deeper integration and concentration of decision-making in Brussels - an evolution that Germany reluctantly accepts - could push Britain to follow Norway’s relationship with the EU through the European Economic Area. Britain would secure economic privileges under the EEA and protect itself against"regulations that affect sovereignty rights, but at the cost of giving up direct political power in continental politics.

For similar reasons, Britain could opt for the Turkish model, in which Britain secretly negotiates an exchange of EU membership for a customs union af!liation similar to Turkey’s. If successful, it is likely that other EU member countries would negotiate their own deals with the EU, which could start a process of creating tiered EU memberships.

Fiscal demands by debtor nations (Greece, Cyprus, Portugal and Spain), which are either unreasonable or incapable of being paid, could also force the U.K. to withdraw from the EU. "The specter of having to participate in future bailouts could push Britain into “splendid” isolation. In one scenario, the underperformance of southern nations shifts the loci of EU power from the north to the south (power shifts from debtors to creditors), creating a Mediterranean Union rife with !scal consolidation and large transfer payments.

In another variation of resolving the southern debt crisis, the EU would shuf#e around revenues and expenses to Britain’s detriment in order to cover its obligations to southern countries. The EU could raise revenue by diminishing the EU-U.K. agriculture rebate to a level where the U.K. loses net income and has to !nance less ef!cient agriculture competitors in southern Europe. Today, 30 percent of U.K. farmers are kept a#oat by EU subsidies.

Europe’s failure to defend its security interests, especially in light of a successful Iranian nuclear weapon test, could also force Britain’s hand, especially if such a test was followed by a tit-for-tat retaliation that hits Britain the hardest, prompting it to align more closely with the United States at the expense of Europe.

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Master Narrative 3:

Abandoned and Alone; No Easy Road

Britain would likely leave the European Union under any of these scenarios. Although Britain would regain some measure of its sovereignty and perhaps fend off claims on its national treasure, it would likely struggle to !nd its place in a world comprised of major alliances. As a single country struggling to renegotiate relationships with its border lands of Ireland and Scotland, Britain would likely be unable to compete effectively on the world stage with a uni!ed, if diminished EU. Why strike a deal with Britain at the expense of dealing with the much larger and lucrative EU?

Adopting the Norway model would relieve Britain of some burdens and free its internal markets. However, the move would also leave Britain #ailing for allies without the strength that Norway possesses - low population and high energy production. Adopting the Turkish model could have similar results. However, Turkey does not have to rely on the EU for trade within its geographic region. It is able to trade with many of its neighbors aside from the EU while the U.K. is geographically bound by the EU to its east and the Atlantic Ocean to its west. There is no guarantee that Britain would be able to negotiate favorable trade rights with the EU. France and Germany, feeling betrayed, might punish the U.K. by isolating it economically and politically, demanding onerous trade concessions from Britain as an early withdrawal penalty.

Britain would also likely lose its edge in competitive industries. Should EU agriculture subsidy policies change, Britain would also have no choice but to liberalize its agricultural markets along an Australian/New Zealand model. While this strategy may ultimately strengthen British agriculture, the short-term effects would wreak havoc on farming, banking and other integrated economic sectors.

An EU exit could also trigger a cascading set of effects that marginalizes the English-speaking leader of the EU. Enrollment in the U.K.’s world-class, English-language higher education institutions could drop precipitously as EU students seek English language instruction elsewhere. Enrollment drops would drive up the cost of tuition, putting the cost of higher education out of reach for more U.K. residents, resulting in an increasingly uncompetitive workforce. Maritime companies would also move back to continental Europe, trashing another of Britain’s economic comparative advantages. London’s premier !nancial sector would suffer on both accounts.

If forced out for national security reasons, Britain would become even more beholden to the U.S., losing #exibility with respect to U.S. military and economic policy. In all likelihood, a compliant Britain would even be forced to rely on the United States to rebuild its economic ties with continental Europe.

The downstream effects of a precipitous British exit from the EU could also hurt Britain closer to home, in Ireland (as discussed above) and in Scotland. For example, if Scottish voters passed a referendum that ended the 300 year-old union with England in 2014, this would remove four million Scottish voters from Britain’s EU referendum, leaving Britain on the outside and Scotland still on the inside. Scotland’s separation would cost the U.K. 80 percent of its gas and oil production and large !nancial institutions such as the RBS, grievously weakening Britain. Alternatively, Scotland, taking advantage of Britain’s weakness, could instead push for more autonomy and negotiate a more favorable arrangement for staying in the U.K. Taking note of Britain’s weakness and isolation, Argentinian irredentists could move again on the Falkland Islands, requiring a weakened Britain to beg the United States for assistance, which it might not be willing to provide.

Britain would have to console itself by becoming the fulcrum for EU dissenters continent-wide. The U.K. and Russia, as the two big EU outsiders, would strengthen their relationship, while Britain pursues an economy-!rst foreign policy to mitigate the severe loss of EU trading partners.

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External Reason/Strong Alliances

Battered by incompatible EU policies, Britain is forced to leave the EU and forms strong alliances with more responsible partners.

While British public opinion is decidedly anti-EU, Britain’s politicians, keen on staying within the Union, deftly assuage that anger through EU concessions and other means to keep the U.K. in the EU. Despite these efforts, events play out so badly in the European Union that virulent anti-EU public opinion arises in a manner that the British elite cannot contain. This master narrative explores the pathways and consequences of a reluctant Britain forced to leave the EU but ultimately !nding out that life is better on the outside looking in.

The European Union’s persistent sovereign debt crises and underdeveloped security posture are the two issues that could force a British exit. For example, a second wave of the European sovereign debt crisis could lead to an economic and political breakdown in the EU’s southern periphery, resulting in Greek hardliners repudiating its debts and exiting the EU in orderly fashion. If the contagion spreads throughout the south, Britain could wash its hands of German/French mismanagement by orchestrating its own exit on favorable terms.

Depending on how the sovereign debt crises play out, Germany could jump !rst, leaving"the single currency union to avoid mounting !nancial demands from the south. Germany’s exit would shatter Britain’s con!dence in the EU, prompting its own exit ahead of EU disintegration.

The ineffective control of borders by EU nations could also precipitate a British exit. The countries that are struggling most with government debt and poor economies (Spain, Italy and Greece) are also the frontline states policing the EU’s borders. Should these countries increasingly fail to live up to this responsibility, widespread illegal immigration (much of which directly funnels to the U.K.) could force Britain to effectively seals its borders with a continental Europe suffering under the in#ux of indigent migrants.

Vulnerabilities caused by inadequate EU defense policies could also precipitate an unexpected and unwanted exit. France and Germany have long sought to create an EU military integration plan to co-exist or replace the current role of the Atlantic alliance through NATO. However, chronic underfunding of the defense initiative and the !nancial demands of southern nations could doom the EU defense initiative, leaving Europe inadequately defended. In such a case, Britain (with much urging from Washington) would likely cast its lot with the United States-led NATO, rather than the underfunded French/German defense initiative.

Under these circumstances, an exit from the EU would strengthen Britain’s position only to the extent that it would have been in far worse shape had it remained. For example, the short-term consequences would be harmful should Germany leave the EU !rst. Over time, however, the U.K. and Germany could reorganize their economic relationships in Europe in a manner that would leave both better off than would have been possible in an unstable and unsustainable currency union.

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Master Narrative 4:

Virtue Out of Necessity

Although it would take years for Britain to recoup its European trade losses (which would have occurred regardless with a disintegrating and dysfunctional EU), it could recover by increasing its ties with the Anglosphere and Commonwealth countries and by reasserting itself as the !nancial leader of countries nonaligned to regional trading blocs.

Exiting would also provide Britain with the #exibility to address its security needs. Britain would immediately retain its ability to “punch above its weight” in world affairs, bilaterally and through NATO, by helping the U.S. and its allies maintain global world order while an ineffective Europe dithers. In particular, Britain could help !ll the security gap created by U.S. disengagement in the Near East and strengthen its special relationship with the United States by supporting its pivot to Asia.

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Prime Minister Cameron’s accession to a referendum on exiting the European Union could turn out to be a dangerous gambit. As these master narratives indicate, although there are several pathways for strengthening its global position should it leave the EU, most of the risk is on the downside. The U.K. could easily !nd itself poorer, isolated and irrelevant should it decide to leave the EU. Exiting would also present new dif!culties with Ireland and Scotland. Although some of these issues could be resolved satisfactorily over time, it is inconceivable that the U.K. could deal adequately with all of these issues simultaneously as a result of a precipitous British exit from the EU.

Holding the referendum itself presents dangers. While Britain’s leaders may secretly intend to not honor a vote in favor of exit, a second round of sovereign debt crises, tit-for-tat attacks over Iran’s nuclear issues or breakdowns on Europe’s southern border controls leading to an in#ux of refugees and migrants could force Cameron’s hand to leave the EU. Even a misplayed hand in conjunction with external shocks within continental Europe could result in an undesired exit.

While Master Narrative One illustrates ways in which Britain could improve its world position by exiting the EU, it also indicates that the U.K. could likewise improve its position by working from the inside to improve the EU. Even in a ‘#at’ world, the U.K. still does the majority of its trade with its nearest neighbors. Getting that relationship correct is job number one. Only if the European Union falters so badly or disintegrates would it make sense for Britain to leave the EU. However, in that case, its !rst efforts would have to be in renegotiating its relationships with Germany and France as well as whatever entity the EU transitions into being. The U.K. is too small to act alone on the world stage; its economy is inextricably tied to continental Europe, and its best way to gain access to markets in the Americas and Asia is through a European confederation. Britain’s efforts should be directed at making the EU a more perfect union rather than gambling that it can successfully freelance its way to success.

Strategic Takeaways

August 2013

Britain Exits the European Union

Written by: Jeffrey ItellEdited by: Caitlin Barthold

This report was based on the collaborative efforts of more than 80 analysts

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