The EU should offer Britain a binary choice—it should remove all intermediate options such as the Norwegian, Swiss or “EEA-plus” and “EEA-minus” modelsby Anatole Kaletsky / August 9, 2016 / Leave a comment
Now the referendum is over, it is time for the real debate about whether Britain should “Leave” the EU to begin. Without clarity on whatever new arrangements might replace Britain’s EU membership this question is impossible to answer—and serious thinking about the alternative relationship is only just starting on both sides of the Channel.
In Britain, Theresa May’s mantra is “Brexit means Brexit.” Though this is a meaningless tautology, the emotional message is clear. The UK government seems set on what Scottish First Minister Nicola Sturgeon describes as “Hard Brexit”: a total disengagement from Europe that is very different from the cuddly relationship suggested by Boris Johnson, when he said in the referendum campaign: “My policy on cake is pro-having it and pro-eating it.”
Theresa May has stated unequivocally that controlling immigration is her over-riding priority. Therefore, Norway or Switzerland cannot provide models. Speaking in Rome on 28th July, May said: “I think we should be developing the model that suits the UK and the EU—not adopting, necessarily, a model that is on the shelf already.” Secretary of State for Exiting the European Union David Davis has defined his main objective as zero tariffs with the EU and Free Trade Agreements with other countries. Since trade in services attracts no tariffs and is not affected by Free Trade Agreeements, this approach implicitly accepts that Britain’s financial and business services will be excluded from the EU single market.
The prospect of a Hard Brexit will surely cause the “DIY recession” predicted by the former Chancellor George Osborne, as businesses suspend investment and hiring; but this cloud has a silver lining. The economic damage caused by May’s hardline stance will soon become so obvious that she will face a backlash from public opinion and the Tories’ business supporters.
Already, most British voters seem to disagree with May’s priorities. According to post-referendum polls, clear majorities of two-to-one or more now prioritise single market access over immigration controls. As the economy sinks deeper into recession, Davis’s global trade deals prove illusory, legal obstacles to Brexit proliferate and Scotland threatens secession, May could face backbench revolts, fomented by the many enemies she created by purging a whole generation of Cameron-Osborne supporters from ministerial offices. And if May’s plans for Brexit start to crumble, waiting to pick up the pieces will be Boris Johnson, his Prime Ministerial ambitions surely revived by a miraculous political resurrection.
As EU leaders sense May’s vulnerability, they should call her bluff on “Brexit means Brexit” with an even more robust response. The post-referendum negotiations can have only two possible outcomes. Either Britain must disengage completely from the EU, giving up hope of any preferential treatment in EU markets, or Britain must “Remain” an EU member by persuading voters to change their minds. The EU’s contribution to this reversal could be to recognise the protest by British voters by offering some reforms on immigration and other issues. Such reforms would also help other countries where voters are turning against the EU.
By offering this binary choice and removing all intermediate options such as the Norwegian, Swiss or “EEA-plus” and “EEA-minus” (European Economic Area) models, the EU would greatly increase the probability of Brexit not happening at all.
Suppose Britain decided to take the total divorce option and interact with Europe purely as a member of the World Trade Organisation (WTO). The bedrock of WTO membership is the Most Favoured Nation (MFN) rule which requires all members to be treated equally unless they are parties to a specific Free Trade Agreement (FTA). Under this rule, the EU would have to impose on British businesses exactly the same tariffs and other restrictions as on businesses from China, Japan and other WTO members. Britain would not be able to “retaliate” against any such EU restrictions, as Davis has suggested, because MFN would force Britain to offer Europe exactly the same terms as it offers the US, Canada and so on.
British financial and service businesses would also have to operate in Europe on the same basis as Chinese, Japanese or Korean firms. But with Britain outside the EU, regulations could easily be altered to ensure that most European financial activity was conducted on the EU’s own territory and under EU law. The idea that London could “Remain” the main financial centre of the European time zone if it was outside EU law and regulation is totally implausible. Imagine China accepting Singapore as Asia’s main financial centre or the US government allowing most American business services to move from New York to Bermuda or Panama.
The government hopes to overcome these problems by negotiating FTAs with the US, Canada and other trading partners. But such deals are inconceivable at least until the next decade. Even informal trade talks are pointless, as the US government explained after the Brexit vote, until Britain agrees terms with Europe, since no country would want special British arrangements that could disrupt its trade with the EU. Moreover, FTAs have never fully covered finance, business services, pharmaceuticals, transport and telecoms. These vital sectors for Britain would therefore be left high and dry, even if Davis could miraculously negotiate his FTAs.
If the EU were to state unequivocally that no intermediate options such as the Norwegian or Swiss models were possible for Britain, business lobbying against Brexit would intensify on both sides of the Channel and would focus on one clear objective: to find terms that might persuade Britain to “Remain” an EU member that would also be acceptable and even welcome to other members.
Such pressure for a reform deal that would satisfy both sides of the Channel would not just come from British banks and exporters. German, French, American and Japanese companies that export from Europe to Britain and are currently lobbying EU governments to offer Britain generous Norwegian-type trade deals would be forced, once this option is excluded, to press for Britain to reverse its decision to “Leave” the EU. Since many of these international businesses are also large employers in Britain, they could exert strong political pressure on the May government and could shift public opinion in Brexit hotbeds such as Sunderland or Swindon, whose prosperity depends entirely on investment by multi-nationals.
Eliminating spurious intermediate options such as EEA-plus or minus would generally concentrate minds in Britain and turn vague speculation about Scotland or Northern Ireland breaking up the Union into a palpable threat. While hard-core English nationalists might never change their minds about Brexit, the prospect of losing all the benefits of EU membership, combined with the job losses caused by recession, would probably swing enough marginal Eurosceptics, even in the Brexit heartlands, to reverse the 52-48 referendum majority and perhaps enough to produce majorities of 55-45 or even 60-40 the other way.
A clear choice between “hard Brexit” and staying inside a reformed EU would shift British voters’ attention from the costs of EU membership to the loss of EU benefits, ranging from free health care for British travellers, to subsidies for depressed regions and declining industries, to support for science education and culture much more generous than any that Britain has provided in the past or the Treasury is likely to guarantee for the future.
Confronting voters and businesses with the costs of Hard Brexit is a necessary condition for reversing the referendum decision, but it is not sufficient. European leaders would also need to make a positive contribution to changing the minds of British voters. After wielding the stick of a binary choice between total separation and continuing EU membership, European leaders would need to bring out the carrot of EU reforms.
The EU has a strong incentive to offer Britain immigration reforms beyond those negotiated by David Cameron, but only as part of a deal that keeps Britain inside the EU and not in a semi-detached position like Norway or Switzerland. This is because the British referendum has transformed the politics of EU fragmentation.
Brexit has shaken the bedrock assumption of post-war European politics: that the EU is a permanent and historically inevitable structure with the same legitimacy as European nation states. The entire EU project thus faces an existential threat if Britain actually exits.
Before 23rd June, politicians campaigning in countries such as France, Italy, Holland and Greece to break out of the EU or the euro could either be dismissed as buffoons or denounced as fascists or ultra-leftists. This is no longer possible. If Brexit happens, the disintegration of the euro or of the entire EU will have to be treated as a realistic option by mainstream politicians throughout Europe. Moreover, the temporary technical fixes, such as European Central Bank intervention, which have allowed the EU to avert the breakup of the euro will stop working if the threat to the single currency’s survival comes not from financial markets but from voters, whose behaviour is beyond central bank control.
Already, the EU faces 34 separate demands for break-up referendums in 18 other member states, according to research published by European Council on Foreign Relations. Even if each of these 34 insurgencies had only a five per cent chance of success, the probability of at least one of them succeeding would be 83 per cent.
To make matters worse, the next obvious target for fragmentation is Italy, a country the euro needs in order to survive. In October Matteo Renzi, the Italian Prime Minister, faces a political threat uncannily similar to the gamble which undid David Cameron: an unnecessary referendum, called in a moment of irrational hubris, on which the Prime Minister has staked his career and now looks like he may lose. (The referendum does not concern Italy’s membership of the union but rather constitutional reforms designed to streamline the country’s political system)
The rational response to this threat from the EU institutions would be to do everything possible to strengthen Renzi’s position, and at least to relieve the political pressure he is now suffering as a result of the over-zealous application of EU banking and budgetary rules. Instead, the European Commission and the German government have tightened the regulatory noose strangling the Italian economy and banking system.
Worse still, the European Commission and the German government have demanded that Renzi should launch a direct assault on the life savings of millions of Italian voters by insisting that any public support for weak Italian banks must be preceded by a “bail-in” of their uninsured creditors. In Italy this would include a large proportion of middle class households, who were persuaded to invest in €31 billion of “subordinated” bank bonds, most of them issued after the 2008 crisis to “strengthen” the Italian banking system at the behest of EU regulators and the ECB.
For Renzi to agree to such expropriation of retail savers would be political suicide, especially after the Spanish, Irish and German governments all rescued their own banks without hurting retail savers and then changed EU rules to prevent other countries from doing the same thing. Yet with every week that Renzi delays the inevitable government bank rescue, Italy’s hopes of emerging from its longest recession in history turn into a mirage. As a result of this economic stalemate, all political debate in Italy is now converging onto the nationalist question of whether the country should be ultimately ruled from Rome or from Brussels and Berlin.
Meanwhile in Northern Europe, anti-EU nationalism is fed by a different, but related grievance: loss of control over population movements and fears of a breakdown in social market models that depend on strong feelings of citizenship, relatively high taxes and generous welfare states. For many voters in advanced European countries, citizenship is the most valuable asset they own, worth more in terms of lifetime income than their houses, personal savings or private pension funds. When the benefits of citizenship are given away for free to millions of new arrivals, then the value of this asset is automatically debased. It is astounding that Angela Merkel, who obsesses about the European Central Bank printing money, was ready last summer to print a million passports with no thought at all about the debasement of EU citizenship this might imply.
If EU leaders showed flexibility and willingness to respond to the democratic pressure from Britain by offering to engage with the new government in serious talks on reform, this would be hugely popular throughout Europe. Public perceptions of the EU’s contempt for national democracies would not only be transformed in Britain, but also in the increasingly Eurosceptic countries of northern Europe. Suppose, for example, that the EU agreed to restore more national control over welfare payments to non-citizens and introducing “emergency brakes” on sudden population movements. Such reforms, if extended from Britain to all EU members, could turn the tide of anti-EU populism in Germany, Holland, Austria, Scandinavia and perhaps also France and Italy.
The EU has a long history of responding to referendums and other political crises in important member states by adapting its rules. Why then is this strategy not being considered against the existential threat of Brexit? The answer has nothing to do with supposed respect for democracy, since the Brexit vote is no more irreversible than any other election or referendum, provided the EU is willing to adopt some modest reforms. The real obstacle to a strategy of persuading Britain to “Remain” in Europe is the EU’s bureaucracy.
The European Commission, once Europe’s source of visionary creativity, has become a fanatical defender of all existing EU rules and agreements, even when these are obviously misguided or counter-productive. The Commission is like the Spanish Inquisition in its belief that any reforms conceded to the heretics, in this case British voters, will inspire more heretics to demands more reforms. If the northern countries were granted immigration reforms, the southern countries would demand fiscal and banking reforms. The eastern bloc would demand budget reforms. The non-euro countries would demand reforms in their second-class treatment by members of the eurozone.
The Commission knows that reform demands would extend far beyond Britain because it knows reforms are desperately needed to correct the many dysfunctions pervasive in the EU. But is that a reason to resist all change? Such ideological rigidity broke up the Soviet Union and nearly broke up the Catholic church. It will break up the EU if it continues to resist all change.
Imagine, on the other hand, what would happen if Europe responded to the Brexit referendum by listening to voters and showing ability to adapt to a changing world. If such a miracle were to happen, British voters might happily remain in the EU.