Getting to Grips with Reform, Referendum and Brexit: Part VII
Our last blog post established that the UK would probably seek to negotiate a new agreement with the European Union that combined elements of two existing templates: (1) bi-lateral sector-by-sector agreements (Switzerland); and (2) the European Economic Area model (e.g. Norway). But the UK will only be one player in this negotiation. And it will also find itself in a very weak position. Our concluding post today looks at the politics of negotiating a UK departure from the perspective of the other Member States and then takes a look at what leaving the EU would mean for the UK.
Negotiating British Withdrawal: the view from Brussels
We should not underestimate how much of a blow that a UK departure from the EU will be for the other Member States – and how furious they will be. Their irritation and anger is likely to weaken still further Britain’s negotiating position as it withdraws from the EU and concludes a new agreement.
The perception in Brussels and the other national capitals is likely to be that: (a) the British already had a very good deal from EU membership, even before the pre-referendum renegotiation; (b) at the cost of considerable domestic political capital on their own part, they cut the UK an even better deal; and that (c) the British have repaid their consideration and helpfulness with a slap in the face. The temptation to think: “Fine. Well f**k off then!!” is likely to be overwhelming.
Many emotions will be swirling around the Brussels political mix in the wake of a No result in a UK referendum, but, in the first instance, anger, resentment and a sense of betrayal will tend to predominate over sadness. The depth of fury will depend, in my view to a great extent, on the other Member States’ assessment of the actions of the Prime Minister and his cabinet during the unsuccessful “In-or-Out” referendum campaign that triggered the British withdrawal from the EU. Here again, the Scottish referendum offers an insight: it escaped no one’s attention that the Prime Minister and his cabinet did almost no campaigning to keep Scotland in the UK. We know very well that this was a political calculation on the part of the Conservative party, motivated by the belief (we’ll never really know whether it was accurate or not) that it would actually harm the “Better Together” camp’s prospects to take part. But this was not widely picked up by our friends overseas. Outside the UK, the Prime Minister’s absence from the fight looked like complacency, even recklessness. A similar logic will apply to the EU referendum. If the Prime Minister and his cabinet have campaigned hard to keep Britain in the EU and lost, honourably, that is one thing. However, if they are seen to have campaigned half-heartedly, particularly if some of them have gone so far as to advocate rejecting the renegotiated membership package, then they will find no allies in Brussels.
So the risk here is that Britain will find itself alone and without allies at a moment of great vulnerability. Perhaps this point needs underlining: any negotiations on leaving the EU, we will be completely dependent on the warmth and goodwill of our fellow Member States. A country of 65 million people negotiating with a bloc of 442 million cannot expect to have the upper hand. And the UK will have very few chips to to bargain with. It will no longer be able to ask for backing with a promise of future British support for someone else’s policy goals; no voting British representative will be present at another EU negotiation to honour such pledges.
Our last blog concluded that the UK was likely to seek to a new kind of agreement with the EU that would draw both on Swiss bi-lateral agreements and the European Economic Area model. An agreement that is not disadvantageous to the UK will be exceptionally hard (if not impossible to win) for the following political reasons:
1. Under no circumstances will the EU conclude a deal with the United Kingdom that is, or could be interpreted as being, an improvement on existing membership terms. This is an obvious point that is too often ignored in the British domestic debate. In other words, there will be almost no room for the UK to pick and choose what it wants from the EU acquis.
2. Moreover, the EU will want to make sure that the departing British get a deal that involves more or less no concessions from the EU and many concessions from the UK in order to send a very clear signal of discouragement to any other Member State contemplating secession.
3. Negotiations will be asymmetric. Trade with the EU makes up about 45% of total British trade, but trade with the UK will be worth only about 10% of total EU-27 external trade, a similar percentage to Russia in 2011 (before the sanctions began).
4. The EU already considers the Swiss model as it stands to be annoying. It takes up far too much of the EU’s time to negotiate endless bi-lateral agreements with just one player. It would prefer to move Switzerland towards the EEA model of full compliance and automatic compliance with EU law. This will also be the start- and end-point for any discussions with the UK, despite its larger size.
At the same, it is important not to exaggerate. Of course, the UK will manage to get some sort of a deal from the EU. The EU would even have a legal obligation to pursue a close relationship with the UK since on leaving the EU, the UK will become a European neighbour of the EU, and Article 8 of the Lisbon Treaty states that “the Union shall develop a special relationship with neighbouring countries”. It’s obviously also in the economic and political interest of the EU’s Member States to have a good relationship with the UK. But let us be clear on this point: it will never be as important to the EU to have good relationship with us, as it is for us to have a good relationship with the EU. For that reason, it is ultimately the UK that will be making the nearly all of the concessions.
Life Outside the European Union
So what will happen, if we do leave, once we are out of the EU? I am going to assume that Britain will have a relationship that looks more or less like the European Economic Area.
1. Many laws will continue to be made in Brussels, but without British input (curiously around 40% of Swiss legislation derives from EU rules, a far higher proportion than for the UK as Member State!). This in turn means that:
2. The democratic deficit will grow enormously since Britain will find itself enforcing laws and standards over which we have no control, and which, obviously, will no longer be made taking British interests and preferences into account. This could be particularly damaging for strategic sectors of the British economy like financial services, which in turn may lead to a gradual relocation of certain kinds of business to Luxembourg, Paris or Frankfurt. The UK will be reduced to attempting to lobby EU lawmakers with greater or lesser (probably lesser) success, just like any other external supplicant. So much for “sovereignty”.
3. Much of the existing body of EU primary law and secondary law will remain on the UK statute book for the foreseeable future, not least since in many areas it is the only regulation that exists. Revising such legislation will take many years, take up much parliamentary time and, in many cases, will not result in much change to it. Why would a future British government want softer standards for environmental protection, safety at work or the regulation of financial services?
4. Westminster will, of course, continue to exercise its full sovereign rights by rubber stamping new EU laws, putting a royal arms cover sheet on EU-derived acts of parliament and so on.
5. A court outside the UK will continue to make decisions that are legally binding on the UK (it will either be the EFTA court, with a British judge, or the Court of Justice of the European Union, without a British judge). European countries simply cannot escape the EU legal order.
6. The UK will not develop new regulations of its own for industry or commerce, since it would be expensive and pointless to have in place two parallel sets of standards. It will just be easier to import our regulation from the EU, as Norway and Switzerland do.
7. There will be economic adjustment costs to make, likely to be quite painful in some sectors. But here again we should not exaggerate since much of the domestic economy has no connection with European trade. In terms of GDP, the loss may not be much higher than a few percentage points. We have no reason to believe that the UK outside of the EU would be any more successful in international trade than it is now. The UK is not a top 10 trading partner for China or India. Germany is, incidentally, so it is obviously not EU regulation that holds back trade. The Germans sell things that developing countries buy, such as machine tools. We sell things that developing countries don’t buy much of, such as financial services. Even though the loss to British GDP would be far from catastrophic, quite why a government would be willing to shave a few percentage points off national income and wealth to prove what for most voters is an arcane point about sovereignty is, frankly, beyond my powers of comprehension.
8. More worrying in the long-term for an open economy like the UK would be the effects of a British exit on Foreign Direct Investment. A very significant part (but again, let’s not exaggerate so, I underline, by no means all) of inward FDI comes from non-European companies seeking access to the Single Market (e.g. cars, banking etc.) from a British base. And they would keep that access with an EEA-style deal for the UK. But what would be added to the balance of risk for firms in making investment decisions would be the knowledge that they would no longer have a government to speak up for their interests in the EU decision-making process. That matters enormously in certain sectors, where, without British participation, the outcome of negotiations on new rules in recent years would have been very different. Some good examples here are the Alternative Investment Fund Managers Directive (AIFND, for hedge-funds, private equity and the like), the Capital Requirements IV Directive or the Credit Rating Agencies Regulations. These rules matter a great deal for the UK’s financial services industry. For that reason, some potential investors in the UK would be likely to conclude that it would make more sense to invest in the EU proper, where their legitimate interests can be protected by strong Member State governments and helpful MEPs.
9. The EU and the Eurozone will continue to exist and to integrate further without us. And the decisions that our closest neighbours make will continue to affect us, whether we want them to or not.
10. As we have noted in previous blogs, a constitutional crisis is likely to break out in the United Kingdom, which may then splinter into separate countries. Scotland, Northern Ireland (perhaps by joining the Republic) and even Wales will probably join the EU.
11. Whatever remains of the UK will be a greatly diminished player in world politics. The European Union has been the most important single means of leveraging British power and influence in world politics. Within the EU, the UK is a hugely powerful and influential Member State, especially on defence and foreign policy issues. Outside of the EU, there is no top table to sit around – and we can just forget about leadership. The Commonwealth is not waiting for British leadership and in any case it is little more than a talking shop. Inertia may allow the UK (or its successor) to keep a permanent seat on the UN Security Council, although the argument for doing so will be ever harder to make. Our relationship with the United States will continue to encompass shared bonds of language, culture and history, but we will not really be any kind of useful partner for the US in world politics.
This list is already long and depressing, so we’ll stop there, even though there will undoubtedly be other adverse consequences following a British exit from the EU. On the other side of the balance sheet, we will be able to comfort ourselves that the UK government (or it successors) will have the trappings of sovereignty. They will enjoy the theoretical right to vote against new EU legislation. But they will not be able to exercise it and keep access to the Single Market. That said, we may save as much as 0.045% of GDP in membership fees.
So that’s what life outside the EU would look like. Taking all these factors into account, it is hard to escape the conclusion that leaving the EU would amount to little more than an act of mindless political and economic vandalism.
But let’s not end on a sour note. As all the posts in this series have made clear, there is an alternative for Britain: leading the charge for EU reform and working cooperatively with our splendid European allies. Happily, this is the position of the all the mainstream UK political parties. And, as this blog has argued over the past few weeks, there are solid grounds to believe that we can succeed in our aims here, provided that we remember that EU reform has to be good for everyone, and not just the UK. Finding that win–win solution is the challenge for whoever wins the election in May. We wish them sound advice – and good luck.
This post brings our seven-part Brexit behemoth to an end. One or two related posts may appear in the coming weeks before the election on what Brexit would mean for specific sectors. But that’s it for the regular posts for now. I’ve had enough of this – and I expect you have too. Yet I can’t resist a final word. Europe isn’t just about economics, trade, cost–benefit analyses and so on. It’s also about deep bonds of friendship, mutual appreciation, human warmth, shared experiences, cooperation, affection, and, of course, conviviality. Our friends and allies in Europe bring us all these wonderful things. Long may it continue. On that note: Bon week-end!
Professor Nathaniel Copsey
Dr Anne-Claire Marangoni
Dr Helena Farrand Carrapico