Reality Exchequer: Both Sides of Brexit Debate Need to Cool Down

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Source: Adobe Stock/Sulupress

Britain’s exit from the European Union, colloquially known as Brexit, looks like a train crash in slow motion.

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As each week goes by and neither side shows the slightest inclination to compromise, the prospect of a hard Brexit appears to be mounting. This is worrying business leaders much more than politicians who are rather enjoying the grandstanding, and that alone is cause for concern.

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On the one hand, we appear to have an inflexible European Commission that wants the United Kingdom out as quickly as possible. On the other, hardliners in the British cabinet making the argument for a clean break with the false promise that all will be well if the U.K. does so.

As Peter Mandelson, a former E.U. trade commissioner and U.K. cabinet minister writes in the Financial Times, both sides are in danger of damaging the negotiations before they even start. Few are focused on creating a framework in which the closest and most cooperative relationship can be achieved.

We told you it could happen. Source: Adobe Stock/Stephen Finn.

Time for both sides to make a deal. Source: Adobe Stock/Stephen Finn.

Such a relationship should cover trade in goods and services, security cooperation, and many other aspects of Britain’s 40-year partnership with Europe, but it can only be achieved by Britain and the EU working together. In the meantime, major firms are either putting investment decisions on hold or, worse, actively exploring mainland European options.

Mandelson goes on to say that, in reality, there is a lot of space between a hard Brexit, which would entail the U.K. enjoying no free trade with Europe, and becoming like Norway, enjoying trade in the European Economic Area with all the costs and obligations, but no say in its rule making.

The U.K. could stay in the European customs union, that is certainly one option. This would mean that industrial goods exported to and from the U.K. would not face European customs duties and checks that would increase their cost and jeopardize the value chains that link U.K. manufacturing to the continent.

The drawback could be that the U.K. (or what’s left of Great Britain and Northern Ireland if Scotland votes to leave it)  would not be able to negotiate trade deals with other countries outside of the union for industrial products that are covered by the E.U.’s common external tariff. This would be a hard sell to the U.K.’s Leave campaigners who made so much of Britain’s ability to negotiate its own agreements outside the E.U. Still, while honesty is not the stuff of politicians, Leavers generally may have to ask themselves would future tariff cuts for U.K. exports, globally, be worth the costs imposed on E.U. trade if the U.K. was outside the union? The U.K. would probably have to double its trade with the rest of the world to compensate for the cost of paying duties with its European partners.

Service Economics

Goods, however, remain a relatively smaller proportion of Britain’s exports. Services are a more significant problem and Britain would have to negotiate a bilateral treaty to try to recreate elements of “passporting” for its supply of financial and other services to the E.U. single market.

Here, the E.U. is less likely to be cooperative. Northwern European members like Germany, France, Luxembourg and Ireland are keen for a slice of the City of London’s financial pie. By refusing passporting rights if the U.K. does not accept the “four freedoms” — the free movement of goods, capital, services, and people, of which the last is the U.K.’s major sticking point — those countries are looking for their own advantage and the E.U. generally appears quite united in its opposition to watering down membership by granting some, not all, of the freedoms to a trade deal partner.

Even so, some in Brussels are looking further into the future when the EU itself may evolve into a two-tier structure with a closely federal core of Germany, the Benelux countries, France and Denmark with others moving to a “special associate status.”

This is a model suggested by Guy Verhofstadt, the former Belgian premier and leader of the European parliament’s liberal bloc. The question of immigration should be part of the negotiation process, but with no negotiation taking place it is being used as a call to arms on both sides, hardening opinion and reducing eventual room for compromise. We should bear in mind that many of those who voted Leave did so to control migration, not end it.

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Many Leavers would agree immigration has brought benefits to the U.K. and their objection was not to immigration in principal, just to uncontrolled, in terms of numbers and pace, immigration. Compromise is certainly possible but, back to Mandelson, this requires changing the rhetoric and some of the assumptions on both sides, and curbing the zeal of those in cabinet who want a complete break with Europe, whatever the price.

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