Brexit: M3 and still waiting for Godot

It is now three months after the referendum on Brexit. An economic or financial melt down did not happen. But Brexit did not happen yet either. However what we have witnessed is a complete fog in the UK about what brexit means. This fog reminds us about the warning that “the continent is closed”, in the event of fog. But the fog is entirely on the British side. A tautologic stand like “brexit means brexit” does not help. A very poor understanding of politicians of the basics of economics of trade and integration does not help either. Finally each statement made by any Minister on Brexit, is dismissed within 24hours as a personal statement. Finally a proposal that is framed at restoring parliamentary sovereignty is followed by setting aside the same parliament.

 On friendship and mercy

Let me be clear I think that Brexit is a foolish strategy. Countries are interdependent. There is no such thing as Europe without an EU. But the discussion on the EU in the UK overlooks that the EU is more than a supranational body, it is also a legal realm that offers rights to citizens and companies. Those rights are also at stake. Britain wants to remain friends with Europe said, Boris Johnson in Arnhem. It is like making a friendship out of a divorce. And to be in Europe outside the EU means to parasite on it. All movements in countries to exit the EU assume that the EU survives with them, as they need the critical mass of a EU closeby to maintain their economies.

As Britain discovers they are getting at the mercy of any of 27 remaining EU members that can veto any deal with Britain. There are thus many hurdles, as David Allen Green describes: hardly a demonstration of sovereignty. The trade risks are substantial. A good note on trading is written by Nick Clegg. I do build on that. Brexiteers think they can make up for lost grounds in the EU by improving trade ties with the US and so many other countries. Maybe. But nothing hampered the UK for gaining market share and these countries. So I wonder what balance can be struck with third countries, that massively boosts British exports, without giving away the position of UK lamb and beef producers. The only party that has fully understood the implications of a Brexit is the Japanese industry and government.

The low road to Brexit

So in order to clarify the debate I shall set out two roads to a Brexit, a high road and a low road. First the low road. I do not consider a “hard brexit” a realistic desirable scenario. To fall back on WTO rules only seems to be the temporarily outcome of botched negotiations. WTO rules is not free trade: it comes with import duties and a lot of red tape. The UK should try to avoid the WTO scenario, by agreeing at least an interim agreement with the EU. Since each member state of the WTO can veto an accession of a new member, it is important that the UK has the support of the EU members for joining.

Hence a low road is an association agreement of the type Israel and Turkey has.

The limitations of a FTA

The Israel variety is a free trade agreement. This means that products fully made in the UK or the EU can flow freely (though with custom forms). This means that a Burberry polo made in China does not qualify, the coat made in Yorkshire from EU fabrics does. In this scenario the UK can negotiate any free trade agreement with whoever it wants (first maybe the 50 or so free trade agreements the EU already has). In this instance the UK is not a loophole for Chinese rubbish into the EU (expect the Italians and Spanish to be vocal on this). But this gives a patchwork of agreements, not really what large fashion brands and retailers, the car and airplane industry needs. I would advise them to relocate their logistics to the EU, to avoid a lot of paper world. Gelderland is keen (and expert) to host them.

The elegance of a Custom Union

The Turkish variety is a custom union. This means that all products that are imported or made in the UK or the EU can be freely traded. One may expect that no forms are required. Products sold in the EU have to comply with single market rules. However a custom union implies that the UK and the EU cannot sign trade deals with other countries that create loopholes. A custom union is the best option for business, but trade sovereignty is all but in name for the UK. Hence import duties and other rules should remain aligned between EU and the UK. The EU being the larger market, this means that the UK follows the EU.

In the low road the agreement only covers products, and possibly only industrial products. If the UK develops an agricultural policy that diverges widely form the EU’s, agriculture products can be excluded. Since the main interest for the EU is free trade with the EU a Custom Union is fine for northern EU countries, an FTA is even better for the southern and eastern member states. As long as the choice is not made between an FTA and a custom union, the USA, India and Australia wait in order to start negotiating with the UK. First the UK has to settle with the EU. This creates huge uncertainty for the UK.

The High Road and confusion on “access to the single market”

Some people say that the UK should stay in the single market. This is an original proposal, since the single market is part and parcel of the EU treaties. Some people liked the single market but not the European Union. Well the single market is no longer (since 1985) a separate treaty, but is part of the treaties (1992, 1997, 2004) leading to an European Union. Legally a country cannot stay in the single market but be outside the EU. Technically a country can be in the single market, like Andorra is, but rather as an associated member, without influence on its legal process but with oversight of the European Court of Justice. The UK may be allowed to follow the single market, but that implies that the UK parliament may transpose every month all EU law into national law. This may probably also happen, simply because it is in the interest of British business. On the other end some European politicians say that participation of the UK as a side-kick in the single market must go alongside freedom of movement. I understand this to be a negotiation stance (precluding a possible veto of eastern European countries on a deal). But it lacks economic logic.

Get rid of the London banking culture

The economic logic is in the linkage between the other three freedoms: of services, finances and people. The linkage between freedom of financial flows and of people has been acknowledged by the UK Treasury: Hammond promised free movement for bankers, but not for plumbers. However a free market of services also requires a free flow of people. A plumber can not send his work by DHL to by self-installed, nor can sell on the Internet. As the UK has a strong position in services and in financial services, there is a strong interest to include these aspects in a deal. But the EU has much less interests in opening its markets to UK services. Many Europeans are even happy to get rid of the anglo-saxon neo-liberal banking culture including bonus-addicted bankers and anti-social hedge funds.

High Road and Sovereignty

The high road is thus close to the Swiss or Norwegian model but it involves all four freedoms. But this model is much less straightforward than it seems. In the first place it implies that the UK accepts EU regulations without caveats or delay. Hence it hardly reinstates parliamentary sovereignty. In the second place it maintains legal oversight over the implementation of EU law and it maintains a form of EU court over the interpretation of rules, and it offers the right to appeal but UK and EU citizens on decisions of the UK government. It has also been said that if financial services are part of an EU agreement, these services should be governed by EU law. Hence if the passporting rules remain (enabling Britain based banks to offer services in the EU), the clients should be able to ask for litigation under EU law in a court in their country. So much for sovereignty…

I am pessimistic on the feasibility of the high road. I am afraid the scenario is either a low road or a hard brexit, that is without an agreement of substance. This all is argument for a second referendum on the treaty to exit the European. The voters may then evaluate based either on uncertainty or on a worst case scenario. The only benefit of this mess is that the citizen gets properly informed on what the EU really is about.