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Brexit - the case to answer

In a recent issue of The Week, its founder, Jolyon Connell, referred to an article in Prospect Magazine by Anatole Kaletski about the real costs of leaving the EU. Connell described himself as a vague eurosceptic but felt that Kaletski has made the case that anyone contemplating Brexit has to answer. He is right.

Here is the article in full
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© Ssolbergj

© Ssolbergj

Ask any divorced couple whether their relationship would have been different had they never married. Actually, don’t bother asking, since the answer is obvious. Strangely, most Conservative politicians do not seem to understand this—and neither do 48 per cent of British voters. That is the number, according to recent opinion polls, who want a divorce from the European Union.

Many of these voters seem to consider British exit (or Brexit) a cost-free option that would produce a new relationship similar to, but better than, the EU’s deals with Switzerland and Norway, the only significant countries in western Europe that have never joined the EU. To be fair, not all of the politicians and ordinary voters who want Brexit are naive enough to think that it would carry no economic costs. Some anti-European zealots find the EU marriage so oppressive that they would accept big economic sacrifices to escape from what they see as marital abuse. But such absolutist Europhobes, for whom lower living standards and large-scale job losses seem a price worth paying for liberation from Brussels, are very rare.

Europe is identified as the top issue facing Britain by just 1 per cent of voters and among the most important by 8 per cent according to recent Ipsos MORI polling. This suggests that, if faced with serious economic costs, there would not be remotely enough unconditional nationalists to win a referendum—or even to dominate a Tory conference, once it was recognised that Brexit would precipitate a second Scottish referendum, and therefore the destruction of the very United Kingdom for which voters were being asked to jeopardise their economic well being.

No, Brexit will happen only if most British voters firmly believe that leaving the EU can do no harm to the economy. Yet this belief is wishful thinking—not because the EU is such a wonderful organisation, but because there is a world of difference between politely declining a marriage proposal, as Norway and Switzerland have done repeatedly since the 1970s, and acrimoniously breaking up a prosperous, if difficult, relationship that has lasted for 40 years.

The idea that Britain outside the EU could turn into a Switzerland or Norway is the big lie of the Brexit debate. The comparison, which is made repeatedly by the Brexit lobby, is false in many ways: because of Norway’s oil wealth and Switzerland’s bank secrecy, although these are depreciating assets; because these countries have small cohesive populations, relatively unburdened by a poorly educated underclass; and because their economies are dominated by domestically-owned businesses, rather than American and Asian companies using Britain as a bridgehead into Europe.

But the key difference between these countries and Britain is that they never joined the EU in the first place. The special deals they now enjoy for access to EU markets and institutions, ranging from passport queues at airports to subsidies for academic research, were always negotiated in a calm and cooperative spirit, with both sides expecting tangible economic benefits compared with the status quo ante, but with the EU always recognised as the senior partner and driving force.

In this spirit, Norway and Switzerland have accepted wide-ranging obligations to abide by EU laws over which their citizens and parliaments have no influence, as the price for access to European markets—complete for Norway, but limited in the case of Switzerland to products and services defined in over 100 bilateral treaties. Could Britain hope for a better deal post-Brexit? That was how Eurosceptics unanimously responded to David Cameron’s warnings against the “Norway option” in his first-ever serious comments about the economic consequences of Brexit, at October’s Scandinavian summit in Iceland.

But why on earth should Britain expect better treatment than other non-member countries, if it chooses to leave the EU? Instead of a friendly, businesslike negotiation, expected to produce economic benefits for both sides, Brexit would start a highly politicised negative-sum game. The purpose would be to share out the losses from unravelling shared institutions deeply embedded for 40 years in the lives of both Britain and Europe—much more like a court-ordered divorce settlement, than a cooperative and mutually beneficial business deal.

Brexit, if it happens, will be viewed as a hostile act by every other EU government. Even Britain’s former allies outside the eurozone, such as Sweden and Poland, will feel indignantly betrayed, as Britain’s departure will tilt the EU balance of power overwhelmingly in favour of Germany and France and towards the full-scale federalist integration spear-headed by the euro project. To make matters worse, the EU will want to punish Britain, so that the Brexit precedent does not start a chain reaction of other departures and renegotiation demands. For this reason, the rise of populist nationalism and the EU’s present unpopularity across the whole of Europe will make it much tougher, not easier, for Britain to negotiate a favourable post-Brexit deal.

To see this dynamic in action, one has only to look at the punishment meted out to Greece, pour encourager les autres among the Eurosceptics in Spain and Italy. Judging by this experience, Britain should expect much harsher treatment from its former partners in trying to negotiate a post-Brexit relationship than the conditions imposed on Switzerland, Norway or other countries, like Israel and Turkey, which have privileged trading relationships with the EU.

Yet the economic, and even political, case for Brexit largely depends on the assumption that Britain will continue to have access to the European single market on terms at least as generous as Norway and Switzerland. Without such market access, many of Britain’s most successful business sectors—finance, law, pharmaceuticals, creative industries and higher education—would be in deep trouble. These industries all depend on the easy movement of capital, people and ideas around the world’s biggest market. They would be extremely vulnerable to the loss of single-market benefits—uniform financial regulation, consistent competition policy, freedom of establishment, mutual recognition of qualifications and so on—extracted with great difficulty over decades by Margaret Thatcher and subsequent British leaders, sometimes against strong opposition.

British-based financial institutions would be the most obvious victims. Exclusion from the single market would not close down the City of London, which would continue to operate as an off-shore financial centre. But London would surely lose its role as Europe’s financial hub and would thereby lose its dominance of the world’s most attractive time zone, with working hours overlapping both America and Asia. Most euro-denominated financial activity would likely move to Paris or Frankfurt, while asset management and other activities subject to EU regulation would move to Luxembourg or Dublin.

These shifts can be confidently predicted because gaining financial activity for their own financial centres, while simultaneously punishing Britain and its financial institutions, would be a conscious objective of the French and German governments in any post-Brexit deal. Britain would therefore be in a very weak negotiating position on trade with the EU. But what about Britain’s apparent trump card as the EU’s second-biggest trading partner (after the US)? This frequently touted “ace in the hole” is actually a busted flush.

The manufacturing industries in which countries such as Germany, Italy and to some extent France, specialise are operating under worldwide trade rules that would generally guarantee EU businesses their present rights in British markets even after Brexit. Thus German or French manufacturers would have nothing to fear from the minimal restrictions on cars, machine tools and so on that Britain might threaten to impose in the absence of a free-trade agreement similar to those currently enjoyed by Norway and Switzerland.

On the other hand, Britain’s service industries could be severely damaged by non-tariff barriers erected outside the EU single market. This is why the blithe assurance that Britain would negotiate a single-market deal at least as favourable as Switzerland or Norway is essential to the economic case for Brexit. It is even more essential to the political case. Other EU governments would certainly insist, in any post-Brexit talks, on the same degree of harmonisation and control from Brussels over domestic regulation and law-making as the EU now commands in its deals with Switzerland and Norway.

Among these conditions are four, all of which would negate the supposed political liberation implied by Brexit: Norway and Switzerland must abide by all single market standards and regulations, without having any say in setting them. They must translate reams of EU laws into their domestic legislation, whether their voters like them or not. They must contribute substantially more to the EU budget than they receive in various benefits and grants. And, most controversially in the British context, they must accept unlimited EU immigration—and both countries have a higher share of EU immigrants in their population than the UK.

Would such encroachment on national sovereignty be acceptable to Britain in the first flush of post-Brexit nationalist fervour? If not, then the most likely outcome would be much less access to the EU single market for Britain than currently enjoyed by Switzerland and Norway. There would be tariff-free trade in goods, provided Britain observes all the relevant EU regulations and standards, but no access to the single market in services at all. German and French cars would still sell in Britain unimpeded, as would British-made cars sold across Europe. But British banks, insurers, lawyers, architects and online businesses could only continue to sell their services by shifting much of their activity and employment inside the EU.

When confronted with this reality, Britain would probably baulk and eventually accept the intrusive regulations required by Swiss-style EU association agreements. The ultimate result would therefore be an economic slump immediately after Brexit, followed by a renegotiation that led to less sovereignty and self-determination for Britain, or more precisely for England, since Scotland would surely split off and rejoin the EU. Within a few years, England might even be re-applying for EU membership. In short, Brexit would be the most spectacular case of self-harm in British diplomacy since George III lost America over a tax on tea.

Why then is the Brexit debate not dominated by warnings of potential disaster? The obvious explanation is that Cameron prefers not to provoke Eurosceptics, and neither do business leaders, especially while the government’s strategy of modest renegotiation seems likely to succeed. But there are two deeper, more worrying, reasons for the complacency about the dangers of Brexit.

The first is a misconception about democracy. Because opinion polls show roughly equal numbers on either side of the Brexit debate, the arguments are assumed to be finely-balanced—and anyone who claims otherwise is seen as disrespectful of democracy. This is absurd. As evidenced by the opinion polls already mentioned, most voters know or care little about the EU, one way or the other. What little knowledge they have about the EU reflects the overwhelmingly Europhobic media bias detailed in Denis MacShane’s revelatory book Brexit: How Britain will leave Europe. To the extent that voters do express strong views about Brexit, these are in part a proxy for their feelings on immigration, religion and even race. When discussing France it is considered obvious that anti-EU supporters of the National Front are partly motivated by racism, xenophobia and plain ignorance. Why then should this apply in Britain?

A second self-righteous misconception is that honourable politicians should not try to frighten voters and that negative campaigning never works. This is manifestly untrue. The power of negative campaigning was demonstrated in the last days of the Scottish referendum and in every Tory election victory since 1979. As for frightening voters, Thatcher and Winston Churchill never hesitated to do this when they perceived a serious threat. With luck these misconceptions will not matter. Cameron may well succeed in presenting some modest bureaucratic concessions as a transformational New Deal and the British people will duly vote against Brexit.

If, however, the Prime Minister’s EU-conjuring trick looks like failing, intelligent politicians, business leaders and media commentators must stop beating about the bush and tell British voters the unpleasant truth about Brexit: the financial and legal haggling after one spouse has slammed the door is often the worst part of a divorce.


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