(grateful to Chris Wong for important comments)
Brexit can be seen as a special case of the global breakdown of international cooperation and the geopolitical weakening of Europe. While Africa recently concluded a wide-ranging free trade agreement (African Continental Free Trade Area) and the countries of East Asia, New Zealand and Australia agreed on establishing the largest trading zone of the world in the Regional Comprehensive Economic Partnership (RCEP), cooperation in Western-dominated global institutions is at a low point, China‘s economy is rising inexorably – and Europe has to contend with its second largest economy dropping out. „Cui bono? Who benefits?“ one could ask. Both the European Union and the United Kingdom will be left weaker.
A 1300 Page Agreement Full of Holes
At last, after more than four arduous years, the United Kingdom’s departure from the European Union is final. The Trade and Cooperation Agreement („Agreement“) which the UK parliament approved on December 31, 2020 can be compared to the incomplete attempt to glue together a previously massive antique vase that has been broken, with a number of pieces missing (most importantly finance and the service sector). Major pieces are there, like no tariffs or quotas, but the vase no longer holds water. Now the UK is once more „sovereign“ to make its own laws and is no longer subject to the verdicts of the hated European Court of Justice (official language, French!!). From now on, it can „flourish mightily“ and resume its appropriate role in the world, as Prime Minister Johnson opined. Let us wait and see.
Sovereignty and/or Economy
The UK and the EU have spent a long time negotiating, first, the exit treaty and, finally, the trade and cooperation agreement to map out a common (?) future. It was not only time but personnel, resources and energy-consuming – which might have been better spent on the challenges confronting the world and Europe (including the UK) during these four years. Until the last minute fishery rights (economically miniscule, politically important) and access to the EU market for British producers („level playing field“, economically important) became victims of brinkmanship. The former reminds Brits of its former prestige as a seafaring nation („Britannia rules the waves“) and the symbolism of „sovereignty“ over the sea. But the insistence on fishing rights can also be seen as Johnson’s (eventually failed) attempt to present himself to the rural British public as a preserver of traditional life styles – in contrast to the modernist city centers. The issue of the d”level playing field” is important because the EU could not accept that at its doorstep a former member would undercut it by lowering labor and environmental standards. It was also a UK illusion to „negotiate at eye level as two sovereign nations“, given the fact that the EU economy is 6 times that of the UK and that 46% of UK goods exports go to the EU, while only 15% of EU external exports arrive in the UK. Moreover, that it was the UK which left the EU against the expressed wishes of the remaining 27. To obtain market access privileges that would go beyond those of EU partners (e.g. Norway or Switzerland) who subjected themselves to EU regulations voluntarily, was an illusion the Prime Minister promised his citizens. The fact that the UK loses the benefits of around 60 trade agreements which the EU has around the world, and that the few agreements the UK has hitherto concluded at best mirror the lost EU ones, belies the delusion of „Global Britain“ which the Prime Minister promised.
Johnson had to negotiate a trade-off between “sovereignty” – a return to an illusory rural past – and the economic benefits of the “crashing waves of modernity”, economic efficiency. The former eventually trumped the latter. The effects of this choice will be part of Johnson’s unintended legacy, as violations of the “level playing field” demand will evoke constant threats of the EU imposing tariffs on UK goods. Finding replacements for the EU markets (“global Britain”) will be an impossible task.
Bleak Economic Forecasts
Eventually, the UK got what a slim majority in 2016 voted for and what the Prime Minister promised („Get Brexit Done“) in his election campaign in 2019. The UK is no longer a member of the EU, no longer part of the EU customs union, no longer part of the EU Single Market. And for all this trouble, the UK government itself forecasts a loss of around 4% GDP as a result of the Agreement. Without it, the loss would amount to least 6%. This all comes on top of a GDP loss of minus 11.2% for 2020 (OECD data), relative to an also staggering 7.5% for the Eurozone, and a weak recovery in 2021 of around 3.6%, as against 4.2% for the EU. The economic costs of the Corona crisis are staggering, the recovery will last several years, and is certainly not helped by Brexit. There are rumours in the UK that the Prime Minister intends to „hide“ the negative effects of Brexit on the UK economy behind the Corona effects, in order to avoid being held accountable for Brexit. Whether the UK public will accept this, enjoying its newfound sovereignty, remains to be seen.
The total Agreement (including annexes) runs to more than 1300 pages. Like in any trade agreement, the details are key to any assessment. Many areas are not contained in the Agreement and will need to be negotiated in the future. The bulk of the agreement concerns trade in goods, while services where the UK has a definite comparative, maybe even absolute, advantage is not covered. While the UK government boasts about seamless trade, this concerns only the absence of tariffs and quotas. All UK (and EU) exports will require customs forms to be filled in, and will meet strict controls at the border. This concerns especially foodstuffs and phytosanitary checks. The British tax authority has estimated that the additional bureaucracy alone will burden UK exporters with around 7 bill GBP per year. No estimates of EU exporters are available. Additional costs will occur as a result of delays at the borders, occasioned by the above controls.
From Standard-Setter to Taker
Another important effect, less discussed, is the fact that the EU, as the world‘s largest market, is a major standard setter: since all goods imported into the EU need to meet EU standards, these become benchmarks for third countries – if they want to export into the EU. With the UK gone, it will no longer be an active part of these standard-setting processes, but rather a standard-taker. The illusion that the UK will be able to lower labor and environmental standards, and not accept technical EU standards, is just that, because UK producers will not want to produce separate specifications for separate markets. If they want to maintain access to the vast EU market ($15 Tril. GDP, 430 Mill inhabitants), they will have to follow EU standards. This will put a dent in those purported aspirations of sovereignty.
Another effect will be that the departure from the EU market will be an impediment to innovation, especially from small and medium UK businesses, since the UK market by itself will be too small and the incentive to build a presence on the EU market is gone.
From Single-Market Paulus to Saulus to Brexit
It is somehow ironic that the UK left the Single Market. The UK was the strongest advocate of the Single Market, as exemplified by the 1985 paper by EU Ambassador Cockfield „Completing the internal market“ which set the stage for the 1986 Single European Act, establishing the internal market with its „Four Freedoms“, namely free border crossings for goods, services, labor and capital. These „freedoms“ form the basis of the EU economic policy paradigm, a free market-driven agenda. It was Margaret Thatcher who more than nudged the EU into this direction and prevented a unanimity rule for Single Market legislation, thus preventing a single EU member from vetoing it.1 One needs to remember that all this happened after Thatcher smashed the UK industrial labor unions and pursued de-industrialization by promoting the less organized serivces sector, giving rise to UK pre-eminence of financial and business services. Thatcher, however, started to turn against common rules with the argument that she had not successfully rolled back the limits of the state in the UK in order to become subject to a European „Superstate“ ruled from Brussels. Already here, “sovereignty” trumped economics.
Finance Left out
It is incongruous that the UK‘s strongest sector, finance, was not able to get the government to include financial services and their access to the EU market into the Agreement. Their access will still need to be negotiated. Before exit, UK financial institutions had „passporting rights“, meaning they could do business in all EU states. In order to replicate this in the future, the EU would need to grant „equivalence status“ to the UK, meaning they recognize that EU financial market supervision and regulation meets all EU standards. So far the EU has been reluctant to grant this, less because of market share considerations, more because it seems quite inconceivable to avail itself of UK financial services without being able to regulate or supervise the firms directly. The – quite negative – alternative would be that UK banks would have to apply for permission and licences for each financial segment in each of the 27 EU members separately. As a result, many UK banks have established subsidiaries in the EU, in order to maintain their business there. It is clear, however, that for the EU the UK financial market is crucial, since it is the deepest and most liquid financial market in Europe, where especially derivatives trading is stronger than anywhere else. However, the present uncertainty about the future relations between the UK and the EU has led to a strengthening of Irish, Dutch and French financial actors, while also New York and Singapore are extending their feelers into the EU.
The End of EU Neo-liberalism?
The UK‘s exit raises hopes that with the exit of the main neo-liberal driver, the future EU economic policy might make a shift towards a more „progressive“, a more people and welfare-oriented economic policy with a strong emphasis on the protection of the environment, including climate. The fact that the UK will no longer sit at the table and that its significant lobbying power will be diminished, might strengthen alternative powers. A slight ray of hope is shining as a result of the (unfortunately only temporary) suspension of the infamous Stability and Growth Pact which for the past decades has made public budget consolidation the major objective of EU economic policy. Another positive EU development is the establishment of the 750 bill € Recovery Fund („Next Generation“) with its emphasis on green and digital investment. The most significant feature of this fund is that it enables the EU (for the first time) to raise joint refinancing, occasioned by Germany‘s surprising reversal about the „dangers of entering into an indebtedness union“. It is still to be seen how “sustainable” this German reversal will be: the precautions attached to the Fund (single purpose, temporary) suggest that Germany soon will reverse to its hard-core role. The present political constellation in the 27 EU members does not give rise to high hopes for transitioning to a more „progressive“ economic policy. Hope needs to be replaced by lobbying and action. The more “progressive” EU parliament will be pitted against the more neo-liberal Commission and most member state governments.
Brexit can be seen as part of the EU having passed its territorial size. At the same time, attempts at further enlargement in the Balkans and Turkey have been put on hold. The difficult questions of promoting the depth of integration further and/or enlarging the union have been fuelled by the difficulties resulting from the previous enlargement process in 2004 (and later years) when the number of member states with very different stages of economic (and democratic) development was significantly increased. The idea of the EU moving forward together has already given way to separate “circles”, as seen in the less than full membership in the Eurozone, the Schengen area and adherence to the Social Protocol. This uneven progress forces members states to choose and weakens the bonds and commitments to the EU in the member states.
Brexit signifies a significant weakening for the EU, less so in economic terms, more so in the EU‘s role in the world. The UK‘s military and diplomatic clout is lost and cannot be replaced by mutual agreements, especially as the UK would like to „pivot“ away from Europe. Also EU citizens sustain losses: free travel and the free take-up of work are gone, as are the opportunities for EU students to study in the UK, since the UK left the „Erasmus“ student-exchange program. EU exporters will encounter higher costs for the exports into the UK, a number of supply chains will be interrupted. But the bar far greatest loss is that the idea of a Common Europe has been shattered. This will have long-lasting repercussions.
Boris „Alone at Home?“
In addition to the effects described above, the UK also faces the danger of breaking up. Scotland‘s First Minister, Nicola Sturgeon, already said that her next year‘s election campaign will focus on Scotland‘s independence from Britain and its membership in the EU as a separate state. Scotland‘s Remain vote during the 2016 referendum and the ignoring of its interests during the withdrawal and trade agreement negotiations, have hardened its position to „go it alone“ and dissolve its 300-year old union treaty with England. The strange situation of Northern Ireland, now being a member of both the UK union and the EU customs and single market may in the medium term also lead to its stronger attachment (in whichever form) to the Republic of Ireland. Given the remaining religious and social divisions in Northern Ireland, this seems far away. But economic realities will lead to a tendency that the virtual border between the UK and the EU in the Irish Sea to become permanent. Boris Johnson‘s sovereignty might in the medium run extend to England and Wales only. He might come to regret Brexit – if by that time he will still be in power. But his legacy achievement, having gotten Brexit done, might trump this.
Lessons from Four Years
Extremely difficult and arduous negotiations have led to 1300 pages of minute details. For the UK, the major economic tradeoff between tariff-free access to the EU market and the cost of new tariffs imposed as a result of regulatory divergence will remain a constant issue, as will the issue of financial services’ access to the EU market. For the EU the “successful” example of the UK leaving will mean a constant attention to whether the next member states will try to emulate Brexit. The Trade and Cooperation Agreement, time consuming as it was, has not brought closure. The Brexit would will continue to fester.
1 This in contrast to taxation matters where the UK, with the strong support of Ireland (and later other members) insisted on unanimity, in order to be able to attract foreign investment by means of lower corporate tax rules.