The Bother with Brexit
By Pedro Schwartz
Brexit is turning out to be a much more complicated affair than both the “remainers” and the “leavers” initially surmised. The hope of an amicable divorce is vanishing. The British Government and the European Commission are edging nearer the precipice of an unwanted and unplanned total break, which neither side really wants, though in the end it could be the best solution. Theresa May, the tottering British Prime Minister, is trying to devise a way of leaving the European Union without actually leaving it. Michel Garnier, the European Commission’s chief negotiator, wants to send a message to other “exiteers” tempted by the British example, but he also strives to keep Mrs. May in office as the least bad UK negotiator he could wish for. And the clock is ticking: the moment when exit must happen is March 19, 2020, 11 pm (Greenwich Time).
The whole question started with the Referendum that former Prime Minister David Cameron called for in June of 2016. His bet was that a majority of the British would vote to stay in Europe, as a majority of the Scots had voted to stay in the United Kingdom. He lost 51.9% to 48.1% and immediately resigned; Theresa May smoothly took his place. She had been a tepid remainer before the referendum but soon turned exiteer, because she said, “it’s what the British people wanted.” She is now having a hard time sitting on the Brexit fence, because public opinion at home is proving to be as divided as ever, and because her European partners have not offered her a helping hand. The European question has troubled the Tories for the last fifty years and has led them to unseat one Prime Minister after another—from Edward Heath to Margaret Thatcher to John Major to Cameron. We should not be surprised to see Theresa May’s name soon on that list. In fact, she recently survived in Parliament on parts of her proposed Brexit deal by only three votes, with eleven pro-EU MP Tories voting against and four pro-Brexit Labour sympathisers voting with her to give her the needed majority.
The negotiations are tripping up on four realities. The first one is how intertwined the affairs of Europe and the United Kingdom have become after nearly fifty years of EU membership. The United Kingdom has always shown itself to be a disciplined member of the Union, so that the law of the British land is shot through with tens of thousands of derivative European laws and regulations. This makes it impossible to review all the outstanding legal texts in good time and to decide what will stay and what will have to go. So Parliament has granted the British government what are picturesquely called “Henry VIII powers” that would enable ministers to amend or repeal the provisions of an Act using administrative orders, without Parliament having to concur. These powers date back to 1539 when the King was given leave to legislate by proclamation.
The second difficulty is that the open border between Northern Ireland and the Republic of Ireland will now become an international border between the United Kingdom and the European Union. So the free movement of goods and people between the two parts of Ireland is now under question. There is little doubt that free economic communication on the island has helped consolidate the peace brought by the “Good Friday Agreement” of 1998 between all parties in the civil war. I well remember what it was like to be in Belfast during the “Troubles.” My great friend and distinguished historian of economic thought, Bob Black, had invited me to give some lectures at Queen’s University Belfast. A number of incidents have stayed in my memory. When we drove to the University, our car was stopped at army check-points and our boot opened, “to prevent possible kidnappings.” The entrances to restaurants and pubs were protected with sandbags, so that no one could easily run in or out of the establishment. No posters or banners were to be seen in the corridors of the department of economics and no one there, student or teacher, ever mentioned politics or religion. One saw helmeted and fully armed soldiers walking along the pavements close to the walls of houses for fear of snipers. This is why Mrs. May is so insistent on finding an arrangement to ease tariff or regulatory barriers for goods between the two parts of Ireland.1
A third problem is connected with the United Kingdom wanting to control immigration in the British Isles. The difficulty lies in the fact that there are some 3 million EU citizens living in the United Kingdom and 900,000 Britons in the EU. The British government has unilaterally promised Europeans unconditional resident status if they have been there longer than five years, and to offer them resident status if they have been there less than five years at the time of separation. The EU have offered nothing yet on this chapter, which has peeved the British Government.
And the fourth unsettled point is that the United Kingdom objects to the European Court of Justice having a last say on questions decided by the British Courts. But if Mrs. May is successful in keeping the United Kingdom within the Single Market for goods, at least for a none too short transition period, the Court will still hold sway over the United Kingdom, which is sure to infuriate those who voted for Brexit to have their country recover its sovereignty.
The Chequers White Paper
This is the lukewarm impression I got from reading the White Paper Mrs. May has just had the government publish under the title “The Future Relationship between the United Kingdom and the European Union.”2 This proposal was presented to the Cabinet in a meeting at Chequers, the residence of the Prime Minister. It is very much middle of the road and has led two senior members of the government, the Secretary of State for Brexit and the Foreign Secretary, to resign without delay. Monsieur Barnier quietly tore it apart.
What Theresa May wants is to base future relations with the European Union on only three of the four freedoms outlined in the Treaty of Rome of 1957: freedom of movement of goods, services, and capital, leaving aside the free movement of people. This “would ensure that we leave the EU without leaving Europe,” wrote the Prime Minister.
The first point of this proposal is a free trade area for goods, which would avoid tariff and regulatory barriers between the two parties and which, by the way, would dispense with a hard border between the two Irelands. The second is no limitation to the supply of services, especially financial, a major export of the United Kingdom, of course including capital, which would stop Paris from trying to step in the City of London’s shoes. However, a major point of contention would be the demand that the British control immigration from the Continent. This was a principal initial reason for the Brexit vote, but it would play into the hands of central European nations, such as Poland and Hungary, who want to stop Brussels’ imposed free circulation of migrants.
The freedom to supply services is subject to special and recondite complications. The easiest solution has been rejected by Brussels—the mutual recognition of rules, institutions and operations by the two parties. Neither is Brussels ready to automatically grant a “financial passport” to British banks and financial institutions. The fall-back solution in the White Paper is an “equivalence model,” as the United States and Singapore enjoy in the European Union. No deal. Brussels wants to be able to decide unilaterally who can enter the European financial market so as to control competition—an old habit of the Commission.
I said above en passant that “a total break could be the best solution”. I was not trying to shock my readers. What would be the costs and benefits of no agreement? Let me point out that Mr. Jacob Rees-Mogg, who is the voice of the hard-brexiteers in Parliament, has suggested a radical solution for the question of the Irish border. He suggested that the United Kingdom open the border totally and unconditionally on the Northern Ireland side and see who takes the blame for the disruption thus imposed by the EU.
I would apply this idea more generally. Instead of looking for reciprocity, the United Kingdom could open its borders to all imports of goods and services with zero tariffs and regulations enforced ex-post. After all, the average EU tariff is 2.5% (though cars and clothing are higher), and most of the European health and safety regulations are nothing other than non-tariff protection against foreigners. True, the opening of UK borders would cause a sudden increase in competition that would make some UK producers suffer. But consumers would gain (especially after leaving the Common Agricultural Policy); and the cost of British exports to the whole world would fall markedly. The same reasoning is valid for financial services, scientific, and technological services.
Do not forget that the United Kingdom has in principle to pay the EU £39 billion as a settlement, even if the divorce were amicable. Refusing to settle that amount would be an added bonus for the United Kingdom in case of a Hard Brexit.
 The question is not so weighty for Gibraltar, the small rock on the southern coast of Spain, for there the frontier between the mainland and the British territory never disappeared, since it was not a part of the EU Customs Union.
*Pedro Schwartz is “Rafael del Pino” Research Professor of economics at Universidad Camilo José in Madrid. A member of the Royal Academy of Moral and Political Sciences in Madrid, he is a frequent contributor to the European media on the current financial and social scene. He currently serves as President of the Mont Pelerin Society.
For more articles by Pedro Schwartz, see the Archive.