Wednesday, January 08, 2020

This time around, the EU should not wait until the last moment to become flexible

Published on The Telegraph
As Britain gears up to the next stage of Brexit talks, the most pressing question of 2020 will not b “to diverge or not to diverge” from European Union regulations. Members of the government will instead be asked why they would be willing to sacrifice European market access from 2021 onwards, when there is no prospect of the UK altering the EU rules in its current playbook at anything like this speed. 
Boris Johnson's answer will be predictable: sacrificing market access in gradual stages could perhaps be defended, but the EU isn’t offering it as an option anyway.
Speaking at the LSE today, European Commission President Ursula von der Leyen warned: “Without the free movement of people you cannot have the free movement of capital, goods, and services. Without a level playing field on environment, labour, tax, and state aid, you cannot have the highest quality access to the world’s largest Single Market.”
That the EU continues to repeat its line on the indivisibility of the four freedoms suggests that nothing has changed. In practice, the EU stands ready to disrupt the supply chains of big manufacturers - all because the UK refuses to let Brussels govern the biggest financial center in the world, the City of London.
This is plainly a terrible idea. As the Bank of England Governor Mark Carney explained, “It is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world's leading complex financial system to another jurisdiction.”
Big manufacturers will of course urge the EU to show leniency. Shouldn’t the EU be delighted that the UK is willing to align its rules for selected sectors, at least for a while? And didn’t the EU negotiate such a “pick and choose” arrangement with Switzerland in the 1990s, which has worked more or less fine for the last twenty years? Global geopolitical tensions already seem to soften the EU’s stance on security cooperation with the EU, so this may lead to it becoming more flexible on trade.
The EU would naturally retort that even if it wanted to go down that route, one year simply wouldn't be enough time, such a comprehensive trade agreement would require ratification by EU member states.
How to square this circle? One option would be for both sides to agree a bare bones trade agreement quickly, promising not to impose any tariffs and quotas. Perhaps the UK could even agree a “level playing field” similar to the one agreed by Theresa May in November 2018, as this didn’t really have any legal teeth, save on state aid.
Secondly, the UK would not consider permanently aligning with EU rules in a number of policy areas, including financial services. In such cases, a Treaty providing full market access for three years in return for regulatory alignment could be agreed. The UK would then have time to change EU rules and negotiate market access for these sectors until the 1 January 2024, ahead of the next General Election.
Thirdly, in a select few policy areas, the UK may be happy to adopt EU standards permanently, or at least for the foreseeable future. Manufacturing can broadly fall into that category. Don’t get me wrong: regulatory competition is a great idea and will also benefit EU citizens wary of Brussels overregulation, as the UK ditching harmful EU rules would help rein in Brussels. But surely market access should only be sacrificed when the UK actually wants to diverge?
Free traders needn't worry: the over-zealous Brussels regulatory machine is likely to be a greater factor in pushing the UK towards divergence than the UK’s preference for economic liberalism.
Fourthly, a number of pressing EU concerns, like fisheries access, could be sorted quickly, but only in return for EU leniency when it comes to the parallel negotiation that will take place this year on how to implement checks between Northern Ireland and Great Britain, so to make sure these checks will truly be minimal. Most of the Northern Irish economy revolves around services and small businesses, so exemptions for the latter should go a long way to make sure only a fraction of the intra-UK goods trade is hindered by this extra bureaucracy necessary to avoid border checks on the island of Ireland.
Here, the Irish Republic will likely be a great friend for the UK at the EU table, as its main goal will now be to avoid anything upsetting the hard-fought settlement, where it had to concede to a possible unilateral Northern Irish exit.
Even if the political will existed for all of this, many will rightly argue that major legal hurdles remain. Both sides should put any moves towards negotiating open markets between the EU and the UK at the very top of the political agenda.
Fundamentally, however, ways can be found. In 2010, the leaders of Eurozone countries were able to negotiate a 500 billion euro “bazooka” bailout fund over a weekend. Surely, in 2020, they should manage to use the twelve months available to work out a framework for the future EU-UK relationship.

Tuesday, January 07, 2020

What can we expect from European politics in 2020?

Published for The Spectator and Doorbraak
As we enter the third decade of the 21st century, here is an overview of what to expect from European politics in 2020.
1. Brexit – or at least a ‘beta version’ of it – will happen
At the end of January, the UK will finally leave the EU, even if for the rest of 2020 it will continue to outsource its regulation-making capacity and trade policy to Brussels, in return for full EU market access. Boris Johnson has promised not to extend this transitional arrangement beyond 2020. A decision on that is due by the end of June.
There are two schools of thought as to what the UK will opt for. Some argue that there simply isn’t sufficient time to negotiate anything beyond a ‘bare bones’ trade agreement and that both sides will ultimately settle for that, with all its repercussions for industry.
Others think that while a deal to avoid tariffs and quotas is feasible, Boris will ultimately make major concessions, due to the damage industry would face from so-called ‘non-tariff barriers’ to trade. They think that as a result, the UK would simply agree to continue to take over most, or even all, of the EU’s rules in return for continued full market access because of the lack of time to negotiate market access dependent on UK regulatory alignment. In this scenario, Boris could perhaps argue that because the UK has at least recovered part of its sovereignty, this does not amount to extending the transition.
It’s very possible that the first school of thought is right and that Boris simply will go for ‘full regulatory divergence’ from 2021. Perhaps the resulting disruption may end up being a lot less disastrous than some predictions foresee.
Then the ultimate question would be: why would the UK opt to sacrifice market access in return for the right to diverge when it would not be planning to change many of the rules in place anyway just yet? Intransigence and path dependence may well keep the UK in the EU’s regulatory orbit for a few years. Rather than a conscious UK desire to diverge, it may instead be the EU’s zeal for evermore regulation which forces the UK to go for a ‘full divergence’ Singapore-style Brexit over the longer term.
2. EU relations with the rest of the world prove to be challenging
In between sorting out its relationship with the UK, the European Union is likely to be quite preoccupied with tense relations with the rest of the world as well.
First of all, it will need to deal with the tariffs of US President Trump, who may well end up being re-elected. Among his proposals is a threat to impose a 100 per cent tariff on European goods, including wine, from early 2020, in retribution for France’s ‘digital services tax’, which largely hits US tech companies. Only a single French company would have to pay the tax.
EU-Turkey relations are at a post-war low, while the bloc’s relationship with Russia has been icy for more than ten years now. France and Germany seem to be trying to mend relations with Russia – to the dismay of their Anglo-Saxon allies. Turkey, which now even faces US sanctions, is drifting further away from the West under the leadership of President Erdogan, however, he is facing more and more internal rivals.
Elsewhere, more of the EU’s external relations are going through stormy weather. The EU still hasn’t managed to force Switzerland to accept changes to the EU-Swiss arrangement, and another referendum on EU free movement is coming up in Switzerland in 2020. Even the EU’s recent successes in concluding trade deals aren’t secure. The deals with Canada and Latin American countries are likely to face road bumps when it comes to ratification by national parliaments in the EU next year.
Last but not least, tensions between the EU and China are increasing. In March, the EU named China a ‘systemic rival’ and China’s envoy to Brussels has warned that EU plans to clamp down on foreign corporate ownership, trade opportunities and 5G may trigger a backlash from ‘suspicious’ Chinese companies. This follows similar Chinese threats to Germany. On the more rosy side, China did just unilaterally cut 389 billion USD in tariffs, so there may be opportunities to improve trade relations.
3. A new migration crisis may be on the horizon
The challenge of uncontrolled migration is sneaking back to the top of the political agenda in European countries, having never really disappeared. Dutch PM Mark Rutte has listed migration as a ‘priority’ for 2020, even warning that the passport-free ‘Schengen [arrangement] is in danger’, due to the EU’s leaky external border.
Turkish President Erdogan has also warned that a new migration crisis may be on its way, as 80,000 refugees potentially make their way from Syria to Turkey. This follows his threat in October to ‘open the doors’ and allow Syrian refugees to enter the EU if he didn’t receive more assistance from it. Meanwhile 40,000 asylum seekers are currently stuck on Greek islands. The Greek government’s decision in March 2016 to no longer allow those without a positive asylum decision to leave the islands largely ended the inflow of people from Turkey, and almost completely ended the drownings at sea, but no solution for those stuck has been found.
Up north, Belgium and France are struggling to cope with illegal migrants refusing to apply for asylum – as this would lead to them to being sent back to Italy or Greece, where they have been ‘fingerprinted’. Many try to make it to the UK, where it is seen to be easier to live without documents. Meanwhile, in some kind of parallel universe, the new EU Commission led by Ursula von der Leyen is putting its energy in convincing member states to ‘voluntarily’ redistribute asylum seekers, as if people cannot simply move to wherever they want within the Schengen area. No effort is being made to link development aid to repatriations of those denied asylum, an area where the EU could provide added value, as big receivers of EU funds, like Morocco, sometimes even refuse to meet with government representatives of member states to discuss this particular concern.
4. The EU continues with business as usual
Regardless of crises of all kinds, the EU simply continues with its business as usual. That includes two main things: spending and regulating.
For spending, a deal needs to be found on the EU’s new seven year budget, to be spent between 2021 and 2027. Whereas the EU commission is proposing a modest increase in spending, the European Parliament has demanded a wild increase and member states – who will need to foot the bill – are resisting this. The big difference this time around, however, is that the second biggest contributor to this EU budget, the UK, is leaving the club. Of course, it’s possible that the UK will just ‘pay to play’, like Switzerland or Norway, but spending cuts will still be unavoidable. That’s of course a good thing, given how problematic EU spending is.
When it comes to regulating, the EU Commission seems to have redeclared its love for even more of it. As the Commissioner for ‘Better regulation’ under Jean-Claude Juncker, Dutch EU Commissioner Frans Timmermans made some – but still disappointing – efforts to restrain the Brussels regulatory machine. These days however, he’s in charge of promoting the so-called ‘European green deal’, a raft of newly proposed EU rules and stringent targets.
Of course, there will be several national elections this year. In particular, we need to look out for an Irish parliamentary election, the Polish presidential election and also whether next May, Belgium will break its own world record of one and a half years without a federal government. None of this is likely to be a game changer for EU policy though. Perhaps in Germany, Angela Merkel, who has pledged not to run again, will see her reign end in 2020, given how weakened her social democratic coalition partners are. But precisely because of that, it’s still more likely that both German governing parties will prefer to avoid an election before the end of the term, in 2021. One thing that may tamper with ‘business as usual’, is the EU’s ongoing confrontation with Poland and neighbouring member states over the ‘rule of law’, but it’s not likely to escalate.
5. A return of the Eurocrisis is always just around the corner
As the memory of the 2008 financial crisis fades, the Eurozone has become complacent. Governments are relaxing any spending restraint they may have had, despite decreasing growth and therefore likely lower tax revenue.
A number of hard facts suggest they will face a great challenge if the economic weather changes: Eurozone banks are still in a very shaky condition; Eurozone bond spreads have not converged since 2008, when they decoupled; and the European Central Bank is deeply divided internally, which would complicate any attempts for yet another monetary ‘bazooka’ – a policy instrument which is delivering less and less return. Stock owners must be enjoying something like the biggest bull market in history, so expecting a correction of some sort would not be an irrational expectation.
Sure, deeply indebted states like Belgium or Italy have been extending the duration of their debt, providing them with a cushion against a firm rise in interest rates. True, both Portugal and Greece have enjoyed growth in recent years. But they are all strongly dependent on Eurozone support and the ECB’s leniency. The high debt levels remain and the ECB’s easy money policies still do not discourage Eurozone members from taking on even more debt.
Most fundamentally, however, Eurozone politics has not changed. Populists in Italy and France may have abandoned their anti-Euro stance, but they have not abandoned their opposition to the EU imposing conditions. And if the North was asked once again to fork out billions to prop up the South, conditions will be part of the package. Some may wonder what the point is of throwing yet more money at something which looks like a bottomless pit, given that Italy’s per capita personal disposable income is lower today than before the introduction of the Euro more than twenty years ago. During a deep crisis, alternatives to more transfers – such as tolerating sovereign defaults, followed by relegating member states to Montenegro status or full Eurozone exit – may finally be considered. The same fundamental questions about the viability of the common currency, predicted by Margaret Thatcher and many others, could well return.

Tuesday, December 17, 2019

We’re heading for a Singapore-style Brexit, no matter what Boris does

Published for The Spectator 
Reactions to the landslide victory of Boris Johnson have been rather positive on the other side of the Channel. German Chancellor Angela Merkel for example, stated: ‘To be honest, many are now happy to see a clear result. Boris must be recognised for having managed to convince lots of citizens. Chapeau.’
So what’s next?
First, the Withdrawal Agreement will be ratified by both the UK and the EU. The UK will then formally leave the EU at the end of January.
After that, the UK will enter the ‘transition’ stage, effectively outsourcing its trade policy and regulatory powers to Brussels until the end of 2020, in return for full and unrestricted market access. Nothing will change until then.
Meanwhile, negotiations on the future relationship will commence. There have been some statements and leaks on what the EU is willing to negotiate and how, but the bottom line is that the EU wants the UK to align as closely as possible, fearing that the UK would otherwise emerge as a ‘competitor’, as Angela Merkel has put it. The EU side is also sceptical that the negotiations can be sorted by the end of 2020.
What will the future relationship look like?
One thing is for certain: the UK wants to leave both the EU’s single market and customs union. Theresa May’s great failure was to underestimate the importance of leaving the customs union, and agreeing a Brexit deal whereby the EU would be able to veto whether the UK would get its trade powers back. This stance was inspired by businesses understandably fearing disruption to their supply chains. But it should always have been considered unrealistic for the world’s fifth largest economy to outsource its trade powers to Brussels until further notice. This mistake has since been rectified by Boris.
Is there any precedent for a country leaving the EU’s single market and customs union? Apart from Algeria in 1962, Greenland in 1985, and St Barts in 2012, not really. But there is a precedent of a non-EU country that wanted a close relationship with the EU, but at the same time refused to join its single market and customs union.
That country is of course Switzerland, which decided in 1992 in a referendum not to accept the status of Norway as a ‘regulatory vassal’ or ‘fax democracy’, as former Norwegian PM and current Nato chief Jens Stoltenberg once dubbed his own country (where officials sit by the fax machine waiting for the latest directive from Brussels to arrive). It basically then took five years, from 1994 until 1999, to negotiate which EU rules the Swiss would align with and the degree of market access that would be granted in return. A package of seven sectoral agreements was signed in 1999 – all related to single market access. Like Norway, Switzerland isn’t part of the EU’s customs union. Tariffs on Swiss-EU trade mainly apply to agriculture.
It will be a challenge to negotiate a ‘zero tariffs and zero quotas’ arrangement between the EU and the UK in less than one year, but this kind of agreement would only determine whether tariffs are due on goods that are being traded, not whether those goods are able to enter the market at all. Financial services also wouldn’t be covered.
Therefore, the real question is if there is time for the UK to negotiate a Swiss-style ‘pick and mix’ arrangement for market access? Having five times as many staff working on something – as there would be five times less time available – would speed things up and any arrangement could be implemented ‘provisionally’, meaning it would partially enter into force before national parliaments in the EU have approved it. At this point, Boris should perhaps wonder if the importance of sticking to his promised timetable is worth it – and implementing the exit from ‘vassalage’ in phases instead of in one go could save him face.
Another question is why the EU would relax its opposition to Swiss-style ‘cherry picking’ of market access. Its claim that this somehow endangers the functioning of the single market is quickly debunked by the fact that such an arrangement has been working just fine between the EU and Switzerland for almost twenty years. Whether Switzerland agreed to freedom of movement of persons as well as part of the package is irrelevant. If the UK rejects freedom of movement, it would simply have to ‘pay’ for this EU concession with reduced market access.
Sure, there have been tensions in the EU-Swiss relationship lately, with the EU cutting off market access to the Swiss stock exchange last summer, when the Swiss refused to sign up to a role for the ECJ and to take updates of EU regulations automatically. It must be said that this escalation, which didn’t cause much damage in the end due to Swiss countermeasures, was partially fuelled by the EU’s desire to set an example to the UK. And the tensions weren’t the result of a dysfunctional Swiss-EU model, but because of the EU’s attempt to increase its control over regulations in Switzerland.
It’s very hard to see any alternatives to the Swiss ‘pick and choose’ model for the EU-UK relationship. This model strongly resembles Theresa May’s Chequers proposal, which was previously called the ‘three baskets approach’. Here’s why there are few other options. Suppose the EU sticks to its current stance, and so forces a cliff-edge event, dismissing the UK’s offer for ‘selective rule-taking in return for selective market access’ because the UK refused ‘full rule-taking in return for full market access’ (which would have meant letting the EU regulate the City of London, the biggest financial centre in the world). EU businesses keen to see the chemicals trade and manufacturing supply chains undisrupted would be up in arms. It would also be strange to see the EU, which otherwise goes around boasting about how it is a ‘regulatory superpower’ – because other countries adopt its regulations – dismiss the UK’s offer to do just that, because the UK would only take over part of the regulations. Will the EU risk its £94bn trade surplus in goods to simply avoid making yet another negotiation U-turn? Political gravity is likely to prevail here.
A key question is naturally also whether Boris will reheat the Chequers deal again. Opinion seems to be divided here, with some arguing that Boris will prioritise the timetable and stick to his promise of not extending the transition, at the price of aligning more closely to the EU than one would expect, which will be easier given his comfortable majority. The prospect of possible job losses due to loss of EU market access and regulatory divergence, would push Boris to aligning even more closely.
Others argue that the election result is a vindication of those desiring to diverge in terms of regulation, to fully exploit the benefits of ‘taking back control’ as soon as possible. The thinking here is that prioritising the timetable will actually result in the UK opting for a more divergent approach. This is because there would simply be no time for a ‘mixed agreement’, which basically allows for a deal whereby the UK is more closely aligned, but which would also need to be ratified by all EU member states. An agreement which falls under EU exclusive competence alone is easier to fudge in such a short time period, but only allows a looser relationship.
Both sides make strong arguments and we’ll probably know sooner rather than later what the intention of Boris is. We’ve already seen reports that he will legislate to ‘block’ an extension of the transition period. In the longer term, it is very likely that the UK will opt for more regulatory divergence, which is in line with Boris Johnson’s own strong preference for divergence from the EU.
The reason for that is quite simple: one only needs to take a look at the new European Commission. Dutch EU Commissioner Frans Timmermans, who was responsible for the ‘better regulation’ agenda in the previous Commission and who only achieved disappointing results, is now pushing the so-called ‘European green deal’, which contains a raft of new EU initiatives for more regulation and imposes all kinds of more stringent targets – not to forget wild spending plans.
One example: imagine the UK ends up agreeing to align with EU chemical regulations, like REACH, after Boris listened to the concerns of the UK’s chemical industry, who are keen to keep EU market access (after having made huge investments to comply with REACH) and are wary of competition from outside of the EU. After a number of years, however, the EU may update REACH. That this update is likely to be more stringent, especially after it has gone through the European Parliament, is not hard to predict. If the UK rightly decides not to accept this update, this may well force it to give up part of its EU market access, something that would then need to be renegotiated. Remember: Brexit means perpetual negotiation.
To summarise, even if Boris opts for the softest of soft future relationship models, the EU’s regulatory zeal is likely to drive the UK to diverge in terms of regulation, thereby truly becoming the ‘competitor’ Angela Merkel fears. And so it would be the EU that would drive the UK toward becoming a ‘Singapore on Thames’ (even if Singapore is actually not as deregulated as sometimes assumed).
Last but not least, the regulatory competition resulting from all of this would not only benefit the UK, which would be able to attract new business and research, it is also likely to put more pressure on the EU’s regulatory machine. European companies may urge the EU to abandon regulations similar to its burdensome, unpredictable GDPR data regulation in case the UK offers digital service providers a more comfortable regulatory environment. Prominent European researchers have already warned that an ECJ ruling on gene-editing ‘will end innovation’. In the future, if the UK decides to adopt a more innovation-friendly approach, companies and researchers may consider moving there, in turn putting pressure on EU regulators to change tack.
Forget about the money that the UK will save as a result of no longer having to contribute to the – largely wasteful – EU budget or how the UK will manage to open more markets than the EU. The real benefit of Brexit will be to be released from the burdensome Brussels regulatory machine. Just as Brussels is partly to blame for Brexit, it may well ultimately drive the UK to more regulatory divergence than would have been the case otherwise.

Will the EU be divided during the trade negotiations?
This question is easy to answer. The EU is divided in every single trade negotiation. There always is a protectionist camp and a free trade supporting camp, and sometimes when a ‘pro-free trade’ country happens to host an industry which may face more competition after a trade deal, that country quickly jumps into the protectionist camp. There is little reason to believe it would be different here.
What would be different from a classic trade negotiation is that the purpose of this negotiation is not to open up new markets, but instead to protect ongoing trade as much as possible and reconcile this with the UK diverging in terms of regulation. The stakes for companies in an ordinary trade negotiation tend to be lower. Then, it’s about gaining new possible business or defending a market against new competition. In the EU-UK negotiation on the future relationship, it will be life and death for some companies, as they may need to lobby against being partially or fully shut out from the market where they currently operate.

In an ideal world, the UK would have remained a member of a trade-friendly EU, focused on its core business of scrapping trade barriers. But if there is one great benefit of Brexit, it is how regulatory competition will eventually enable an environment where different regulatory zones can experiment with their own approaches for the great challenges of today.
It’s likely that the UK will have to rethink the timing set forward by Boris, while the EU will eventually need to grant it Swiss-style selective rule-taking in return for selective market access. That would still closely align the UK to the Brussels regulatory machine, but due to the EU’s apparent willingness to continuously give in to its instincts favouring ever more regulation, the UK will ultimately end up as what has been described as ‘Singapore-on-Thames’.

Wednesday, December 04, 2019

As Britain goes to the polls, the EU is preparing a brand new list of 'Brexit Unicorns'

Published in The Daily Telegraph

As Britain prepares to take to the polls next week, the European Union is gearing up towards its own negotiations on the future EU-UK relationship. If, as the polls currently suggest, Boris Johnson gains an absolute majority and Brexit happens at the end of January, these will begin right away. But what will the EU will be demanding? Statements and leaks from Brussels suggest the following.
Their first demand will be that Boris Johnson breaks his promise not to extend the eleven months transition period if he wants a proper trade deal. As one EU diplomat put it, “the choice is either no deal Brexit 2.0 or to extend the transition period.” Another senior EU diplomat added that “not in my wildest dreams would I imagine" the possibility of the EU agreeing a zero-tariff, zero-quota deal by 2020, which would permit divergence from EU rules on workers’ rights and environmental protections.
The EU's chief Brexit negotiator Michel Barnier has said that trade and security will be prioritisedbut “we cannot do everything in 11 months, we will need more time.” It would be possible, he conceded,  to negotiate “the principle elements” of a free-trade agreement to avoid an economic cliff edge before the end of 2020. Only covering part of cross-Channel trade, however, this would be expected to hurt UK services access.
Even if the UK did request a transition extension, it would be on the extra condition of paying a “proportional” contribution to the EU budget. Though there are potential ways to fudge this, for example, by amending the Withdrawal Agreement itself by retroactively changing the provisions for transition extension, the EU’s cooperation will still be needed.
A second EU demand is that the UK agrees to grant the EU access to British fishing waters before the end of June, and it sees this as a pre-condition for any trade deal. An EU diplomat adds that the fisheries issue, where the UK is seen by many to have a strong negotiation position, “needs to be resolved by June, so in four months.” According to the withdrawal agreement, the decision on whether or not to extend the transition is also due by then.
Thirdly, the EU will demand so-called level playing field commitments to guarantee that the UK will not undercut European social, tax and environmental standards to gain competitive advantage after Brexit. If not, the UK should expect a response in kind; Barnier has warned that “access to our markets will be proportional to the commitments taken to the common rules”. He even redefined a refusal to copy the EU's failing model of excessive regulation when exporting to continental Europe as "dumping".
And what of finance? The EU’s Commissioner for financial services has specifically warned that the bloc will restrict market access if the UK diverges too much from EU financial regulations. This threat isn’t as straightforward as it may seem - the City of London is just too important to the EU. Moreover the use of similar tactics against Switzerland has so far failed to deliver a result, with the Swiss able to contain the effects by reciprocal protectionism. 
Fourthly, security cooperation will be a further condition of an EU-UK trade agreement, specifically, finding an alternative to the European arrest warrant and providing access to crime-fighting databases.  
In this regard, EU officials have pointed out that if the UK becomes a competitor and diverges, this will not only result in reduced EU market access, but it will also hurt cooperation in other areas. One official explains “We want leverage in these areas", “to keep the UK in the continental Europe's orbit”. In the past, the EU and the UK have cited aviation, carbon pricing, anti-money laundering, illegal migration, data protection and sanctions on rogue states as areas of post-Brexit cooperation.
A fifth demand is that the new relationship should be governed by a single overarching deal, instead of a patchwork of bilateral agreements, which is for example the case in the EU-Swiss relationship. The latter has been rocky lately, due to EU attempts to push a single framework onto the Swiss, which would force them to accept the power of the European Court of Justice and to align with EU rules in return for market access.
The EU does consider there to be separate areas of cooperation and roughly sees three key ones: trade, security and research. It however wants everything to depend on everything else. They will likely demand some kind of permanent framework in place to govern the relationship, with a coordinating body and two EU-UK summits per year.
There's more. The European Union will also attempt to make the UK sign up to freedom of movement in return for tariff-free market access. Barnier has repeatedly spoken of the link between the frictionless movement of goods and people. Never mind the well-documented exceptions to this rule; the EU for example carved off free movement of people from its trade deal with Ukraine.
This is an extraordinarily ambitious wish list, and one which seems especially ludicrous given EU officials' tendency to accuse the UK of "unicorn thinking". Still, it is Christmas I suppose...

Friday, November 29, 2019

How might the EU react to the possible outcomes of the general election?

Published on BrexitCentral and German opinion site

The upcoming general election may well turn out as a de facto second referendum on Brexit. Here is an overview of the different scenarios that are possible and how the EU is likely to position itself in each case:

The first scenario, which is taken by most as the base case, is for the Conservatives gain an absolute majority of seats. If this happens, it is very likely they’ll simply pass the “Boris deal”, so then Brexit happens.

However, Boris has now promised not to extend the transition stage, in order to convince Brexit Party voters. This increases the chance of a “no deal” in a year or so, given how ambitious it is to negotiate the future relationship in such a short period. Sabine Weyand, who heads the trade department of the European Commission, has just warned that the UK will only get a “bare bones” deal – meaning only limited market access - if Boris sticks to his short timetable.

In 1992, in a referendum, the Swiss narrowly voted against an arrangement whereby they would automatically take over EU rules in return for full market access to the EU, as is the case for Norway today. The negotiations to work out a “Chequers”-style deal took five years, from 1994 to 1999. Thereby, the Swiss agreed to voluntarily take over EU regulations in return for market access. Given how it took five years for the EU and Switzerland, the EU may get its way here, at least if both sides are willing to protect integrated supply chains of heavily regulated companies, such as car manufacturers or producers of chemicals.

The promise made by Boris is ultimately a result of the EU not merely offering a short extension, which would have prevented an election before Brexit. Perhaps another fudge may now be for the EU and the UK to negotiate another “standstill” period during the transition, with the UK already recovering some sovereignty, so technically this would not be an “extension”. After all, Brexit is a process, not an event, and it will mean perpetual negotiation with the EU.

The withdrawal agreement only allows a one-off extension in any case, and to deal with this, the European Commission is already thinking to let the grand EU-UK trade deal enter into force provisionally, to enable a “mixed agreement” to be negotiated. Such an agreement can deliver more market access but it would also need approval by member states parliaments and not just the European Council and European Parliament.

While the UK will likely need to concede on the timetable, the EU will likely be forced to move on its opposition to “cherry picking”. Continuously, it has ruled out that a Swiss-style deal would be up for negotiation, claiming that this would somehow “split the four freedoms”, even if this arrangement functions smoothly with Switzerland for almost twenty years now. One can only wonder what major manufacturers would say in case the EU would risk a “no deal” cliff-edge when the UK would offer to continue to take over EU rules for manufacturing and chemicals – at least for a while - but would refuse for the City of London to be governed from Brussels without a say for the UK.

Due to fears of harming supply chains, the stars are aligned for a Chequers-style arrangement. Every time the EU will come up with an update of those rules the UK takes over, however, voices in the UK will be raised to reconsider whether market access to the EU is still worth it. It will be “pick and choose” like never before.  

In a second scenario, the Tories narrowly fail to achieve a majority, but the 8 to 10 expected DUP MPs are needed. A scenario with Brexit Party MPs holding the balance is extremely unlikely, given how unlikely it is that the party will manage to obtain even a single seat.

If the DUP comes back into the game, the EU won’t be keen to throw Ireland under the “no deal” – bus, so it can be expected that negotiations will re-open.

To make the Brexit deal more palatable to the unionists in Northern Ireland is in any case a good idea in the first place. Even if Nobel Peace Prize winner Lord Trimble supports the “Boris deal”, there’s quite a bit of anger about it in Northern Ireland, with reports of Brexit contributing to the risk of paramilitary violence.

The “Boris deal” foresees that Northern Ireland will remain in the UK’s customs area, not only legally but also practically, given that the Northern Irish will be able to enjoy any lower tariffs negotiated by the UK. Then some kind of checks will be needed in the Irish Sea, something that also already triggered protests from lorry drivers.

There would be customs declarations for goods coming from Great Britain to Northern Ireland, even if Boris Johnson seems to have denied this, by stating on the campaign trail that "there will not be tariffs or checks on goods coming from GB to Northern Ireland that are not going on to Ireland.” Perhaps he was confused, as there will not be tariffs on such goods, but unfortunately, some extra bureaucracy and therefore checks will apply to those, under the deal.

Another concern is that “exit summary declarations” for goods traded from Northern Ireland to Great Britain would be required, even if article 6 of the Northern Ireland protocol may enable the UK to waive these for quite a few goods. Also, EU Commission sources suggest that the Irish Sea checks will be less dramatic than they appear at first sight. The crux will likely be checks for goods entering Northern Ireland from Great Britain, as this is what the EU is primarily concerned about.

A lot of the detail is still unclear, but in case of such a renegotiation, the DUP is likely to only concede more to the extent the EU is flexible on intra-UK checks. This time, it wouldn’t be DUP versus Ireland but it would be DUP versus the likes of the Netherlands, Belgium, France and Germany: countries fearing a hole in the EU’s external border, even if their own part of that border is quite leaky.

Precisely for that reason, the EU is likely to move on DUP demands to water down that Irish Sea border, but the question is whether their concessions would satisfy DUP, which are known to be tough negotiators. “No deal” would firmly be back on everyone’s minds.

third scenario is if the “everyone but the Conservatives and DUP” – coalition secures a majority of seats, followed by Jeremy Corbyn somehow managing to convince this shaky rainbow coalition to prop him up as Prime Minister. One condition for that will certainly be a second Brexit referendum, something which the Lib Dems will push hard, and perhaps even a second Scottish referendum, on request of the SNP.

Corbyn would then submit a choice of “remain” versus “soft Brexit”, which is likely going to entail so little sovereignty for the UK that many Brexiteers and perhaps even the Conservative Party may boycott the vote, triggering accusations that the choice is between “EU membership” and “EU membership without voting rights”.

Despite some grumbling, the EU is likely to go with Corbyn’s renegotiation. After all, the UK aligning or harmonizing its regulations and trade policy is more attractive than facing a “competitor”, as German Chancellor Angela Merkel has put it.

If the UK electorate would then support the “remain” option, that would clearly not be seen as the end of the world either for the EU, even if many now genuinely understand the dangers of having the UK in the club after all, with more than 17 million Brexit voters feeling rightfully angry that they were told to vote again and give a proper answer.

As said, it’s unlikely for the Conservative Party to simply go along with this. Given that it has now become the “party of Brexit”. It’s likely to state it will deliver the Boris-deal after all, simply waiting for Corbyn’s shaky minority government to collapse. The EU will feel helpless, knowing that Brexit will be on its way despite the second referendum.

And even if the Tories would not go down this route, sooner rather than later the UK will emerge as a much more difficult partner than it ever was before 2016. Therefore, this election does not only matter for the UK’s future, but also for the EU’s future. Brexit was supposed to turn the UK from a bad tenant into a good neighbor. A UK which continues to obstruct would be seen by EU leaders as an even worse tenant.

In the first place, it’s of course unfair to consider a member state which is the second biggest financial contributor and which is widely considered as sticking to EU rules more firmly than many others as a “bad tenant”. Then it’s an accurate description of how some EU leaders see the UK.

A few weeks ago, outgoing EU Commission President Jean-Claude Juncker accused Tony Blair – of all people – of having contributed to Brexit, arguing that "when it came to the political union, to moving closer together, they wanted nothing to do with the EU. That was even the case with my friend Tony Blair. (…) If you stick to that narrative for over 40 years, it should not come as a surprise when people remember it during the referendum."

This not only reveals an odd belief that politicians shape the convictions of the population, it’s downright bizarre to suggest that the UK public may not have voted for Brexit if only the UK’s leadership had ignored popular discontent about the course of the EU. In Brussels, there’s very little introspection as to why the UK voted to leave in 2016.

The UK somehow remaining in the EU after all would be very much “back to the future”, with the agenda to reform the EU, which Open Europe has always pushed, returning to the fore. This agenda, which truly revolves around turning the EU into a more modest vehicle, focused on scrapping barriers to trade, may now well be a lot more appealing to mainland Europe than it was before 2016, when the so-called Eurosceptic populists were much weaker. It would in any case be tried as a way to deal with the concerns of Brexiteers in the UK, perhaps in vain.

In any case, UK voters now hold the keys. Apart from the slight chance of the DUP holding the balance, it’s quite black and white: an absolute Tory majority means Brexit. Otherwise, “remain” for at least another year is a very real prospect. The EU will simply play along in both scenarios, even if it now realizes “remain” may not be sustainable for long.