Tuesday, February 28, 2017

Juncker has “four or five scenarios” in mind for EU integration after Brexit

Published on Open Europe's blog

Belgian daily Le Soir has obtained information about the broad thrust of European Commission President Jean-Claude Juncker's revamped proposals for EU integration after Brexit. What to make of them? Open Europe's Pieter Cleppe gives his take.

European Commission President Jean-Claude Juncker’s ‘White Paper’ outlining his revamped plans for EU integration after Brexit has featured quite a lot in the continental media over the past week. Italian daily La Repubblica reported that Dutch Prime Minister Mark Rutte and German Chancellor Angela Merkel had both urged Juncker to delay publication until after the celebrations for the sixtieth anniversary of the Treaty of Rome on March 25 – the very event which the document was intended to mark.
Belgian daily Le Soir has obtained information about the broad thrust of the now famous White Paper. Interestingly, the article suggests Juncker only briefed his team of commissioners on the initiative last week and has summoned them for an extraordinary meeting later today to discuss the matter.
At today’s meeting, Juncker will reportedly put forward four or five concrete scenarios for structuring a post-Brexit EU which the 27 heads of state and government of the remaining member states would have to consider. Le Soir cites a “European source who has been closely following the preparation” of the White Paper, as saying that these scenarios are not “academic models” but instead “options based on real political experiences in the EU.” None of the options would entail treaty change, a move which is intended to circumvent politically-charged referendums and complicated parliamentary ratification in member states.
The White Paper will presumably be finalised shortly, as Juncker is keen to get it ready for the Treaty of Rome anniversary at the end of next month. Whenever it is published, it is widely assumed that it will be hard actually to decide anything until after the 24 September German elections at the earliest.
An overview of possible scenarios Juncker could present, according to Le Soir, follows. (A caveat: the White Paper is still a work in progress, and even the number of scenarios is reportedly not fixed yet.)

Scenario 1: Business as usual

The first scenario is “to continue on the current path”: implement the different working programmes and political agendas which were once again reiterated at the Bratislava Summit last September.

Scenario 2: The “Verhofstadt option”

The second scenario is to pursue “EU federalism to the maximum”, which Le Soir’s source dubbed “the Verhofstadt option.” This refers to former Belgian PM Guy Verhofstadt, the European Parliament’s chief Brexit negotiator, who is also the leader of the ALDE liberal Group in the European Parliament. Verhofstadt has long argued in favour of the ‘United States of Europe’.

Scenario 3: Enhanced cooperation without veto power for those not taking part

The third scenario allows those countries that prefer to advance more quickly on the path of further integration to do so without others being able to block them. Belgian Prime Minister Charles Michel is a supporter of this idea, having suggested that the Eurozone could be a natural platform to serve as the suitable orbit.
German Chancellor Merkel has also backed the scenario, having stated that, “There will be a multi-speed EU, and not all members will participate in the same steps of integration. I think this may be in the [March 25] Rome declaration as well.” The Polish government led by Beata Szydło is known as an opponent of the idea, but the Polish Prime Minister did not contradict Merkel when she repeated her support for this idea at a joint press conference.
Le Soir’s source notes that “certain member states see this option as a way to get rid of member states that are slowing the EU down – one especially thinks of Hungary and Poland – while others on the contrary see it as a way to push them to accept continued integration.”

A secret, “innovative” Scenario 4, backed by Juncker, combining elements from the first three options

According to Le Soir, Juncker does not intend to support the third scenario of an “avant-garde group,” even though he mentioned something similar in a recent speech, as he reportedly intends to do anything to keep the 27 together after Brexit. As a result, Juncker is thought to support a fourth scenario that has two varieties and would be “innovative.” It would combine elements from the first three options, but the details are secret, and the newspaper’s source did not want to disclose it.

What to make of this White Paper?

With this White Paper, Juncker wants to reignite the debate over the future of EU integration. The Treaty of Rome anniversary would be the springboard, while the end-year EU summit in December (after the German election) is envisaged as the culmination of the process.
Based on what Le Soir has reported, one could summarise all four scenarios for the EU’s future post-Brexit as “more of the same” – that is, yet another call for ‘more Europe’ but with little willingness to undertake wholesale reform of the EU. Since the White Paper will reportedly steer clear of recommending EU treaty change, a mere political pledge to make more use of “enhanced cooperation,” without relaxing the treaty’s procedure to do so, is only a shaky political pledge.
Furthermore, it doesn’t necessarily follow that, after Britain’s departure, core EU member states would suddenly become enthusiastic about “ever closer union.” It wasn’t only Britain, but the strength of anti-establishment parties across Europe which stopped the EU from agreeing to go further. And in Italy or Austria, such parties may be even closer to power.
Needless to say, Juncker hasn’t listed the option of turning the EU at 27 into a mere trade-facilitating arrangement – a vision that may have kept the British in if it had ever been presented. According to a Pew poll, a majority in EU countries want to return powers from the EU back to member states. Few people dislike the fact that the EU makes sure Ryanair and Wizzair can offer cheap flights everywhere.
But anger towards the EU inevitably follows when ‘Brussels’ meddles with national budgets, when it organises fiscal transfers or when it imposes conditions attached to these fiscal transfers. When the EU micromanages national decisions on asylum policy, it’s dealing with policy areas that are close to the heart of the democratic debate and which are often deemed too sensitive for supranational officials to decide. The EU could limit itself to something that’s already ambitious enough: removing barriers to trade.
But perhaps Jean-Claude Juncker has been around for a little too long to include “the EU as a mere free trade arrangement” as a scenario?

Wednesday, February 15, 2017

If Britain gets a bad deal, the EU also loses

Published on Open Europe's blog and BrexitCentral

In the EU institutions in Brussels, an assumption made by many is that if the British would get a "good deal" after Brexit, this would be bad for the EU. Even those genuinely concerned that negotiations shouldn't go off the rails, like Joseph Muscat, the Prime Minister of Malta, whose country holds the rotating presidency of the Council of the EU, have stated that “we want a fair deal for the United Kingdom, but that fair deal needs to be inferior to membership….It cannot end up better than the current situation”.

This attitude reveals how many in the EU institutions and member states instinctively consider trade to be a zero-sum game: when one party wins, the other party must lose. Of course, it’s the other way around. If Britain gets a bad deal, for example because it faces tariffs to export to the Continent, the EU also loses. That’s the case not just because Britain could itself seek to impose tariffs on imports from mainland Europe, but because restrictions on investment from the City of London into the Continent would drive up the cost of investment in the EU27.

To be fair, this is appreciated in Brussels to a certain extent. Last month, the EU Commission’s Brexit Chief Negotiator Michel Barnier expressed concern that there would need to be “special vigilance on financial stability risk” as a result of possible EU restrictions imposed on UK-based financial service providers. One senior European official has even remarked that closing London as a euro clearing centre is likely to increase costs for EU banks and companies.  This echoes an estimate made by the CEO of the London Stock Exchange Group, who has warned that if the UK were to lose the ability to clear euro-denominated transactions as a result of Brexit, this would fragment markets and cost European banks an extra £63 bn in additional collateral.
The EU of course would be sensible to avoid cutting itself off from the world’s biggest financial centre, but then all kind of grand strategies are being prepared on the Continent to lure finance jobs from London, for example by limiting UK banks’ ability to operate in the EU. UK banks then would need to set up a subsidiary, putting up new capital to do so, which would hamper their investment in mainland Europe. As so often, special interests may trump the general interest.

This is something that the British need to keep in mind. They must not asssume that the EU institutions are acting purely rationally or shielded from the influence of special interests.

Some EU policy makers in Brussels are not only skeptical about giving Britain a “good deal” because of flawed economic thinking. Some of them actually believe that the EU project would benefit from this. It was reported that Martin Selmayr, the “chef de cabinet” of Jean-Claude Juncker, thinks that “Britain’s departure will help Europe to finally forge a new identity.” But this view is not universall accepted: a senior EU commissioner commented that “Martin is mad — he is positively insane” as “no one else believes this idea that Brexit will unite Europe somehow. I don’t think Jean-Claude believes it either.” Still, although not everyone in Brussels is as radical as Selmayr, the thinking goes that if the British leave the club too easily, others may start thinking of taking this route as well.

While this reasoning may appear sensible at first glance, it doesn’t hold up. Any economic damage for Britain would go hand in hand with economic damage for the EU27, especially for the Benelux, Germany, Malta, Cyprus and Ireland. The EU Commission is often blamed for all the wrongs in the world, so how would it not be blamed for job losses related to this?

Assuming the UK triggers article 50 this spring, a period of two years will then start, after which Britain will automatically leave the EU (unless this period is extended by unanimous agreement).  In Brussels, there is near-consensus that fixing a long-term free trade deal in such a short time span is completely unrealistic. Clearly, Theresa May wouldn’t fancy the prospect of tariffs kicking in one year before the scheduled general election in 2020, with potential job losses as a result. But equally she’s been clear that the government would prefer no deal over a bad deal.

Despite the talk of “setting an example” to others, many on the EU side would be genuinely unhappy with a cliff edge. Some in Britain may think that this prospect would drive the EU to agree some kind of a deal, perhaps temporarily. They may be right, but there’s little certainty.

There is willingness to conclude a transition deal, but both the Commission and  the Council presidency have (so far) stated that during that period the UK would be subject to EU rules and jurisprudence without having a say. A Belgian high-level business group advising the government on Brexit has stated that if the UK refuses this, Belgium should still remain “remain open minded” and prioritise avoiding tariffs. The question is if this view will prevail. One senior European official, commenting on a transition deal, told Reuters that "the technicians of course say it's obvious. But frankly, politically it's not at all. (…) Do the Brits really want it? On the kind of terms we can offer? There's a real danger they will just fall off the cliff."

Although Theresa May wants to avoid an “unlimited transitional status”, she has acknowledged the case for a “phased process of implementation”, for example on a sector-by-sector basis. But she doesn’t have long to agree this.

Will she be successful? Perhaps. As so often with things in Brussels it will come down to politics above all else. As we saw with the imposition of EU sanctions against Russia politics can triumph over economics. If the politics is of punishment and setting an example then the consequences could be bad: a cliff-edge Brexit with tariffs and no winner on either side. But if the politics is more constructive things could become much easier.