How long will the EU’s Brexit inflexibility last?

Published on CapX

While the debate rages about the European Commission’s draft treaty setting out the terms of the Brexit divorce and transition period, we’ll soon learn more about the UK’s vision for its future relationship with the EU.

On Friday, Theresa May will make yet another big speech on Brexit. She will set out in more detail how the British government sees UK-EU relations after the transition stage, which is due to end by January 1, 2021 and the terms of which still haven’t been agreed.

Thankfully we already know, in general terms, what Theresa May will say. The proposal has been dubbed the “three baskets approach”.

The first basket contains sectors in which Britain would be happy to voluntarily take over EU regulations. These are areas where this is needed to prevent supply chain disruption. Aviation, car manufacturing and chemicals are three salient examples. Would the UK really want to insist on having different standards for steering wheels?

Then again, the “voluntary” part is also key. Britain would be happy to avoid damage for supply chains by taking over EU rules, but ultimately it shouldn’t be forced to do it automatically. What if the EU were to come up with an onerous update of its costly REACH chemicals regulation, which faced a lot of protest when being drafted? It’s known that the EU regulatory process is, to put it mildly, not always science-led. The European Parliament in particular has demonstrated a fondness for the more superstitious side of things. In such cases, Britain may find it useful to be able to refuse to simply copy the EU’s rules, instead raising the issue at a joint committee where both sides can then try to find a compromise in order to avoid the UK losing market access and supply chains being disrupted.

The first basket, then, is basically what Switzerland negotiated with the EU after it voted against single market membership in 1992. But in other areas Britain would refuse to import EU rules. Instead, it would try to obtain a declaration from the EU that UK rules are “equivalent”. This is the second basket.

A good example of this approach would be clearing houses. It’s quite realistic for the UK to obtain this status given that the EU grants US clearing houses access to the EU market and that blocking UK clearing houses from offering their services to EU27 clients would fragment the clearing market and badly affect finance opportunities for companies in mainland Europe.

Of course, in many cases, the EU will refuse to declare divergent UK regulation to be “equivalent” and deny market access, even if this harms EU27 consumers. After all, Trumpist economic thinking is alive and well in the EU27. Special interests and powerful exporters will come before consumers, even if that flies in the face of economic orthodoxy.  Hence the need for the “third basket”, for sectors without equivalence.

Is this UK government approach realistic? The short answer is yes. Brexiteers like Boris Johnson, will be very keen on the ultimate UK right to say no, but are sympathetic to industry’s concerns about supply chains, so to take over 99 per cent of the EU’s rules is fine, as long as Britain can say “no” when EU rules really don’t make sense. The Swiss approach squares that particular circle.

Where there are no supply chains, why should the UK government take over EU regulation rather than merely try to get its own rules to be declared “equivalent”?

Many will say that, however reasonable such an approach sounds, the EU will not agree to it. I don’t think that is the case. Why would the EU refuse the UK’s offer to copy and paste many of the EU’s rules, while only asking in return that for the sectors where it does that, the EU offers market access?

Brussels will be flattered by the thought that others are importing its own regulations; and EU companies with supply chains between the UK and mainland Europe will also push very hard for this.

Therefore, it is surprising that the initial EU reaction vis-à-vis the “three baskets approach”, even before its official unveiling on Friday, has been quite so negative.

The first reaction came in the form of slides published by the European Commission, which claimthat the approach would amount to cherry-picking and represent a “risk for integrity and distortions to proper functioning of [the] internal market”. This claim ignores the fact that the EU has such a deal with Switzerland. That, apparently, doesn’t endanger the internal market.

Furthermore, European Council President Donald Tusk called the approach “pure illusion”, describing it as “cake philosophy”. Irish PM Leo Varadkar also felt the need to mention cake, saying it was “not a significant move away from having your cake and eating it”. Even Dutch PM Mark Rutte, one of Britain’s friendliest neighbours said: “I told [May] we don’t like cherry-picking and that it’ll be difficult to come to a bespoke deal along the lines some in the UK are suggesting.’

Despite the fondness to dismiss “picking and choosing” or “having your cake and eating it”, EU leaders are well aware that the EU did close such a deal with Switzerland and that even within the internal market, the opening of markets has been selective. Germany has for years obstructed opening its insurance market, in spite of the fact that doing so is a Treaty obligation.

In reality, the EU truly is one big festival of picking and choosing. But, of course, it’s possible that such flexibility will not be granted to the UK. That however would impose a very high cost to both sides, with estimates of up to 1.2 million job losses for the EU27 alone in case of a cliff-edge “WTO” Brexit.

Behind the scenes, things look less inflexible. A Swedish government report makes mention of the Swiss deal, internal Belgian Foreign Ministry deliberations are looking at the arrangements foreseen in the proposed TTIP trade deal between the EU and the US, and some more market-friendly German commentators are openly dismissing Barnier’s “no pick and choose” approach. Warnings that Brexit woes are hitting German businesses in the UK hard and outlooks are growing increasingly pessimistic, focusing some German minds on the economic consequences of inflexibility.

Even EU Commission chief Juncker has admitted that he thinks EU unity is unlikely to survive the second phase of the Brexit talks once big business starts pressuring capitals to accept British proposals on cherry picking. He fears that “in the end we’ll have several extras, several exceptions that will make Europe a mess”.

It is a fiendishly complicated negotiation, but the one big advantage is that, unlike in other trade talks, there won’t be talks on which sectors should be opened up but instead on which sectors should face restrictions. This is likely to lead to warnings from industry that will hopefully avoid most of the damage. And, as the UK government has pointed out, it’s of course a great advantage that Britain will have implemented all of the EU’s rules already, a big difference with Japan and Canada, and a reason why some optimism is warranted.

Former UK deputy PM Nick Clegg does offer some fair criticism of the UK government’s approach, when he writes that under this Tory plan, “the state anatomises a sophisticated economy into three discrete zones and gives each a different regime”. That’s correct, but it’s also the case for Swiss-EU relations. Moreover, it’s mainly the EU side demanding market restrictions, so perhaps he should focus his wrath on them.

In practice, it may be that only two sectors are identified: goods and services. That avoids the legal complexity involved in defining which exports belong to which sector. As the EU’s Single Market in services hasn’t been opened up properly, the UK also has less to lose here from demanding the right to have divergent rules and lose some market access.

It is regrettable that for now the EU is effectively refusing the UK’s offer to voluntarily copy EU rules in selected sectors to get market access there. Clearly, the EU instead wants Britain to copy its rules in all sectors. That is to choose self-harm over the kind of flexibility the EU has already offered Switzerland. Let’s hope that after Theresa May fleshes out the UK government’s approach in more detail, that rigidity starts to disappear.

The ECJ isn’t the right actor to make political choices related to trade deals

Published on Euractiv and Belgian newssite Express 

Trade deals should focus on opening up trade and should not be overloaded with all kinds of other purposes. And when politics does sneak into trade deals, it should be left to the elected politicians and not to judges, writes Pieter Cleppe.

Free trade deals are being more and more politicised. That’s not only due to the opposition against free trade. It’s also because these treaties are more and more overburdened with all kinds of issues that, strictly speaking, have little or nothing to do with scrapping protectionist trade barriers.

Then we’re not just talking about the European Commission’s plan to only sign trade deals with countries that ratify the Paris climate change accord or about the all kinds of clauses in trade deals that impose specific standards and regulations, for example on how extensive intellectual property protection must be.

This did lead to a lot of protest in the case of the proposed trade deal between the EU and the United States, TTIP, as well as with the EU-Canada trade deal CETA. There, many have expressed concerns about differences in food protection standards, obviously accompanied with a lot of exaggeration and hysteria.

We wouldn’t have this problem if trade deals would contain no standards but would simply scrap national protectionism, without aiming to align legislation and with trying to declare as much of each other’s regulation as equivalent.

All EU trade deals now include a clause stipulating that human rights are central to relations with the EU. The intentions here are obviously good, but who will be the judge of this and how strict can and should one be while judging whether or not there have been violations?

The opening of world trade in the past fifty years has lifted a couple of billion people out of extreme poverty, which has also improved the level of human rights protection. Imagine if this had not happened, because the West had refused to trade with countries where there are violations of human rights?

Yet a step further now is the EU’s top court in Luxembourg investigating whether existing treaties between EU and non-EU countries comply with international law provisions on the self-determination of peoples or the respect for human rights. This is often tricky political territory for judges.

In January, the advocate-general of the European Court of Justice, Melchior Wathelet, produced a non-binding advice on the so-called EU–Morocco Fisheries Partnership Agreement, which will have to be renewed this year or will otherwise expire in July.

Wathelet is a former Belgian politician, who’s controversial for having released a convicted child rapist early from prison in the early 1990s, which led to a major political crisis in Belgium afterwards. Perhaps his background as a politician makes him less reluctant to wade into politics as advocate-general.

In his advice, he says to consider the deal between the EU and Morocco to be invalid in so far as it applies to Western Sahara and its adjacent waters. This is because he thinks the EU violates international law, more precisely “the right of the people of Western Sahara to self-determination” and because it “recognize[s] an illegal situation” resulting from the Moroccan control of the area.

A core reason, according to the ECJ’s advocate-general, is that the deal prevents the exploitation of the natural resources of Western Sahara to benefit the inhabitants of the area.

Wathelet claims this support isn’t sufficiently generous, stating that “only 35% is destined for the Western Sahara, whereby there is no proof whatsoever that these funds effectively benefit the population of  Western Sahara”.

On the basis of this, he concludes that the “self-determination of the population of the Western Sahara” isn’t respected and that therefore fishery activities enabled by the trade deal shouldn’t be possible in the adjacent waters.

This despite the fact that a report prepared for the European Commission mentions that this partnership agreement does effectively provide several regions in Western Sahara with financial support whereby at least two-thirds of the funds go to the Western Sahara regions Dakhla-Oued Eddahab and Laâyoune-Sakia El Hamra.

Whether Wathelet has his facts wrong or not, ultimately the question is whether it’s desirable to let a Court make decisions here that are ultimately political.

It must be said that here we’re only talking about advice from the man whose job it is to represent the “general interest” in the court case and that the ECJ judges themselves still need to rule, something that is scheduled for 27 February.

Behind the scenes, Algeria has been involved in the Western Sahara dispute, so we’re talking about a sensitive geo-strategical issue, where Morocco has been convinced to at least propose a degree of autonomy.

The interests are considerable. If this Treaty with Morocco were to be legally torpedoed, we’d witness quite a bit of economic damage, as 90% of Moroccan fishing happens in Western Saharan waters and half a million jobs depend on it indirectly.

The EU accounts for two-thirds of Moroccan exports, so disturbing this relationship may destabilise a country that isn’t all too stable to begin with. Also, for EU countries this is important: about 120 ships from 11 EU member states are active in the area.

Apart from that, Morocco is also an important partner in stopping irregular migration flows and combatting terrorism, which happens to be an issue in Western Sahara itself.

Naturally, the importance of good EU-relations with Morocco is one of the reasons why the European Commission simply wants to renew the partnership and that’s also what most EU member states seem to prefer, unless the European Court of Justice throws up obstacles.

As a result of the tendency to increasingly politicise trade deals, difficult political trade-offs need to be made, for example with regards to the question to what extent trade deals with authoritarian countries are a good idea and what to do in case a territory is disputed.

The politicisation itself is already a problem, but to shift such sensitive decisions onto courts that don’t possess the legitimacy to make political decisions can endanger important trade deals. Resulting in a whole range of geo-strategical consequences.

Therefore: let trade deals focus on opening up trade and do not overload them with all kinds of other, perhaps even valuable purposes. Trade has proven to lift people from poverty and promote good neighbourship. And when politics does sneak into trade deals after all, leave it to elected politicians and not to judges.

Barnier’s hard line on transition is unreasonable and reckless

Published on CapX

At the moment, Britain and the EU are negotiating the terms of the so-called transition period, which will start next March. The British are hoping to find agreement on this by the EU Summit on March 22. But, according to EU negotiator Michel Barnier, a deal is “not a given”.

Given how important it is for both the UK and the EU27 to avoid a damaging cliff-edge Brexit, that is a pity. The uncertainty is also unnecessary, and the fault sits on Barnier’s side of the negotiating table. There is little reason for the EU not to grant Britain at least the rights the other “rule-taking” non-EU members that enjoy full access to the Single Market have. And yet, in various ways, Brussels is refusing to do so.

The first point of disagreement is on the cut-off date for freedom of movement. Britain, having already conceded that this would not be the date of the Article 50 letter, March 29, 2017, but the date of its departure, March 30, 2019, wants to stick to that date. The EU has other ideas, and wants freedom of movement to last until the end of the transition period. Barnier has described this as a “major point for us and also the European Parliament”.

Regardless of the chance of EU citizens still using this period to try to “sneak” into Britain, one thing is beyond dispute: the EU is adopting a stricter line with the UK here than towards Norway, Iceland and Liechtenstein, those other non-EU countries that enjoy full access to the EU’s Single Market.

Norway has never used the so-called “emergency brake” whereby non-EU members of the EU’s Single Market can suspend parts of the Agreement, including the free movement of people, in the event of “serious economic, societal or environmental difficulties”, but Liechtenstein has. This happened in the late 1990s. It involved a minor restriction for a very specific case and subject to EU approval, and of course Liechtenstein is tiny, but the principle is there. The EU could show a bit more flexibility here, given that Britain will be allowed to restrict freedom of movement after the transition anyway.

A second issue is the UK’s demand to have some kind of a “right of opposition”, as Barnier called it, which would allow Britain not to have to introduce a new EU rule during the transition period. The UK government reportedly thinks there are about five EU directives that have a “high likelihood of materialising” and will carry a “high risk” for the UK when it would be forced to implement these during the transition stage, while nine would be highly likely to be implemented and carry a “medium risk”.

Britain’s Foreign Secretary Boris Johnson has said that after the transition, “the British people should not have new laws affecting their everyday lives imposed from abroad, when they have no power to elect or remove those who make those laws”. He has however specified that the UK may well find it wise to take over EU rules, so not to disrupt companies’ supply chains, stressing that regulatory alignment is “all about voluntarism”. Effectively, this is what the EU has agreed with Switzerland. The Swiss do suffer some restrictions on market access and despite the fact that they often simply copy paste many EU rules they do ultimately have the right to say “no”.

Given that Britain will not face restricted market access during the transition, the EU may find it justified not to grant it this Swiss-style veto power during that period. But even then, there is no reason not to give the UK the so-called “right to reservation” that other non-EU members of the Single Market, like Norway, possess. This doesn’t constitute a right to veto but is effectively a “right to delay”, which Norway has only considered in 17 cases and only actually used once – in the case of postal liberalisation, with the country ultimately changing its mind when a new government came in. In other words: the EU shouldn’t fear this would allow the UK a real veto right, but at least the British wouldn’t be treated worse than Norway.

Of course, one could argue that being able to delay EU rules during a limited period effectively constitutes a right to veto, but then we should ask ourselves how realistic it is not only for the EU to decide “anti-British” legislation in less than two years but also whether the UK would ever seriously consider implementing that legislation, especially given the lacklustere implementation by EU member states of many EU regulations. There’s one thing we shouldn’t lose sight off: during the transition, both sides will need to act in good faith, as they’ll be simultaneously negotiating a new trade relationship. The EU shouldn’t give the impression it is keen to “punish” the UK for leaving the club by withholding it the rights the non-EU members of the Single Market enjoy.

Third, the British are annoyed about a so-called “sanction mechanism” during the transition that would not only subject the UK to the European Court of Justice – despite the fact that the UK won’t have a judge in it, but would also allow the European Union to unilaterally suspend market access for the UK. Barnier has defended this, saying “it is perfectly normal to provide for an effective implementation mechanism to settle disputes”. But why is Norway not subject to such a unilateral mechanism? Especially given that Norway does have a judge in the “EFTA Court”, which polices its deal. Never mind that the EU has conceded that there is no supranational court to police Swiss-EU relations. The good news is that the EU appears to realise all this, as it is reportedly planning to replace the clause with a less tough-sounding paragraph that will refer to the standard EU infringement process.

Fourth, Norway’s “right to be informed” about the EU decision making process won’t be available for Britain. According to the Commission, the British only “may, upon invitation and on an case-by-case basis, exceptionally attend meetings” where EU rules are decided. This is an important tool for “rule-taking” countries to shape the EU decision-making process, so why should the UK be deprived from having it?

Doesn’t it increase the chance that Britain won’t be happy to take over EU rules, which would ultimately endanger a cliff-edge Brexit that would be very damaging to the EU as well? We know the possible damage for Britain in that case but let’s not forget that 1.2 million jobs may be lost in mainland Europe in this case. Countries like Ireland, but also the Benelux nations and Germany, which do a lot of trade with Britain, should be much more wary that this “penalising” spirit does not sneak into the EU’s offers to the UK.

Last but not least, Britain will be able to negotiate trade deals with third-party countries during the transition stage, but it will need to ask for permission from the EU. Why? Again, the other three non-EU countries that enjoy full access to the Single Market can happily talk trade with anyone. In any case, a lot of Britain’s trade efforts during the transition are likely to be focused on keeping the access UK companies enjoy due to trade deals with third countries negotiated by the EU and no longer automatically available from the end of the transition stage. Given that many supply chains run between Britain and the EU27, it’s very much in the EU’s own interest that Britain can convince third countries such as South Korea and Mexico to also keep this access after the transition.

Why not make sure Britain can have its hands free to convince them to avoid disruption for the period after the transition? Why complicate the whole process with procedural tools that can be abused by the weakest chain in in the EU machine?

And more generally, why insist on terms for Britain that are harsher than those agreed with the other non-EU countries with full access to the single market? Why make a cliff-edge Brexit more likely?