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.

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.