Monday, May 01, 2017

Granting Britain all of the EU’s benefits is in the EU’s interest

Published on E-Sharp
Right after the UK voted to to leave the EU, many in Brussels didn’t believe it would actually happen. Some claimed the UK wouldn’t even trigger article 50. But the British government did and was supported in doing so by an overwhelming majority of Parliament. Some others thought there should be bad consequences for the UK.
By now, things have calmed down somewhat. It’s accepted that Britain will leave, safe for an unlikely major change in British politics. Many have said the UK shouldn’t be punished, understanding that in a world where EU relations with the United States, Russia, Turkey have deteriorated, it would be foolish for the European Union to have a bad relationship with the UK, whose economy is about as big as the economy of 20 EU member states combined.
Still, up till today, the prevailing idea in Brussels and the diplomatic corridors of the 27 EU capitals is that, after Brexit, the UK should have a deal which is “less good” than the one it currently has as an EU member state. If the UK would still enjoy the same kind of market access, so the thinking goes, other member states may be more likely to follow in its footsteps and leave the EU as well.
This reasoning is completely wrong. If the UK would get less market access to mainland Europe and if there would therefore be more restrictions on trade between the UK and the EU27, this would cause economic damage on both sides of the Channel. How could the European Union become more popular when it would just have caused job losses in mainland Europe, damaging the ports of Zeebrugge or Rotterdam, or the German car industry, all because of a weird political strategy of the European Commission? The Commission is typically blamed for all kinds of things it shouldn’t be blamed for, so it can rest assured it will be blamed for something it is actually responsible for.
Furhermore, it is also assumed that because the damage on the British side may be greater than on the EU side, this would somehow increase the EU’s “bargaining power”. Also this is at odds with reality. If 50.000 jobs would be lost in her country as a result of a nasty Brexit divorce, German Chancellor Angela Merkel wouldn’t get away with it just because 100.000 jobs would be lost in the UK. The latter is politically irrelevant in Germany.
Another assumption is that the EU27’s great asset in the negotiations is the ability to restrict access to trade for the UK’s financial services industry to the EU’s single market. Again, reality is different. For a start, the EU’s so-called “financial passport” isn’t as relevant for the different UK financial sectors. With Open Europe, we looked into this and concluded that it is pretty important for the banking industry but much less important for insurance firms, simply because the EU’s insurance market hasn’t been opened up, so there isn’t much to lose. For asset management, the importance of access to the EU is only averagely important.
Among politicians, there is an obsessive focus on the interests of exporters, given that they typically are much better in lobbying politicians than consumers. EU27 politicians forget that any restrictions for UK financial services exporters translate into damage for EU27 consumers, who would be stuck with less choice and less competition. Equally, UK restrictions on EU manufacturers’ access to the UK market would hit UK consumers hard.
An important aspect here is that the customers of the UK’s financial services industry are typically governments, who are funding themselves through London. But also many major infrastructure projects on mainland Europe – bridges, football stadiums, etc – are funded through the City of London, which really is a giant pot of cash lying just next to the EU27. Studieshave pointed at the importance of city of London for the economies of mainland Europe. How intelligent is it to restrict access to this? 
Then, what is the EU for, some may say, if the UK would get all the benefits of the EU without being a member? Amongst others newly elected French President Emmanuel Macron have stated that "you cannot enjoy rights in Europe if you are not a member - otherwise it will fall apart." What he doesn’t get, however, is that the point of the EU is to safeguard open trade, not to reserve it to its members. Restricting trade access goes against the heart of everything the EU stands for. The core mission of the EU is to open up trade internally and towards the world. The EU Commission’s DG Trade department is focused on closing deals with third countries not to restrict trade, but to open it. Once the EU goes down the road of actively pushing for more restrictions on trade, then the EU will be doomed. Not when it makes sure the UK keeps a lot of trade access, as this benefits EU consumers.
Without dismissing the major economic challenges the UK faces, it should be clear that EU27 countries really are on welfare. They are on welfare in economic terms, given their ageing populations, crippling tax, debt and regulation burdens and shaky banks with bad debt. They are also on welfare in security terms, given the troubling state of their armies, intelligence services and unsatisfactory integration of minorities.
If there is one mistake the EU27 should avoid, it is to let Brexit go off the rails and complicate the process with all kinds of grand strategies which then backfire. An interesting example of that is Commission officials reportedly having leaked the content of a dinner between Theresa May and Jean-Claude Juncker in a bid to paint the British government as an unreasonable negotiation partner. Rumour has it that, in response, May’s team gladly instigated a media offensive against the EU Commission, the perfect opponent in any British electoral campaign. Juncker had to openly state that the leaks were a “mistake”. This can serve as yet another example of how the European Commission really shouldn’t wade into politics.
The EU27 should learn from Brexit and realize that a member of the club is leaving because the club hasn’t been focusing on its core job: to scrap barriers to trade between countries. To buy a car in another country or to be able to enjoy the services from a foreign airline or foreign telecom operator is not something that often provokes protest, apart from maybe the grumbling surrounding the EU’s posted workers directive, which would make Western-European businesses uncompetitive – an incorrect claim, given that it’s very high national social contributions which are to blame.
Every time the EU is facing opposition, it is because it is organizing fiscal transfers, because it is imposing conditions linked to these fiscal transfers or because it’s sticking its nose into what possibly is the most sensitive topic in every country in the world: immigration. If only the EU would become what it was sold as to the British in the 1970s – a mere free trade arrangement – it could be popular again.

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