Europe would be mad to let Britain leave without a deal

Published on CapX

It’s hardly suprising that Brexit isn’t the top priority of the EU27 . There is the attempted Catalonian secession from Spain, Greece and Portugal have become financial protectorates of its fellow Eurozone member states, banks in Italy and elsewhere are still struggling with very high levels of bad debt, the governments of Poland and Hungary are on a constant clash with Brussels, and all over Western Europe, eurosceptic populist parties have done well in elections.

Still, as much as they may regret the British decision, the remaining EU member states should step up their game to prevent the UK leaving without a deal. Indeed, Brexit is already having a profound effect on the EU – and things, as I discuss below, can only get worse.

The “financial transaction tax” has been frozen

In 2011, the European Commission proposed this tax, which didn’t garner much enthusiasm. A limited number of member states decided to pursue the idea, with only Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain still at the table. The proposal has been widely criticised for various reasons and even before the Brexit vote led to warnings that it would endanger pensions.

Brexit has now sounded the FTT’s death knell. In July, the French Finance Minister, Bruno Le Maire, said that Brexit could bring “thousands of jobs to Paris” and that this opportunity could be lost if the tax were imposed, effectively announcing a pause.

Wolfgang Schaeuble, the then German Finance Minister, said that “quite a bit speaks in favour of the French argument to look first at how the Brexit negotiations are going”. By September, however, French President Macron seemed to have changed his mind about suspending the FTT, pledging to “relaunch” the initiative. Whatever happens now: the important thing is that it shows how future regulatory competition, which will probably only start in 2021, is already having an effect on current policy.

The rules on banker bonuses are being questioned   

The desire to lure the financial industry away from London after Brexit is not only affecting possible future legislation, such as the FTT, but also existing regulation. Ireland may revisit caps on banker salaries and bonuses at bailed-out banks, while the Dutch Economy Minister has saidthat the Dutch limit on bonuses puts the Netherlands at “a disadvantage” when attempting to attract companies from abroad. The new Dutch government has pledged to relax bonus rules in order to attract business from London.

The Netherlands has reduced its dividend taxation to 0 per cent

Dutch Prime Minister Mark Rutte has explained that Brexit is behind his government’s decision to reduce dividend taxation to 0 per cent. The logic is that when companies know that they won’t have to pay any tax on dividends they will be more likely to keep their decision making centres in the Netherlands. London-based companies may also look at the Netherlands more favourably when considering relocation.

The Northern-Ireland debate is flaring up

The Brexit referendum has given new impetus to those keen to unite Northern Ireland with the Republic. The Irish make the fair point that they didn’t ask for Brexit and aren’t wild about having a border imposed. Most British politicians, not least the Northern Irish Unionists, also want to avoid a hard border too and are keen to sort out the issue. Meanwhile, the EU Commission has showed goodwill by making the Northern Irish question one of its three priorities to make progress on before trade talks could commence.

To secure a soft border, the British government has basically agreed to Irish-European demands of a common customs union and no regulatory divergence, at least for the transition stage. Given that Ireland has been making these demands before the EU has started trade and transition talks, it does look like it won’t be possible to sort out Northern Ireland before the negotiations move on.

Naturally, Britain can’t outsource its trade policy to Brussels for ever so a technical agreement to aim for an “invisible” border when the UK exits its common customs union with the EU needs to be worked out.

A hard border in Ireland could be avoided by letting only Northern Ireland stay in the EU’s customs union, but this would effectively split the UK. It’s troubling that not only Sinn Fein, but also the Irish government and even the European Commission have proposed this.

As if Brexit weren’t divisive enough, vested interests are now trying to use it to split up the UK.

The EU’s Common Agricultural Policy is failing

Brexit could blow a 20 billion euro hole in Europe’s budget, according to the EU Commission. It’s well known that about a third of the EU’s long-term  budget, is spent on agriculture. Less well-known is the fact that more than 270 billion is spent in “direct payments” to owners of agricultural land – banks, for example, or the Queen – regardless of whether they produce or not. To put that in perspective: that’s almost seven times the amount the eurozone bailout fund used to bail out the Spanish banking system a few years ago.

We won’t have to look far to find ways to deal with the “Brexit hole”. Agriculture is an area that urgently requires pruning. The EU27 should be grateful Britain is forcing politicians in mainland Europe to finally do this.

Indeed, as Politico reports, many in Europe’s food industry expect cuts to be made to the EU’s Common Agricultural Policy (CAP) following Brexit. Propping up companies and individuals who own agricultural land isn’t high on your average Euro-citizens list of priorities.

Direct CAP subsidies have often acted as an outright disincentive for farmers to modernise. French farmers in particular have been on the receiving end here. After milk quotas were abolished in 2015, allowing more production, the French government, aided by an EU scheme, has been handing out cash to farmers not to produce milk, effectively contributing to a butter shortage in France in 2017.

Brexit and the CAP cuts it’s likely to inflict effectively reduce the EU’s scope for failing economic planning schemes like this. A new EU measure which would allow farmers more leeway before being considered as engaging in cartels in their negotiations with bigger players such as supermarket chains, has been explained by an industry source as being the result of Brexit as “the real story is about money and what happens to finance in the future. That’s really what has changed, not the debate about the supply chain”.

Fears of a cliff-edge Brexit are increasing amongst European industry

Some might be bored by the tale of the German car manufacturer who would push the German government to make sure there’s a good deal for the UK, eager to keep market access – especially as tactic was used in the British EU debate in the 1970s.

Still it’s a good example. The Association of German Chambers of Industry and Commerce DIHK just published a study revealing how a cliff-edge Brexit would result in 2.35bn euro in tariffs alone for Germany’s car industry, irrespective of the damage it would do to sales. Of course, it added that the UK shouldn’t be allowed to “cherry pick” but it’s clear who’s getting nervous here.

Ulrich Hoppe, the Director of the German-British Chamber of Commerce has stated that “an outcome without a deal would be fatal for the [Germany] economy”, explaining that “German chemicals and car industry as well as all other exporters to UK” would be hit, calling a transition very important. Also the Confederation of German Employers’ Associations has come out stressing that “we need clarity”.

Emma Marcegaglia, president of pan-EU business federation BusinessEurope, has warned after a meeting with Theresa May on Monday that “business is extremely concerned with the slow pace of negotiations and the lack of progress only one month before the decisive December European Council…”Business aims to avoid a cliff edge and therefore asks for a ‘status quo-like’ transitional arrangement with the UK staying in the customs union and the single market, as this will best provide citizens and businesses with greater certainty.”

Now guess what: the UK has practically suggested such an arrangement, but the EU is still haggling over the details of what can constitute “sufficient progress” in ongoing negotiations on the divorce bill and citizens rights. Some on the EU side assume that time is on their side, but given how trade benefits both sides, one cannot really “win” here by going against the interests of the other side.

WTO tariffs threaten 1.2 million job losses in the EU27 alone, according to one estimate by KU Leuven University. Even if this may be inflated and even if Britain may be hit relatively harder: such stats are slowly focusing minds on the Continent.

As I’ve argued before, Brexit could happen without major disruption for citizens or businesses. The UK has already made major concessions, effectively suggesting solutions that the EU isn’t likely to oppose. Now the EU side must also move if it wants to minimise the disruption that Brexit is about to inflict on the member states.