Despite everything, Brussels and the UK largely agree on how to implement Brexit

Published on BrexitCentral

When Theresa May delivered her grand speech on Brexit in January, this was received by many as the Conservative government pushing for a “hard Brexit”. While presenting their own view on Brexit, Labour have pledged to “fight hard Brexit”. Meanwhile, the European Commission has been trying to paint the UK government as an unreasonable partner, by leaking some of the discussions between May and Commission President Jean-Claude Juncker.

In reality, however, despite the fact that there is a risk that negotiations go off the rails, the EU and the UK aren’t that far apart. The simple reason is that there aren’t so many different ways to implement Brexit. In what follows, I provide an overview of how the Conservative Government plans to do it. This was entirely predictable and leaves few alternatives, apart from perhaps a disruptive “no deal” scenario.

By Spring 2019, the EU and the UK will on the one hand need to agree on the terms of Britain’s exit from the EU club: can EU citizens stay in Britain and can UK citizens stay in the EU? How high is the outstanding bill the UK would need to pay? On the other hand, the UK’s trade status needs to be agreed. Will British companies still be able to export to the EU and under what conditions and how will their Continental counterparts fare when exporting to Britain?

I. The exit deal

Two main things need to be agreed. First of all: the money. There, the European Commission is showing itself from its pettiest side: leaking calculations amounting from 60 billion euro up to 100 billion euro gross, even as EU Commission negotiator Michel Barnier publically denies that it has made an official estimate but only wants to agree a calculation method, which wouldhowever involve going back as far as 2007.

That said, the EU is known for demanding an arm in order to get a finger, and even EU funded think tank Bruegel admits that the Commission is leaking “the most extensive possible liabilities for the net bill”.

Moreover, the EU now only wants there to be “sufficient progress” on the exit negotiations before starting to talk about the trade deal, a notion which can be stretched and would be decided by Barnier. He seems more reasonable than Juncker, who is keen on having a deal on an exact amount before trade talks can start. Furthermore, despite the fact that the House of Lords has claimedBritain is not liable to pay a single pound or euro to the EU under international law, the UK government has also stated it wants to have a good relationship with the EU and is happy to “discuss in detail what the rights and obligations are”.

Moreover, in the grand scheme of things, these amounts are relatively small. Few people therefore think that, for all the drama about money, it won’t be possible to reach a compromise somewhere in the middle. After all, the EU’s core business is horse trading.

The second issue to be settled in the exit deal is the rights of citizens. Also here, both sides are very likely to agree. The UK government has basically said it will guarantee the rights of the 3 million EU citizens in the UK but it is only waiting for a reciprocal guarantee by EU countries that British citizens can stay there as well. A fair request, which is very likely to be honoured. Spain, which hosts most British citizens, has already made clear it will be more than happy to allow the British to stay there, while they would also keep their social security rights, if the UK would replicate that. A no-brainer for Spain, which, despite the drama over Gibraltar, is one of the biggest proponents of a friendly Brexit, given the economic interests the British in Spain represent.

So why is there no deal about this then just yet? Because of two things: first, the EU wants to follow its own procedure, whereby no negotiation has been possible before the UK triggered the start of the negotiation, in accordance with Article 50 of the EU Treaty. Second, because the EU hasn’t been able to restrain itself and is now demanding that the European Court of Justice gets a say over the social security and residence rights Britain would guarantee to EU citizens.

That’s not very reasonable. Switzerland, which even accepts EU freedom of movement, something the UK most certainly won’t do after Brexit, does not have to accept ECJ rule, while the “courts of England and Wales” are named as arbiters in commercial contracts across Europe and the world, so it is somehow bizarre for the EU not to trust them to make the UK government respect the exit terms.

Logic dictates that in order not to risk a deal for its 3 million citizens, the EU will need to drop this excessive demand, likely yet another example of the EU demanding an arm in order to get a finger. That’s not to say that working out the details will be easy or that the legal position of EU citizens would remain entirely unchanged, but it should be seen as highly unlikely that no deal would be found here.

II. The trade deal

Much more challenging is to agree a long term bilateral framework in less than two years. But even here, the sides aren’t that far apart:

– First of all, the UK government has pledged it wants to be able to restrict freedom of movement. While already having stated Britain will remain open to immigration, the UK government wants to be able to fully control who can enter Britain and who can not. This was only possible by leaving the EU – it was a cornerstone of every different faction of the Brexit campaign and is also supported by Labour. One can’t go more predictable than this.

Interestingly, the biggest proponents of freedom of movement in the EU aren’t as passionately in favour of this any more. The Czech Foreign Minister has saidthat “due to [freedom of movement] the EU may break up.” The central European ‘Visegrad’ countries seem to have shifted towards Hungary’s position, which is that it shouldn’t be too easy for citizens to migrate, as this may aggravate the “brain drain” problem. Most likely, anyone who wants to leave will leave, perhaps not to the UK then, but this development is quite a game changer. It means migration is becoming less of an UK-EU issue and more of an intra-UK issue where employers are – rightly, I think – stressing the economic benefits of open migration.

– Secondly, the UK doesn’t want to be “a part of” the EU’s single market but it wants to secure as much access to it as possible. This apparently came as a surprise to many but should it really? For if the UK would be “a part of” the EU’s single market or “European Economic Area”, just like Norway, Iceland and Liechtenstein but unlike Switzerland, this would mean that the UK would copy and paste EU rules without being able to vote on them.

Norway’s former PM, Jens Stoltenberg, who is now the head of NATO, has described his own country as a “fax democracy”, as it basically takes over all EU rules in return for full EU market access. It can be argued that this isn’t a bad deal for Norway, given that it would only have little say over EU rules as an EU member and given that it still can influence and delay the implementation of EU rules, while demanding to adapt those to the EEA.

Clearly, to become like Norway is a total no-go for a country like the UK, which is keen on its sovereignty, at least as a permanent arrangement, as we’ve pointed out many times at Open Europe. For the same reason, Switzerland has opted for a “bilateral model”, effectively negotiating on a sector-by-sector basis whether it takes over certain EU rules and, if it doesn’t, whether it still keeps market access.

Given that also Labour doesn’t want the UK to be “in” the single market but only to gain as much access as possible to the single market, this model of perpetual negotiation is likely to be the future of EU-UK relations. Surely it will be in an adapted form and perhaps with more, perhaps with less market access, depending on whatever the UK manages to negotiate. In any case, those saying the UK should be “in the single market” should realise that this will mean Theresa May constantly having to get on the phone to remind Jean-Claude Juncker to fax over EU rules as quickly as possible for Parliament to eagerly implement them.

The EU has now completely accepted that Britain won’t be in the single market, and understands fully well that the negotiation will be about the degree of access to the single market. Newly elected French President Macron is probably not going to differ much from his predecessor on this. During Cameron’s negotiations he was quite friendly to the UK, but more recently he 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. As I have argued here, it is in the European Union’s interest to grant a lot of trade access to Britain, not least because if the EU were to restrict investment from the City of London, it would inflict a lot of self-harm. This line of thinking is gaining ground. German Finance Minister Schauble recently said that it is in Europe’s interest that London remains a “strong” financial centre after it leaves the EU, while Germany’s German banking watchdog Bafin has warned against rushing to move euro clearing out of UK after Brexit. Even Michel Barnier has warned that any Brexit-developments related to the City of London shouldn’t lead to financial instability in the Eurozone. Then again, of course the EU may just go full political and inflict self-harm, but at least we should recognize there are some positive forces here.

– Thirdly, Britain doesn’t want to stay in the EU customs union. Turkey is the only country outside the EU that has a customs union with it, and as a result, it cannot close its own trade deals. It’s hardly a surprise that the UK government is keen to close its own trade deals. With Open Europe, we’ve pointed out that the UK has massive opportunities to boost its trade after Brexit, especially with China, India, Pakistan, Bangladesh, Israel and Nigeria. The UK government has been spreading around lists with countries who have expressed the desire to do a trade deal with the UK. Is anyone surprised? Is there anyone who can imagine the UK would keep on outsourcing its trade policy to the EU after Brexit?

A complication will be that some kind of technical customs arrangement will be needed to avoid a “hard border” between the UK and Ireland. Both the UK government and the European Commission have gone great lengths to stress that they absolutely want to do everything to achieve this, to guarantee peace in Northern Ireland, so there is ground for optimism here. The EU’s customs borders between Norway and Switzerland function relatively smoothly, so there is no reason why such an arrangement couldn’t be found for Northern Ireland and the other customs borders of the UK. In all likelihood, if there is a delay in this process, it may not be coming from the EU side but from the UK side which may demand to stay a little longer in the EU’s customs union in order to adapt its own customs bureaucracy to that, as we have suggested.

– Fourthly, in terms of defence and security cooperation, the EU is unlikely to spoil the prospects for cooperation, simply because Britain is so important in these two areas. Surely, a lot of technical challenges will come up, and also here there is the EU’s demand for the ECJ to have a say, but there is a firm belief on both sides that Brexit should in no way mean the end of cooperation with regards to counterterrorism, defence, police or justice matters. The UK will likely try to move to an opt-in model in matters of justice and home affairs cooperation, and even if the UK may not get everything it wants, its importance in this area should make it possible to achieve a deal with the EU.

What about time pressure?

It’s one thing that the EU and the UK may not be too far apart on how they see their future relationship, but it’s quite another to work this all out in less than two years. March 31^st 2019, when the UK automatically leaves the EU – unless the UK and the EU27 decide to extend it for another year – will be a real cliff-edge point.

Here most observers agree that two years may be very short. It took Switzerland about eight years to work out a bilateral framework with the EU after its population rejected being a member of the single market in 1992.

Many people think the UK will secure less market access than the Swiss, given how it may have hurt the feelings of some EU leaders by voting to leave. To Britain’s advantage, it can be said that it is an important geo-strategical player in a world where EU relations with the U.S., Russia and Turkey are less friendly than before, that it has all EU legislation already in place to start with – given that the UK is likely to copy paste all EU legislation into domestic law before it exits the EU – and that any EU restrictions for the City of London would drive up the cost of investment in mainland Europe – meaning this isn’t such a strong card for the EU as it thinks it is.

Obviously, if both the UK and the EU would simply grant unilateral trade access to each other, we wouldn’t even need two years and even less this perpetual horse trading, but unfortunately we are living in a world of managed trade, not free trade. So if it is then managed, it is better to make sure that it’s managed in a smooth way. This means some kind of transitional arrangement will be needed.

How could a transitional arrangement look?

One option is for Britain and the EU to agree by April 2019 which sectors would suffer market access and which sectors wouldn’t for the next five years or so, but apart from the technical complexity one may also wonder what the point is of negotiating something only for a temporary period then. Therefore, I think it really will be all or nothing: either the UK simply keeps all market access or it loses it all. That’s if there is no deal and the UK falls back on WTO terms, if it by then has adapted its WTO status. Any partial market access would necessitate extensive and complex negotiations which are very hard to complete in only two years.

Of course, the EU will only grant full market access to a non-EU member under one condition: that the UK after it has left the EU takes over all changes to EU legislation automatically, without being able to vote on it – as it will then no longer be an EU member. Interestingly, this precise option is reportedly being considered by the European Commission, Politico has reported. Interestingly, the news site also obtained a statement from a UK government source that the UK does not exclude this. To be clear: I am not advocating this, as I’d prefer to see both sides granting unilateral open trade to each other, but it looks like a messy solution along these lines would be the politically convenient way out of the conundrum.

This basically would provide the UK a similar status as Norway, but only for a temporary period. It can be expected that the UK would never accept this unless there is a strict time limit to it, to create a new cut-off point, for example after three years in 2022, to give the EU an incentive to actually agree a bilateral framework. The UK used to be in EFTA before it joined the EU. EFTA currently only has Switzerland, Norway, Liechtenstein and Iceland as its members. The latter three are subjected to the “EFTA Court”.

Technically, if this option were to be realised within the same legal framework as Norway, which seems to be the easiest way, the UK would first need to join the European Free Trade Association (EFTA) after it has left the EU in order to then re-join the European Economic Area as an EFTA member. Legally, there are no major hurdles to this, but of course both sides may prefer to go for a similar, newly-created framework outside of EFTA.

Why would Britain agree to this?

First of all, UK full market access to the EU’s single market would be guaranteed.

Secondly, EFTA members that are in the EEA, like Norway, may not be able to veto EU rules but they can delay them. If the EU comes up with some new piece of banking legislation the UK doesn’t like, it would simply be able to delay implementation until the end of the temporary period during which the UK has a similar status as Norway. In short, during this temporary period, the UK would have a de facto veto over all EU rules and would even be able to delay the implementation of EU decisions agreed with qualified majority voting – something it couldn’t do as a full EU member.

Thirdly, the UK would be able to close trade deals, as it would no longer be in the customs union. It would however take some time grandfather or renegotiate the Free Trade Agreements the UK had via the EU, which would cease to be in force after the UK’s exit, as there are 60+ deals with 30+ countries. Perhaps this is another consideration, apart from the challenge to adapt the UK’s custom bureaucracy, why Britain may take a bit more time to leave the customs union. The UK could technically re-enter the EU customs union for a while right after having left the EU.

Why would Britain refuse this option?

Obviously, the UK won’t like the fact that it would be subject to the EFTA Court, even if it would be less intrusive than the European Court of Justice (ECJ). If the Norwegian model isn’t used to apply this solution, the UK may even be subject to the European Court of Justice, which is even more intrusive than the EFTA Court. Switzerland has always refused to be subject to such a supranational court, but the UK may perhaps go for it given that it would only be during a temporary period.

UK Prime Minister Theresa May’s decision to call a general election is probably inspired by the consideration that it may be easier to make some concessions after the election rather than before, apart from Labour’s weakness in the polls and the desire to increase the number of Conservative MPs to obtain a more comfortable majority.

Perhaps then the EU will respond to the UK’s flexibility to accept a supranational court for the transition period by allowing it to restrict freedom of movement to a certain extent at least. Not only will the UK be able to do this anyway at some point but the UK could also make the point that EFTA and EEA member Liechtenstein has been allowed to do so, so any EU claim that this would be absolutely impossible for whatever legal consideration would therefore not be credible.

Making EFTA great again?

When the long term bilateral framework has then been agreed, the UK could leave the EEA again but stay within EFTA. Some preliminary force could be given to the EU-UK FTA after the signature by the 28 heads of state and government, allowing the national and regional parliaments as much time as they need to rubber-stamp it, in case their consent is required.

The UK joining EFTA would increase the weight of the organisation. EFTA could become an alternative in the – now unlikely – event other EU member states choose to leave the EU. EFTA membership could also be presented as a prize to the six Balkan countries that aren’t in the EU yet and perhaps even to Turkey. When public opinion in the EU is happy, some of these countries could then join the EU, but at least they wouldn’t get the feeling that they were not making any progress in the meantime. These countries then wouldn’t see EFTA as a second rate club, given that the UK would have preferred this over EU membership. In this way, Brexit could put the relations between the UK and mainland Europe on a more friendly footing, turning Britain from a bad tenant into a friendly neighbour, while it may help to stabilise the EU’s neighbourhood. At least, that is one relatively benign outcome that may well still fail to materialise, but is at least still on the cards.

Unilateral free trade is the way to go for both EU countries and Britain

Published by The Conservative

How to make the EU popular again?

In the course of the last year, the UK has been “threatening”, according to some, to go for the so-called “Singapore-option” in case the EU would be inflexible during the negotiations on the UK’s exit from the EU and on its trade status after the exit. In particular, UK Chancellor Philip Hammond has suggested that the country may cut taxes in retaliation for the EU complicating Brexit.

First of all, it should be questioned what would be so bad for the EU in case Britain would do this. A stronger UK economy – which would bethe result of the UK government relaxing the tax burden on those who are creating wealth – would logically also benefit the economies ofmainland Europe, as these trade extensively with the UK. The proverbial “German car manufacturer” would be able to sell even more cars tothe British than before. It would also put pressure on EU governments to lower their own corporate tax rates.

Secondly, the UK has already been lowering its corporate tax rate before the Brexit vote, as a result of international competition. This happens amid similar corporate tax cuts or plans to do so as a result of global competition by the likes of Finland, the United States, Belgium, theNetherlands, France, Japan and Italy. Even German Finance Minister Schauble has promised to cut corporate taxation, oddly enough not longafter w  arning the UK not to do so in the context of Brexit.

In short, the UK may or may not have lowered its corporate tax rate after Brexit. What’s however much more related to Brexit and where it may indeed lead the UK to the “Singapore route”, is trade policy. Britain will be able to decide its own tariffs and it will be able to conclude trade deals on its own, as this power will be transferred from the EU level after the UK will have left the customs union, which may happen only some time after the UK’s EU exit, likely in April 2019, given how Britain needs to adapt its own customs bureaucracy first.

One of the main characterics of Singapore is its policy of unilateral free trade, to a great extent at least, something it has in common withHong Kong and South Korea. Whereas there are many things that could be improved in Singapore, starting with its lack of free speech even when it comes to the city state’s economic policy, its trade openness is clearly the core factor having contributed to its enormous economic growth during the last 50 years.

So why are so many people against unilateral free trade?

Many people feel it is somehow unfair to allow market access to businesses when they are coming from countries that do not offer the same kind of market access in reciprocity. China, for example, obviously does not practice free trade. Instead, it has a corrupt protectionist state-driven economic model. That model is however already a massive step forward as compared to what China was before it opened up to theworld in 1978. If the West had kept its door shut until China somehow magically would have converted to Western liberalism, no 700 millionChinese would have been lifted out of poverty and no cheap products would have been enjoyed by Western consumers, helping them to cope with the ever expanding tax and regulatory burdens.

Then – Europe’s and America’s protectionist populists may remark – Western openness to China surely has eroded the West’s manufacturing base, hurting the middle classes badly? That’s an incorrect assessment. The problem is not so much that businesses have chosen to move to countries where people are still willing to do the hard work needed to produce some basic materials and that this has destroyed jobs in theWest. The real problem is that due to the burdensome tax and regulatory policy choices of the West – also in the U.S., where the corporate tax rate has risen to 35% - not enough new jobs have been created. While China has been experimenting with elements of capitalism, the Westhas been lured into adopting elements of socialism, despite the evidence of the massive failure of this model of development in Russia and many other countries.

When one would take it to its logical conclusion, then the more reciprocity is inserted into trade policy, the closer we would move to theworld’s common lowest denominator and to the level of openness of Zimbabwe and North Korea.  

Surely, some middle way should be found, some may say. In order for companies to grow into world players, they may need some state protection first, the thinking goes, and when they have grown up it’s fine to stop protecting them. Here’s how to deal with this argument: while it’s true that some companies do benefit from protectionism,  one should look at the total cost to the economy.

First of all, protectionism makes sure that consumers are faced with either less choice or higher prices of products and services. Secondly, companies that do import bear the brunt– and these days it’s getting harder and harder to distinguish between “importers” and “exporters”, given the ever more complex cross-border supply chains in many industries. Protectionism really distorts market processes, effectively reducing economic prosperity. To deal with the restrictions, companies need to find second rate service providers or pay more for certain goods than they would have otherwise. In orthodox economics, one needs to look at the interest of the consumer, as the French (!) 19^thcentury economist Frederic Bastiat has so eloquently pointed out. Why? Everyone is a consumer, plain and simple.

Perhaps then unilateral free trade would mainly be good for the strong in society, some may object. Also this has been refuted by evidence. Open Europe’s very first research paper back in 2005 concluded that EU protectionism mainly hurts society’s poorest members, given how they spend the highest percentage of their income on food and clothing, as compared to wealthier income groups. Food and clothing are precisely the kind of items made more expensive as a result of the EU’s protectionism.  

Then isn’t this a geostrategical matter? Shouldn’t the European Union – or Britain after Brexit – shield off its agricultural markets and shower it with subsidies just because food is such an important thing? We wouldn’t want to have our food supply being shut off by Russia, would be? Also here the facts reveal the obvious: When New Zealand opened up its agricultural sector at the beginning of the 1990s, food production tripled. In contrast, while their counterparts in New Zealand are thriving, Europe’s dairy sector has become ever less competitive. That’s no surprise, given how they are forced to operate in the context of the EU’s plan economic model for agriculture. Protectionism precisely is what undermines the vibrancy of our agricultural sector.

Opening up trade unilaterally isn’t only about slashing tariffs on imports to zero these days. It’s about allowing goods to be imported easily, making the process of inspecting them at the border as smooth as possible. It’s about allowing services and goods providers from other countries to offer their services in a convenient way, getting rid of the unnecessary bureaucracy to buy a car in another country or to buy insurance from abroad. It’s about a predictable, open and smooth process for immigration. While the differences in levels of wealth in today’s world may still be too big to allow completely unrestricted migration, there is no reason why people who apply for a work visa shouldn’t get a quick answer or why the process shouldn’t be fluid for businesses. 

Brexit offers an opportunity to go for unilateral free trade, also to the EU:

With Open Europe, we’ve pointed out that the UK has massive opportunities to boost its trade after Brexit, suggesting it should prioritise China, India, Pakistan, Bangladesh, Israel and Nigeria. These opportunies are just as great for the EU27, however. The EU should stop trying to overload the trade agreements it’s trying to negotiate with all kinds of technical standards and understand that countries won’t be lining up to trade with the EU if it insists that they need to take over EU regulation first. Also, the UK or the EU should try to convince protectionist countries like China, who will not accept a complete opening of their markets, to at least open certain sectors of its economy or adapt its regulations for a specific sector so to allow foreign companies to provide their services to the Chinese. If EU-US trade talks for the “TTIP”- deal would be revived, why link opening of agricultural markets – a thorny issue everywhere in the world really – to the opening of other markets, which countries typically are more keen to open?  

Also with regards to opening up internal trade, there is much the EU27 can still do. It should learn from Brexit and realize that a member ofthe 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 EU member state or to be able to enjoy the services from a foreign airline or foreign telecom operator is not something that often provokes protest. Every time the EU is facing opposition, it’s because it is organizing fiscal transfers, because it’s imposing conditions linked to these fiscal transfers or because it’s sticking its nose into possibly 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. The EU’s insurance market hasn’t been opened up. Its attempt to boost the free flow of services got stuck more than 10 years ago. Why not have only a limited number of EU countries having their services markets opened up for each other, avoiding the approval by the likes of Germany, who really get nervous when hearing the idea of tolerating someone qualified for something with a non-German degree? And if the EU would keep on failing to close large scale trade deals, why not allow single member states to try their luck? Iceland, Norway and Liechtenstein are part of theEU’s single market but can close their own trade deals already anyhow.

In conclusion: A new push is needed to reinvigorate Europe’s sclerotic welfare states and more trade openness really is the way to get this going. As multilateral trade deals and grand bilateral trade agreements have proved to be truly hard to close, unilateral free trade hasn’t beenproperly tried in Europe. With Brexit, the UK has the chance to do so and EU countries can be inspired by the success of this.

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.