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Should/can we make Brexit work?

Gerhard Schnyder / Feb 2022

Photo: Shutterstock

 

Monday 31 January 2022 marked the 2nd anniversary of the UK’s official exit from the European Union. At this symbolically important moment, the Johnson government and other Brexiters are keen to convince the British public that Brexit is working. Thus, to mark the occasion the government published a report on ‘The Benefits of Brexit.’ The 102-page long document lists everything from rolled-over trade deals, over the new trade and cooperation agreement (TCA) with the EU itself, to the famous crown stamp mark on pint glasses as undisputable benefits of Brexit. However, despite its impressive volume, according to Chris Grey, the report simply lists “a mish-mash of things that are untrue, or true but misleading or of trivial or questionable value.” Most fundamentally, the report is deeply flawed because it does not provide a cost-benefit analysis of the impact of Brexit to date, but simply ignores any costs, focussing thus on gross benefits.

Yet, it becomes increasingly hard to deny that Brexit comes at a considerable cost for authorities and governments in Britain. The Office for Budget Responsibility for instance estimates the cost of Brexit at a staggering 4% of GDP in the long run. Then there is the lost funding for regions from the EU’s structural funds that, as it now starts to emerge, will not be entirely compensated by the UK’s Shared Prosperity Fund. And then there are the costs resulting from border controls, and other trade frictions and new red tape, that lead to the highly mediatised lorry queues at Dover. And this list does not even include the political costs, most importantly the increasingly tense situation in Northern Ireland, where the Democratic Unionist Party has moved to halt checks on goods, thus violating the Northern Ireland Protocol and putting further strain on the devolved Stormont executive.

Given all this, it comes as no surprise that – contrary to the government – a clear majority of people in the UK now seems to believe leaving the EU was the wrong decision.

However, is there a way of making Brexit work?

Leader of the opposition Sir Keir Starmer seems to think so. His announcement in November that Labour would not seek to reverse Brexit, but rather to make it work caused quite a stir. Remainers were disappointed that the Labour leader – an advocate of a second referendum during the Brexit process – was asking people to move on and accept the current situation. Many Remainers still seem to hope that a change in government will lead the UK to re-joining the EU and indeed ask the opposition to campaign on that promise. Besides the question whether that would be a good electoral strategy, there is the more fundamental question of how practical re-joining would be at this stage.

Is re-joining realistic?

To re-join the EU, the UK would have to go through the regular process of applying for EU membership. That process in itself is long and arduous. Moreover, it is almost certain that the UK would not be able to re-join on the preferential terms that it enjoyed before leaving (e.g. the rebate that applied to the UK’s membership fee). Re-joining would also require a unanimous vote of the EU Council, i.e. of all member state governments. Is that realistic? Given the continuing strong polarisation of public opinion in the UK and the virtual absence of any checks and balances on governmental power in the UK, there is the possibility that every change in government would raise the spectre of the UK triggering Art. 50. This continuing political uncertainty may put off EU member states of investing their time and resources into a process that may ultimately prove vain.

That risk, however, needs to be set off against the signal the UK’s application to re-join would send across the EU and beyond. Symbolically, it would be a massive victory for the European project and therefore it is likely that EU member states would have the UK back.

Nevertheless, the political path to re-joining seems a long and arduous one that the next General Election may or may not help to prepare. Therefore, for now at least, we do not have a choice but try and make Brexit work as well as possible. The question then becomes: Can it be made to work?

Can Brexit work?

The short answer to that question is yes. Brexit – in the basic sense of the UK remaining outside of the EU – can certainly work. Indeed, there are countries in Europe that are not members of the EU and who are not faring any worse than EU members. Norway and Switzerland are obvious examples.

The problem of course is that Norway – as a member of the European Economic Area (EEA) - has a much closer relationship with the EU than the UK has chosen after Brexit. That relationship implies much more unilateral alignment with EU law than most UK politicians are likely to accept, even though agricultural and fisheries policies are excluded. Indeed, the Norwegian example has long been rejected by Brexiters – not entirely without foundation – as ‘Brexit in name only.’

The Swiss model, on the other hand, is based on a complex set of sectoral ‘bilateral agreements’ that regulates the relationship with the EU in various areas. This model worked remarkably well after the Swiss rejected EEA membership in a popular referendum in 1992, but has gone into crisis mode in recent years. The EU has made it increasingly clear that the bilateral path was always only meant as a temporary solution on the way to Swiss EU membership. Since that prospect has become less likely since 1992, the EU has increasingly put pressure on Switzerland to negotiated an institutional framework agreement that would cover all 102 bilateral agreements. That framework agreement would also have introduced clarity on the European Court of Justice's (ECJ) oversight of the agreements and its role as final arbiter of EU law. Due to this issue, as well as concerns over EU citizens’ claims to social security payments and the issue of salary dumping through ‘posted workers,’ the Swiss government decided in May 2021 to not sign the framework agreement, which leaves Swiss-EU relationships in a limbo not dissimilar to the situation the UK is currently experiencing.

The examples of Norway and Switzerland show one thing: Life outside the EU, but in its geographic vicinity, may increasingly require close alignment with EU laws to guarantee Single Market access and avoid a state of permanent negotiations, political tensions, and uncertainty. Brexiters currently still prefer the latter in order to avoid the former. Economically, they justify that position with reference to the expected pay-offs from radical divergence from EU regulations – aka the Singapore-on-Thames approach.

Is Singapore-on-Thames an alternative?

In a sign that deep down Brexiters too are disappointed with what Brexit has delivered so far, pressures on the Johnson government have increased in recent weeks to make more of the newfound ‘freedoms.’ These pressures take the form of calls for far-reaching deregulation and divergence from EU rules. The embattled PM has reacted last week by announcing a ‘Brexit freedoms bill’ that would finally make good on the promise of a ‘bonfire of regulation.’ As the UK in a changing Europe research centre’s ‘regulatory divergence tracker’ shows, so far, little real divergence has happened and the potential for such deregulation to actually generate any benefits for the UK economy seems rather limited, or at least much more difficult to achieve than the radical deregulation discourse would suggest.

Still, the ‘Singapore-on-Thames’ trope is a powerful one pushed by the libertarian fringe of the Brexit movement. The idea is that it would be possible to use regulatory autonomy from the EU to deregulate the UK economy, lower taxes, and otherwise create conditions that would attract businesses and investments to the UK.

The comparison with Singapore, which supposedly used this strategy successfully, is flawed in many respects. Most importantly, Singapore is a country of 5.45m people, less than 1/10th of the UK’s population of 68.21m. Its GDP stood at $340bn in 2020, compared to the UK’s $2.71tn. That’s an economy only 13% the size of the UK’s. Absolute size matters here: The often-admired growth rates Singapore’s GDP has experienced have to be seen in that context. To put it very crudely, last year’s 7.1% growth in GDP for instance, meant Singapore added $24bn to its economy. Transposing that to the UK would mean the UK would have to add $192bn to its economy. Deregulation helps with that mostly by creating an attractive environment for foreign investments, e.g. by lowering corporation and other taxes (its impact on actual productive activities inside the country is less clear). Yet, given that the global pool of capital is certainly very large, but not unlimited, generating an influx of $24bn is one thing, attracting $192bn is a different challenge altogether.

Yet, beyond the fact that the UK public does actually not support deregulation – at least not in areas such as food standards -, we should not forget that Singapore follows not so much the benign ‘Entrepreneurial state’ model Marianna Mazzuccato writes about, but rather a more traditional East Asian authoritarian developmental state one. Indeed, Singapore’s political system is classified by the Economists Intelligence Unit as a ‘flawed democracy’ and ranked 58th out of 185 countries ranked in 2020. This is hardly a model for the UK to aspire to, even though some would argue it is precisely where the UK under the Johnson government is heading.

So, with Singapore-on-Thames an illusion at best and an authoritarian nightmare at worst, what models for post-Brexit UK left? I would argue that the politically and economically most realistic outcome in the long run is a softer form of Brexit.

The inevitable path towards a soft Brexit

It is highly likely that what we will see in the UK is neither re-joining the EU any time soon, nor going full-on Singapore-on-Thames. Rather, we will probably end up with a closer relationship with the EU that means closer regulatory alignment, less ‘sovereignty’ as Brexiters define it, but enhanced market access. Any future PM – whether Conservative or Labour - is likely less directly tied up with Brexit than Johnson and is likely to have their political reputation less directly staked on getting a specific version of Brexit done. Such a more pragmatic PM will very quickly realise that softening Brexit constitutes a low hanging fruit when trying to generate economic growth and jobs. Indeed, simply agreeing on an alignment on the EU’s Sanitary and Phyto-Sanitary (SPS) rules, for instance, would reduce the need for border checks and other Brexit red tape very considerably. This would reduce costs and allow UK-EU trade to bounce back from its post-Brexit low. There is simply no good reason – other than the ideological mantra of ‘taking back control’ – not to go down that road, especially because UK rules are currently still pretty much aligned on EU rules and people in the UK do not want them to diverge by the UK lowering its standards. It seems therefore very unlikely that a less ideologically-shackled PM – whether labour or tory – would resist the urge to provide much needed economic growth by seeking a closer relationships and easier access to the single market. How long it will take for such a PM to take office, of course, is anyone’s guess. In the meantime we remain hostages to the hard Brexit and trade fantasies the European Research Group (ERG) and other Brexit ultras favour.

Gerhard Schnyder

Gerhard Schnyder

February 2022

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