Steer Toward A Softer Brexit

- Jul 18, 2017 -

"When the facts change, I change my mind," John Maynard Keynes is often attributed as saying. "What do you do, sir?" In that vein, those who believe that last year's referendum was a mandate not only for the U.K.'s exit from the European Union, but also for a "hard" Brexit, aka leaving the EU's single market, should think again.

The issue is not only the election held last month, which inspired little confidence that the British public had fully embraced the radical approach outlined in British Prime Minister Theresa May's Lancaster House speech. More serious is the contradiction at the heart of the U.K. government's approach. On the one hand, the British want to remain economically integrated with the rest of Europe, which is the market for over 40 percent of all U.K. exports. "Absolutely nobody is talking about threatening our place in the single market," assured Dan Hannan, one of the U.K.'s leading Euroskeptic voices. At the same time, however, the U.K. government seems determined to end free movement of people and retake control over how many and which EU nationals can come and work in the U.K.

The EU is not going to compromise on that point. The single market embodies four freedoms – of movement of goods, capital, services and labor – which are from a political standpoint indivisible. If the U.K. government wants to limit migration from the EU, it will have to forego its single market membership.

To limit the damage of such a hard Brexit, the EU and the U.K. can negotiate a comprehensive free trade agreement to cover the sectors that both sides care about the most, with less market access than single market membership. But that will require some time. The EU-Canada trade deal, which could serve as a model, took seven years to complete. In the end, its ratification was almost derailed by the regional government of Wallonia and by disinformation campaign of far-left groups in Germany.

On the U.K.'s side, the most significant obstacle is the government's continuing insistence on "retaking control." Lest businesses operating across borders see a return of costly certifications, inspections and other regulatory barriers, the U.K. will have to promise to largely abide by the rules set in Brussels.

Worse yet, a large swath of the British political class is living in denial, shaped by the grotesque tabloid headlines. ("May Stands Up to EU Bullies" is how The Daily Expressdescribed a recent EU summit.) For the U.K. Secretary of State for Exiting the EU David Davis, "no deal is better than a bad deal."

Such talk is reckless. The absence of a political mandate after the election, the lack of a clear strategy and the systematic misreading of the mood on the continent increases the odds that in March 2019, the U.K. will sleepwalk into a Brexit that will be economically disruptive and damaging to political cooperation in Europe – and by extension to transatlantic relations.

Beyond vacuous rhetoric coming from some circles in Brussels, the EU is not on a quest to punish or bully the U.K. First, while Brexit is a priority for the British, for Europeans it is only one item on a long list of issues, including reforms in the eurozone and creating a common border protection and asylum policy, to name just two.

The Europeans' priorities are obvious and not seen as controversial on the continent. The EU wants to keep the benefits of the European project primarily available to those who fully participate in it. The British are deluding themselves if they think, as Davis once suggested, that German businesses will pressure Europe's leaders into granting the U.K. special privileges in terms of market access.

It is not too late to change course. The U.K. can still leave the EU and join the European Economic Area, just like Norway or Iceland. The upside of the "Norway option" is that it mitigates the risks of economic damage created by a re-imposition of regulatory barriers to business at the end of the two-year negotiating period.

The beauty of joining the European Economic Area lies in the fact that it would transform Brexit, now a highly risky enterprise of re-engineering of the U.K.'s legal system and trade links, into a gradual process of trial and error. The European Economic Area would open the way towards "retaking control," on a case-by-case basis. Repudiating EU legislation could compromise market access in relevant areas, so the government would have to carefully weigh costs and benefits and justify its choices, instead of following a drastic, wholesale approach.

Of course, May took the Norway option off the table a long time ago because it would require the U.K. to acquiesce to free movement of people from the EU. But even that is not completely clear-cut. The European Economic Area and EU member state have to accept workers from other single market countries but they are fully within their rights to restrict access to social services, pensions or social housing, making the much-dreaded "welfare tourism" impossible.

There is no dishonor in recognizing past mistakes. If she can steer her country away from a disruptive Brexit towards the soft landing afforded by the Norway option, May might still be remembered as a significant, transformative leader. There is still time to change course.

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