Brexit: The calm before the slog | The World Weekly
A country that works for everyone” was the theme of this week’s Conservative Party conference. Such slogans usually carry little meaning. When the opposition Labour Party met for its annual gathering in Liverpool last month having nearly torn itself apart it claimed to be “working together for real change”. But when Theresa May, the new prime minister, gave her key-note speech on October 5 she confirmed that she intends to deliver a sharp break not just with the EU but with her own party’s recent past.
Gone is the economically and socially liberal agenda of David Cameron, who resigned after losing the EU referendum in June. In its place, Ms. May set out a “programme for government to act to create an economy that works for everyone” through state intervention and a crackdown on corporate greed. In a not-so-veiled swipe at her Eton-educated predecessor she used the word “privilege” seven times, while castigating politicians and commentators who find “patriotism distasteful” and “concerns about immigration parochial”. Those same commentators wondered how the Conservatives had come to resemble Nigel Farage’s UK Independence Party.
Ms. May is determined her tenure will not be defined by Brexit, but the starting point for her domestic programme is the referendum itself. The result was “not just a vote to leave the EU”, she said, but a sign of “something broader – a deep, profound and often justified sense that many people have today that the world works well for a privileged few but not for them”.
A clean break
After three months of prevarication during which she said little more than “Brexit means Brexit” and slapped down colleagues who dared utter anything more substantial, Ms. May used her conference speeches to lay down two red lines in the forthcoming negotiations: complete control over Britain’s borders and a refusal to accept rulings from the European Court of Justice. Barring an unlikely change of heart among the remaining members, in practice this means renouncing membership of Europe’s single market, which provides for free movement in goods, services, capital and labour. Since Foreign Secretary Boris Johnson and others talk of striking free-trade deals around the world, Britain will also leave the customs union, which erects a common external tariff.
The precise texture of Brexit will emerge during the negotiations, but it will clearly be of the hard variety. Eurosceptic Tories have completed an extraordinary coup in which their agenda, once considered fringe, has become national policy. John Redwood, a member of Parliament and long-time critic of Brussels who served in John Major’s cabinet in the mid-1990s, told The World Weekly that remaining in the single market in exchange for budget contributions and abiding by EU rules, the so-called Norway option, would have betrayed the 17.4 million people who voted Out. "There is no such thing as a hard or a soft Brexit," he said. "The UK voted to leave the EU and that is what the PM has promised to do."
Investors and traders were less happy with the prime minister's tough talk. Ms. May, Mr. Johnson and Brexit Secretary David Davis all boasted on Sunday that the UK had the fifth biggest economy in the world (measured at market exchange rates). By Tuesday this was no longer true as the pound tumbled on speculation about a hard Brexit, relegating Britain into sixth place beneath EU members France and Germany.
Ironically, the clean break that many businesses fear has in part been made possible by the economy's composed response to the vote. Had markets continued to lay siege after the initial panic and growth stalled, the new government might have pursued a less drastic severing of ties. Straight after the vote most indicators of activity and confidence pointed towards such a slump, but since mid-August the news has generally been positive, capped last week by official figures showing the service sector grew at an accelerated rate in July. The first estimate of overall growth since the referendum is not due until October 27, but the landing appears to have been cushioned by the speedy transition to a new government as well as stimulus from the Bank of England and momentum gathered in the first half of the year.
This continued recovery has led Brexiteers to declare victory over the experts they disparaged during the campaign. But their opponents are not ready to concede defeat. “We are in a period analogous to the ‘phoney war’ when it comes to Brexit: a period in which we sit, wait and hope for the best,” Victoria Bateman, an economic historian at the University of Cambridge, told TWW. “Along the way, we are fooling ourselves into thinking that Brexit will unleash new opportunities for Britain. The most likely outcome is a retreat from the world, and find me an economy that has gone down this path and, in the end, become successful.”
Over many years, even a slightly lower annual growth rate compounds into significantly lower living standards. In a paper from August the Institute for Fiscal Studies, a respected think-tank, estimated that by 2030 the UK will sacrifice a potential 4% of GDP if it trades with the EU under World Trade Organisation (WTO) rules as opposed to maintaining Norway-style access to the single market as part of the European Economic Area. As part of a free-trade area, growth would be somewhere in the middle of these two extremes. Crucially, unlike most free-trade deals the single market tackles the non-tariff barriers that form the biggest obstacle to modern trade and are a particular hindrance to the service sector that powers Britain's economy.
The UK joined the European Economic Community as the sick man of Europe in 1973 but has since regained its verve, a recovery Dr. Bateman attributes to the competition British firms have faced from continental companies producing the same products. “International competition and outward orientation is vital to keeping any economy moving forwards,” she said. “Do we really think that turning our backs on foreign talent will be good for our economy? And, whilst some suggest that any potential loss of trading relationships with the EU can be offset by negotiating trade deals with countries from Canada to New Zealand, economic history tells us that we’ve already tried that road – and found it wanting.”
In for the long haul
The phoney war is just beginning. Ms. May confirmed she will trigger Article 50, the legal mechanism through which the UK extricates itself from the EU, by the end of March 2017. This gives two years to sort out details such as final budget payments and pension rights, after which Britain will officially quit the bloc. This small window hands an advantage to the remaining 27 member states, since Britain is likely to lose more from a disorderly exit.
These exit talks are just one leg of a diplomatic marathon that is likely to consume the British government for the next decade. As Charles Grant, director of the Centre for European Reform think-tank, notes, leaving the EU involves at least six separate negotiations. Brussels is refusing to discuss a free-trade agreement, a process that typically takes several years, until after Article 50 talks are complete, leaving a period during which trade will be subject to tariffs and other restrictions. To avoid this ‘cliff edge’ both sides are under pressure to reach an interim agreement that will ease trade during this period of limbo. On top of all this, they are keen to maintain close security ties and London will eventually try to replicate the free-trade agreements the EU has reached with over 50 other countries. To do so, however, it must first strike a potentially tricky deal with the 163 other members of the WTO on establishing its own quota and subsidy allocations, which are currently tied up with the EU’s.
The government is ill-prepared for the task. In a scathing recent report the Institute for Government, a think-tank, argued that the division of Brexit responsibilities into three separate departments risks creating fragmentation and incoherence. “There’s also concern that the civil service lacks the skill needed to successfully extract Britain from the EU – I’ve been hearing that the Brexit departments have been making increasingly desperate offers to private sector lawyers who are demanding extortionate salaries,” said Alice Buckley, a senior account executive at public affairs consultancy Westminster Advisers. Others fear Ms. May's reputation for micro-managing will create blockages.
Remaining member states are in an unforgiving mood, as are the European Commission and the Parliament. The former will lead talks on both the exit deal and any trade arrangement, both of which must be signed of by MEPs. Significantly, attitudes have been hardening in Berlin, the bloc’s unofficial leader. Brexiteers argue that the EU will eventually cut a good deal out of economic self-interest, often citing German car exports to the UK. But this may misunderstand what is motivating EU leaders, as Mr. Grant discovered on a recent tour of the continent. Above all, many of them fear that if Britain is granted special status it will encourage other populist eurosceptic movements such as France’s Front National, and that the contagion could ultimately bring down the entire bloc. Brexiteers need not look far to see how politics can trump economics.