Brexit Briefing No.53: the forces driving the EU's Brexit stance

There were no formal Brexit negotiations this week. Instead the focus was on the fallout from last week’s Salzburg summit and the party conference season in the UK.

In Brussels, EU ambassadors were sufficiently worried to convene an ‘emergency’ no deal meeting at the European Commission, with a rejection by British MPs of any Brexit deal being openly discussed for the first time. There is also a nagging fear that the European Parliament, always eager to muscle into the political arena in Brussels, could reject the deal.

As with any negotiation, posturing plays a big part in trying to win the other side around to your position.  However the economic shock from a genuine no deal would be a catastrophic for all sides, with global repercussions.

The UK is producing a series of notices on the effect of no deal on the UK and the challenges that will pose. On the EU side Ireland, France and Belgium would be the worst hit and if no aviation deal can be struck that contamination would be far more widespread. The UK government hinted this week that flights to the Continent would be affected. Cyprus, Malta, Spain & Portugal potentially face a summer holiday season without British tourists. For Malta, nearly 90 percent of their summer visitors come from the UK so such a scenario could be economically devastating.

Yet no deal is certainly a possibility, given the challenging parliamentary arithmetic in the House of Commons and the splits on Brexit that run deeply within both major UK parties. So getting a withdrawal agreement that MPs will back looks to be a real challenge. Westminster passed an amendment in July that effectively renders the EU’s backstop plan for Northern Ireland illegal as it would create an internal border within the UK. Any deal would need to avoid impinging on this point, even though the EU is currently insisting on it.

HOC

The opposition Labour Party has said that it would vote against any deal that doesn’t keep the UK inside the EU’s customs union. As the government has ruled that out, it effectively means Labour will vote against any deal. Most of the other opposition parties are also unlikely to support the government’s position.

Given the fact that the Conservative party does not have a majority in Parliament, it will need almost all Conservative MPs to vote for whatever deal is agreed. Despite a very broad desire in the party to deliver an orderly exit from the EU getting almost unanimous support for a deal is undoubtedly going to be challenging. Strong views on both sides of the Remain and Leave spectrum are held within the parliamentary party and achieving a deal that satisfies all of those views is likely to be difficult, although minds will focus when the government's deal is in the voting lobby in Westminster. 

The biggest threat to an orderly Brexit is not the deal between the EU and the UK, which will be tortuously difficult to finalise, but which in the end will emerge. The real threat is a deal that fails to get through the British or European Parliament.

Quite what happens in such a scenario is unknown, but anything would be possible. From a general election to no deal. A second referendum or an extension of Article 50. Or even a last minute deal, under pressure, where everything falls into place.

If the situation in the UK is uncertain, it is no clearer in Europe. Only now is Europe beginning to come to terms with what Brexit really means for the EU.  It is highly uncomfortable to address these home truths, which is why the EU has backed away from it for so long, and why secretly it hopes that Brexit will go away.

Contrary to popular opinion in the UK, the EU would accept the UK back in a heartbeat. Most countries privately mourn the UK’s loss and fear that without its influence the EU will become much more Franco-German dominated with a more protectionist, bureaucratic and regulatory focused economy.

France and Germany themselves have that the UK could become either much more competitive under the Conservatives or much more state-centred under the Labour Party. Both approaches threaten to undermine the social market economy underlined by strict state aid rules that the EU has developed for itself.

 

Singapore

The choice between Singapore west or west China is their biggest fear. Under the Singapore model, the UK would cut taxes and regulations make the economy more flexible and globally competitive. Such a scenario would drag investment to the UK and would see the EU having to deal with a highly competitive economy on its doorstep. Like all vested interests, they do not want the competition.

The alternative scenario is equally worrying for the EU. If a Labour government starts heavily subsidising and controlling large British state industries, it would be a threat to the EU countries that have to abide by state aid rules. Similar to China, which has heavily protected state industries and allowed them to produce goods cheaply to dump on the world market, a Labour UK would undermine the balance of fair trade and would force the EU to impose tariffs and restrictions on UK products. It is worth pointing out that the Chinese policy is disastrous for Chinese taxpayers, who are effectively subsidising European consumers to get cheaper goods on the back of the Chinese taxpayer funded subsidies.

That is why the EU wants to tie future British governments’ hands with single market and customs union membership. It partially explains the hard-line stance on cherry picking of the single market.

The single market, in particular, is a policy that many European governments appear to have conveniently discovered since the Brexit vote. For years, it lay dormant, driven forward only by British politicians and under attack from countries seeking to use new legislation to subvert it. The European Commission currently has 34 open cases of single market infringements against France. Many other countries actively find ways to subvert single market rules to keep products from other EU countries out. The Commission recently proposed a package to create a far more complete single market in services, which is in the process of being rejected by the European Parliament. It is also worth remembering that Norway (in the single market) has less access to that market on some fish and food products than Canada (outside of the single market) has.

Keeping the UK within close regulatory orbit of the EU remains a top priority of the remaining 27 governments, not because of the integrity of the single market, but because a hard Brexit – where the UK leave both the single market and customs union reduced their ability to lock the UK into the EU’s regulatory orbit.

The main uncomfortable truth for the EU is that Eurosceptic forces are marching unchecked around Europe. Many, including French President Emmanuel Macron, wrongly see the Leave vote as part of an intolerable tidal wave of populism that brought the world Trump, Orban and Salvini. They forget that Euroscepticism has been a key component of mainstream British political thinking for at least 25 years.

Any concessions that the EU gives to the UK has to be seen in this light. A fair deal, in their view, would justify nationalism and rejection of the European dream. It would strengthen the argument that the EU has inherent flaws and weaknesses. The EU does not want to confront these weaknesses, but they fear even acknowledging them. It would strengthen the campaigns that many other Eurosceptic forces are launching ahead of the European elections in May.

That ignores the fact that much of this populist wave is a reaction against exactly the type of policies that the EU pursues. The latest example is the attempt by the European Commission to force a mandatory refugee relocation policy that will force countries to accept refugees based on quotas decided by Brussels. This feeds deep animosity to the EU in Central Europe and beyond.

However some sort of deal still needs to be done and as some officials now realise. German Chancellor Angela Merkel told business leaders in Berlin this week that her goal is to strike a deal on the withdrawal agreement within the next “six to eight weeks” as well as the framework on what the future relationship with the UK might look like.

Keeping to that timeline is good news for the chances of getting a ‘fudged’ deal over the line. Decisions on the future relationship before Brexit will be made by a qualified majority of EU countries. Meaning that not all have to agree for it to happen.

Once the UK is out, the UK will be a third country, The Brexit file would then be an external, rather than an internal issue, and foreign policy is an area where every single EU government holds a veto, making any deal far less likely to happen.

EU leaders meet again in the Belgian capital in the middle of October, with the view of holding a special summit in November. If all sides can iron out their differences by then – and the political parties can solve their own internal difficulties on Brexit – a deal might be in sight.

They say a week is a long time in politics. Six months is, therefore, an eternity in which anything can happen.