In the 23 June 2016 referendum, the people of the United Kingdom (UK) voted for their country to leave the European Union (EU). The UK’s new Prime Minister Theresa May has affirmed her government’s commitment to implement the people’s will. ‘Brexit is Brexit’ she said. She still has not officially started the process of the UK leaving the EU, however. This will only happen when she would formally inform the European Council of the UK’s intention to leave. This will activate Article 50 of the EU’s Lisbon Treaty; which provides for two years of talks to arrange the separation.
Before activating Article 50, PM May wants the UK to first determine exactly what it means by ‘Brexit’. What exactly will it bargain for? Her government is expected to come up with an answer before the end of the year, so that the UK could start the process of leaving the EU.
The UK generally has a choice between two main options.
The general positions of both sides are known. The UK wants to retain (most of its) access to the EU Single Market while getting the right to regulate EU migration to the UK. The EU has said that access to the Single Market is a package deal (i.e. there can be no Single Market a la Carte), and thus there can be no exception made for the free movement of labor.
At first glance, one may think that these are mere starting positions for negotiations, and that some kind of compromise somewhere in between should be possible. But the EU has a much stronger position than the UK’s, so it is much more likely that the UK will have to work within the framework set by the EU, not the other way around.
Lesson from the Greek Crisis
During the recent Greek crisis, Greek Prime Minister Tsipras assumed that the Eurogroup (the group of countries which have the Euro as their common currency) ,and the EU as a whole, could not afford to let Greece leave the Eurozone. This was based on his assumption that a Greek exit of the Eurozone (or a ‘Grexit’) will unleash a chain reaction that will put the whole Eurozone in crisis. The Greeks thus delayed agreement on a rescue package until the absolute last minute, in the belief that the EU will end up giving them the money they needed without extracting reform and austerity concessions from them.
During marathon talks on 12 – 13 July 2015, PM Tsipras. was shocked to realize that a Grexit was not that much of a worry to the EU. In fact, there were a number of countries (especially Malta and Slovakia) who wanted to throw Greece out of the Eurozone; and that other countries were open to the idea. Bailing out Greece was becoming too much of a burden for them. Also, public opinion throughout the Eurozone had turned against the Greeks, with a growing majority of people actually preferring Grexit.
Tsipras realized then that accepting the Eurogroup proposal was not the worst possible scenario. Getting expelled from the Eurogroup (and maybe the EU), and economic chaos, were much worse. Thus, he ended up accepting most of the Eurogroup’s package.
The mistake the Greeks made was to assume that they had a stronger negotiating position than the EU; and that the EU would act as they wanted. Many of the UK’s ‘Leave’ campaigners make a similar mistake.
UK Position is Weak
The ‘Leave’ campaigners said that the UK has the stronger position when it comes to trade talks because it is a big trading partner of the EU. They even said that the EU needs a good deal more than the UK does.
They correctly point out tha the EU exports more to the UK than it imports from it (44% of UK exports are to the EU, while 53% .of its imports are from the EU). What they don’t fully realize is that the EU economy is about 9 times bigger than the UK’s; and that from the EU’s point of view, trade with the UK is only a small part of its overall trade (exports to the UK make up 6% to 7% of EU exports, and only 4% to 5% of its imports). If trade talks were to fail, it would be catastrophic for the UK, but merely an inconvenience for the EU.
The negotiations will be done by 27 different EU countries, and this further weakens the UK’s position. All countries will have issues with certain parts of the deal, which all need to be addressed. Then, the fact that 11% of all UK imports is from Germany (bigger that its imports from the US, and a full fifth of its total imports from the EU), actually makes things worse for the UK; since it is only Germany which would be a bit worried if the UK bought less its products – only one country out of 27.
Once negotiations start, the parties have two years to come to an agreement. If there is no deal, the EU will just treat the UK like any other country.. This will be quite bad for the UK economy. So, it will be the UK that will be under pressure to make an agreement within two years.
Single Market Access
UK politicians keep talking about negotiating for ‘access to the Single Market’, That seems to be clear enough; but actually, it is not. There is a difference between being part of the Single Market and simply having access to it. In principle, all countries in the world have access to the EU Single Market – in the sense that they can all trade with the EU, invest in companies within the EU, and have their citizens travel to the EU. Being part of the Single Market, however, entails a deeper involvement in it. It gives the EU countries advantages that non-members do not enjoy. These include the following:
1. Goods that cross internal EU borders will not be subject to tariffs, nor to administrative, technical or other non-tariff barriers. In effect, they will be treated in the same way as locally produced goods .
2. Their companies could operate all throughout the EU, and be treated the same as local companies.
3. Their companies could hire personnel from all over the EU.
4. The EU negotiates trade agreements with other countries on behalf of all its members.
5. Their companies could bid for government contracts in all EU countries. Big companies, big non-profits and government institutions are required to be open to bids from companies all over the EU.
6. Licenses to operate that are granted in any member country are valid all over the EU.
7. Diplomas and school credits from any member country are valid throughout the EU.
8. All EU citizens are able to participate in, and benefit from, social security, health and other programs that are open to host country citizens. EU students pay the same school fees as local students.
As part of the Single Market, the UK has become a base for many foreign companies that serve the EU market. This has made London a financial center and a center for internet technology. The UK is the manufacturing base for many foreign auto makers. UK-based service companies have a significant part of the EU market. The UK people and companies have benefitted greatly from being part of the EU Single Market.
This is why the UK wants to retain many of the advantages from being in the Single Market, while taking control of migration into the UK.
The Single Market, however, is an integral whole. It will be extremely difficult for the EU to agree to the UK’s desire to leave out the free movement of labor. The poorer countries of the EU will not agree to this, especially since they don’t gain much from trade with the UK anyway.
A basic aspect of the Single Market is the body of laws that govern it. UK voters were told that Brexit meant that they would not follow EU laws anymore. But it is impossible to be part of the Single Market without following the laws that govern it.
Another important aspect of the Single Market is the financial contribution to maintaining it. EU countries will not agree to give the UK a free ride. If we take what Norway pays (which participates in the Single Market, but is not an EU member) as an indication, the UK would pay about 6 billion euros a year as administration cost for being part of the Single Market. This is less than the present net UK contribution to the EUof 14 billion euros a year, but it is still something that many Brexit voters will not like.
If the UK wants to be part of the Single Market, it must:
– accept all the laws that govern the Single Market (including the free movement of labor);
– contribute financially to administering the Single Market.
These conditions would likely be politically unacceptable in the UK; so, it will not be possible for the country to remain within the Single Market. This leaves the UK with two main options.
Free Trade Plus
The more likely option is for the UK to negotiate a ‘Free Trade Agreement Plus’.
A Free Trade Agreement (one which provides for tariff-free trade) between the EU and the UK would be ‘relatively easy’ to make. The problem would be in the details (of course). One such detail would be fishing: if UK fishermen are no longer constrained by EU fishing quotas, other countries may push for a maximum import quota for UK fish, or for the exclusion of UK fishermen from EU waters. There are many such details that need to be hammered out.
The EU and UK could also agree on a transition period during which people and companies who currently enjoy Single Market privileges would continue to avail of them. For example, UK residents already in EU countries could continue to be covered by domestic health care and other social security programs during the transition period. EU citizens in the UK would enjoy similar benefits.
There could be additional agreements made on specific matters, such as:
1. Cross recognition of diplomas and school credits.
2. The free movement of labor for specific sectors (e.g. Internet Technology).
3. Agreements on specific product categories (e.g. for wines and spirits).
European Economic Area
Another option for the UK would be for it to immediately leave the EU with a transition period during which it will remain within the Single Market. This will mean that during this period UK laws will have to continue to be in harmony with the EU’s laws, and that the UK will contribute around 6 billion euros a year to the Single Market administration costs.
This arrangement will be similar to what Norway has with the EU; Norway is a member of the European Economic Area.
This arrangement will give the UK time to negotiate a longer-term deal with the EU, and to have trade talks with other countries. An added advantage of this option is that Scotland will not leave the UK, for as long as the UK stays within the Single Market.
The problem with this is that the Brexit advocates will complain that the UK is effectively not leaving the EU, since immigration will continue as before, and the UK can’t make its own laws on a host of economic issues.
The choice is PM May’s. Will she choose to immediately negotiate for a Free Trade Agreement Plus; or will she choose the more careful route of temporary EEA status?