Yves here. I beg to differ with Weeks on some of his assumptions. First, his cheery view that a UK trade deal with the EU can be achieved faster than CETA is optimistic. The reason is that what most people loosely call a “trade deal” would in the case of the UK and EU, include a deal on services since financial services are the UK’s biggest export to the EU. Services deals are much more difficult and time consuming than pacts involving physical goods. And on top of that, the Foreign Office has been hollowed out, and woefully undermanned to handle Brexit, let alone the at least 759 other agreements it will need to think about redoing when it departs the EU.
Second, his view that the German view will drive the talks. While Germany is influential, it is less so when it is not writing checks, as it was in the case of the Greek bailout. Each country has a vote on Brexit matters which means in theory any one could lodge a veto. In practice, the EU generally follows when France and Germany agree, because their native interests and inclinations are enough at odds that if they come to a unified position, the other nations conclude it can’t be all that bad. And let us not forget at a critical juncture when the 2015 Greece negotiations had broken down completely and the consensus was to let Greece default, it was Hollande, not Merkel, who got everyone back to the negotiating table.
Nevertheless, even he with his more cheery views generally confirms what we and many others have been saying: that May’s “no deal” talk on Brexit is sheer bluster.
By John Weeks, Professor Emeritus, School of Oriental & African Studies, University of London, and author of ‘Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy‘, Anthem Press. Originally published at Open Democracy
A year ago this month the referendum campaign to leave the European Union ended with victory for the EU leavers. Almost immediately both the winners and the losers embarked on a second campaign, to convince the British public that the process of leaving (“divorce”) would be protracted and expensive, possibly leading to untold disasters.
For the pro-EU side, the “lengthy-and-costly” narrative allowed claims “I told you so” – they told us during the campaign that leaving would devastate the UK economy and, they assert, how right we are. For leavers, Brexit disaster serves their broader interests, especially in the current election campaign. Their narrative also asserts a costly and protracted process that requires a strong and stern leader to stand up to the fickle and vindictive “Europeans”.
In the last days of the election, the Conservatives have placed Brexit disaster at the centre of their campaign with Theresa May billed as our unlikely saviour, telling us she would have “no deal” rather than a “bad deal”. “Unlikely” applies to the prime minister for many reasons, not least her reversal from remainer to leaver and her vacillation on numerous other policy issues.
In practice, however, weak or strong, vacillating or steadfast, are largely irrelevant. I campaigned for remain and strongly regret leaving the European Union, but the exit process will prove difficult only if the British government chooses it to be so. The route to a solution is not difficult to map, and negotiations, while tedious, should not encounter intractable problems.
Reaching an agreement with the European Commission (the body formally representing the European Union) will prove extremely lengthy because of the EU’s ratification procedure, not difficulties in reaching agreement. EU treaties require that all member governments ratify any such agreement. In the case of Belgium, the ratification process devolves to the legislatures of the four regions.
The approval of the Canadian-European Trade Agreement (CETA) demonstrated how long ratification can take. The negotiations began in 2009, ended in 2014, and the treaty ratified in 2017. I would predict that Brexit negotiations need not require five years as with CETA, but ratification would occur no faster.
I reached this decidedly minority opinion – what might be named “easy Brexit” – after a visit to Berlin at the end of April, where I gave evidence to the Committee on the Affairs of the European Union of the Bundestag (described here). The German government, most powerful by far among EU decision-makers, will in practice determine the parameters of the negotiations from the European side.
These parameters will follow from the two central concerns: 1) the Merkel government’s need to resolve the funding problem created by the exit of Britain, and 2) the importance to German business leaders of maintaining its current trade surplus with Britain.
During the period 2015-2016, according to a report of Parliament, the UK government’s net contribution to the EU budget was £10.8 billion or 13-14% of net contributions by the member states (money payments in minus benefits). A report by the European Policy Centre estimates, through 2020, a “post-Brexit” UK contribution of slightly less, about 12%. Rather than a problem, the demand by the European negotiators for these contributions, the infamous “divorce cost”, provides the vehicle for a mutually acceptable and beneficial agreement.
How to cover the UK contribution presents the Merkel government with a serious political problem. Angela Merkel’s perennially close ally, the Bavarian Christian Democratic Union, has rejected additional contributions to the EU budget; i.e., they will oppose the German government increasing its contribution to fully or partially offset the loss of UK contributions. The alternatives are to reduce the already miniscule EU centre budget (1% of EU GDP) or pressure other members to increase their contributions. Both would severely weaken German government influence among the countries receiving net benefits (a majority of members).
Though the UK media has reported that German industry supports Chancellor Merkel’s “tough stance” on negotiations, I came away from Berlin with the opposite impression. Close inspection of the statements of German business leaders, one of whom gave evidence to the Bundestag when I did, indicate more nuanced conclusions.
The position of the German Confederation of Industry, as its director Markus Kerber stressed, is that “it is of utmost importance to reduce the damage [of Brexit] for the German economy” – a view shared by representatives of branches of large industry (summarised here).
Combining the political difficulties for the EU budget and the division of opinion among German business leaders shows the route to agreement. Agreement in principle to pay contributions for the foreseeable future would initiate discussions. This would not represent an important concession by the UK government. Several non-members contribute to the EU budget, for example Norway. Any form of post-Brexit EU association will require such payments.
Making these payments would not be controversial were it not for toxic rhetoric of Brexit ideologues. Post-Brexit contributions to the EU budget should be no more controversial than UK funds for the budget of the World Trade Organization, payments for services in return for benefits.
On the emotive issue of immigration, I gained the impression in Berlin that this will not block reaching agreement. Behind closed doors (where the EU governments manage consensus) an arrangement for the British government to accept three of the four “freedoms” could emerge (unrestricted capital flows, EU rules on trade flows, and cross-border bidding for private and public services).
The aggressive anti-EU rhetoric May’s government makes the coming negotiations appear difficult when they need not be. Should the prime minister return to power after 8 June, a softening of that rhetoric will certainly occur. However, regaining good relations with EU governments will be no easy task for a government full of rampant Brexiteers. Having accused Commission officials of “sabotage” and “threats”, on 19 June she and her negotiators may find it difficult to convince them and European governments that they were “just kidding”.
A Labour victory on 8 June would make a positive approach to negotiations much easier. The new Corbyn government could immediately confirm its intention to make payments to the EU budget, as well as unilaterally granting employment and residency rights to EU citizens now in Britain. This would also undermine the case for a second Scottish independence referendum – a collateral benefit of considerable importance.
In his famous exchange with Rosencrantz and Guildenstern, Hamlet says “for there is nothing either good or bad, but thinking makes it so” (Act 2, Scene 2). In the case of Brexit negotiations, “agreements are neither hard nor easy, but rhetoric makes them so”.
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Perhaps five years is not too optimistic as the process drags on the EU countries may want shot of the issue. The UK’s bigger and closer than Canada.
On national vetoes, I am most interested that Weeks thinks Germany needn’t insist on freedom of movement since I would imagine W European countries do not want to open this can of worms or their electorates will want to keep immigrants out too. Whereas E Europeans may want to threaten a veto to keep their own access to the UK’s labour market so they can export their unemployed and get remittances. (Or would they prefer to lose that, but keep UK’s budget contributions?)
Scot indyref 2 will proceed no matter what as it’s the SNP raison d’etre. Change is to the case for voting Yes. More important than English ppl realise — UK’s large balance if payments deficit would be much worse if the Scottish oil is removed and threatens a “sudden stop” causing a recession in both Scotland and rUK!
Meanwhile, the UK’s net fiscal transfer to Scotland is ~6% of Scots GDP, losing that is like a Great Recession size hole in the Scottish economy. After which, taxes must rise (without brain drain), or public spending must be cut, because the difference cannot be borrowed forever. And then they have to come up with a plan for faster growth.
At least the USA hasn’t cornered the market on vacuous elected officials.
I remember reading some of Macrons statements during the French election and wondered if the phrases were as empty in French or was something lost in the translation.
I don’t see how May could spin a softer Brexit without dooming herself. (Though, arguably, she may have already doomed herself by running such a terrible campaign. Certainly, if the majority shrinks, I foresee an unstable Tory government.) Opponents will be ready to call her out on her u-turns, which she may shrink from. And whether she is able to beat back the Daily Mail crowd is another question… for someone who tries to portray her as strong and stable, she has appeared to be anything but.
And she only has herself to blame for this. Perhaps if she had come out to concede the dementia tax nonsense was poorly thought out, and state she’s willing to change for the better, she wouldn’t appear both wishy-washy and arrogant!
May’s popularity is a creation of the Daily Mail – as home secretary her main purpose in life was to grace its front cover once a month, with a cutaway to her fabulous heels. If she drops the “no deal” mantra I expect they’ll crucify her.
Hm, an interesting perspective, and point taken. Certainly explains the kowtowing to the DM as well.
May has pretty much boxed herself into a rather prickly corner.
I agree with you, Yves, negotiations are likely to be more difficult than Weeks suggests. Germany’s voice is not the only one which matters. As you say, if Germany and France can agree a way forward, that will determine in large degree the course the EU takes. Just to add a little flesh for other readers, this is not just for the reasons you cite but also because the two countries are the leading members of two important groups in the EU: the ‘Club Med’ (France, Italy, Spain, Portugal, Belgium, often Greece) and what one could call the Beer drinkers (Germany, Holland, the Scandinavians). Each group tends to come at the world in a pretty like-minded fashion, Club Med more dirigiste, the Beer drinkers more market-oriented. This is for historic reasons, reflecting cultural, legal traditions etc. I would guess Germany and France talk often to the members of their respective EU sub-groups so will either discuss these issues explicitly with them or have a pretty good idea where they are coming from. So when France and Germany sit down to discuss between the two of them they probably know what is necessary to carry a large part of the EU behind them. The Eastern Europeans of course form another group of sorts who will have their own views which will need to be accommodated. The EU does in fact try as much as possible to operate by consensus, so although qualified majority voting plays a part at times, the importance of this can be, and is, overstated. In this case, even if the legal framework did allow for some decisions to be taken on the basis of QMV, which is arguable, I would expect the EU to proceed by consensus on this issue. It is too important to all the EU 27 members to proceed on any other basis.
Given the complexity of the issues to be discussed and the imperative from the EU’s perspective that the UK be seen to be worse off as a result of Brexit, I cannot share Weeks optimism. I write this partly as someone who several decades ago was close, for too many years, to EU legislation . Negotiations were always more difficult than people in the UK expected. There was a UK tendency to assume that everyone else in Europe must think along the same lines as the British and therefore would fall into line with British views. This was always a mistake.
There is a school in the UK who say that all that is needed is to copy the CETA and not introduce tariffs in 2019. This fails to take account of the fact that CETA is an agreement between, on the one side, a small economy whose principal exports are raw materials and, on the other, a very large mixed economy thousands of miles away which still has significant manufacturing and other interests aside from raw materials. They are complimentary and may not trade very much together in the long term anyway. The UK is a larger economy, close by and much more of a potential trade rival in some areas. So the EU will very probably not respond well to the suggestion that the UK can be treated just the same as Canada. The circumstances of the two countries are different so they will be treated differently.
It would be nice to be proved wrong but I am not expecting that.
As Yves says, the writer seems to be completely misread the dynamics of EU decision making by assuming that what the Germans agree to will be accepted by other members. Brexit is orders of magnitude more complicated politically than CERA simply because so many individual countries have issues that they may well see as veto-worthy.
As one obvious example, even if Germany and France were happy to concede to the UK on migration, eastern European countries most certainly are not – they see this as sacrosanct. LIkewise, there is absolutely no scope within Europe to allow any compromise on the issue of UK contributions to the EU budget – this again will be a line in the sand for many eastern European countries who will make it clear to negotiators that they will not pay a cent more. And the issue of UK retirees in Spain, Portugal and France is likely to be very difficult and complicated. And thats even before you get to the sensitivities involved with the Irish border.
For a negotiated Brexit to occur in 2 years time the EU would have to develop a strong concensus on those issues which are political red lines for the Conservatives (assuming May wins). I find it very hard to see this happening as the Germans and French would have to burn a lot of political capital to drag along the less enthusiastic EU members, and they quite simply have no inclination or motivation to do so.
I’m not a close follower of German or French politics, but I get the strong impression that both of them have essentially decided a hard and dirty Brexit is going to happen, and are already focussed on minimising the damage domestically. This means accepting the damage and moving on, without any regard to what will happen to the UK. If I’m right about this then unless there is a major political change (e.g. Corbyn becoming PM), then a chaotic and hard Brexit is already baked in.
There’s a glimmer of a reason to think France is not so committed to freedom of movement from the Irish Times today, with argument between W European countries including France, Germany and the Netherlands, and 11 others. An attempt to change the Posted Workers Directive so foreign workers “posted” to a country have to comply with that country’s rules including industry wage agreements. The west says the current situation is social dumping. The east says the change would be anticompetitive. Macron is in favour of the change.
As for sensitivity over the Irish border, yes it will blow up (no pun intended) because the nationalist and unionist parties must maintain their endless sneering at each other and use all material, but freedom of movement could be maintained as it was pre-1973 because it existed for nearly 50 years already.
Customs controls are another matter and must exist no matter what, because the Republic must maintain the EU common external tariff. if not done on the border with NI, they have to do it for the EU26. http://www.irisheconomy.ie/index.php/2017/02/16/brexit-customs-unions-and-borders/
Irish nationalism has always had this problem over sovereignty vs the economy, rather like the Brexiters and the SNP (see my comment above). Yes, a united Ireland would avoid the “hard border” (customs checks) and loss of EU handouts. But at a cost of losing the net fiscal transfer from rUK to NI, which is about £5000 per capita — or 38% of NI’s public spending! The south would not be able to replace much of that due to its small economy, and both parts of the island would be poorer in the process.
http://www.assemblyresearchmatters.org/2016/08/08/fiscal-transfer/
I agree PK. I think the topic interests the EU 27 a lot less than the UK. Unless HMG show a great deal more interest in engaging constructively with the EU 27 I expect them to take the line that the UK has made its bed so now it must lie in it.
Interesting piece, thank you Yves.
I’ve seen variations on this argument being made (carefully) this past week. Some thoughts:
First, given Weeks’ optimism about a post-brexit trade agreement, I’m surprised he’s so pessimistic about the ratification-process. Most interpretations of the ECJ’s recent opinion regarding the Singapore FTA would reïnforce his point:
The ECJ basically handed the commission the keys to the FTA-castle last month, though critically with the exception of ISDS-mechanisms. As long as a UK-EU FTA does not contain ISDS, ratification should be the least of the UK’s worries. So you could argue that this is yet another example of May’s uncompromising position (in this case regarding ECJ or EFTA-Court jurisdiction) unnecessarily complicating matters (by possibly bringing national ratification in play because it could steer the EU towards an FTA that is going to include some sort of ISDS/ICS-framework in lui of ECJ-oversight).
Second, I think I mostly agree with him re: the financial settlement:
The financial settlement is a largely technical issue (thus giving politicians some cover when making concessions) and one where a lot of technical classifications create room to maneuver. Plus, a lot of the money will be coming back later since a good chunk of it are loans that will be repaid. So he’s entirely correct that it shouldn’t be the lightning-rod it has become.
But as he points out later, agreeing to pay only gets the EU to initiate discusions, it’s not part of the quid-pro-quo for retaining or regaining a degree of market-acces. Furthermore, I think that if the settlement is really such a simple issue, any difficulties here bode ill for the rest of the article 50 process, let alone an FTA.
Third, as Yves rightly points out, his emphasis on the Germans betrays a misunderstanding of both the Brexit process and of the main economic interests at hand (including the UK’s). I’ll add that because the fundamental problem with an FTA is that it’s going to take years to agree, this type of denial is particularly dangerous. It means there’ll be insufficient focus on negotiating a transitional arrangement, which is non-optional if you want to ensure any kind of meaningful continuIty in cross-border economic activity after march 29th, 2019.
Finally, a Labour government’s more pleasant demeanour and decreased hysteria over the financial settlement might be helpful in reaching an agreement on the article 50-issues, despite the fact that Labour seems to have adopted the Tory red lines re: freedom of movement of persons and ECJ jurisdiction. However, like Weeks, few Brits seem to have realised that those red lines have, in effect, put Brexit on auto-pilot as far as the EU27 -and EU Law itself- are concerned so it might not make that much of a difference in the long run.
very interesting. after all, the EU is only a tiny, tiny portion of the world. And China is building a freight train to die for.
Huh? The EU is the world’s second largest economy., more than 2x as large as China’s.
These are the two central issues to Brexit? Haha. I don’t think so. The first is strictly who pays and the second is deep in the weeds. Important yes, central no.
The ‘two’ real issues are what the EU have said all along, first: right to work, right to regulate, right to live. And the second one is all the nit-picky stuff like air flights rights, budgets that cross country lines, and tariffs on imports and exports of actual physical stuff.
The shear willful ignorance of how the world actually works outside of the political sphere by some still astounds me.
ps. It is less than 2 years now, not ‘in 2 years time’.
Beware the EU and Euro-zone.
After the Second World War the Japanese economy was in ruins and the banking system full of bad debt. The BoJ bought the bad assets off the banks at full value and returned them to health.
The FED did a similar thing with all the toxic waste on the books of US banks after 2008.
The ECB.
What is it doing?
Dragging out banking crises within the Euro-zone and forcing Governments to load themselves up with debt, when it could just create the money to resolve these crises.
Europe should take heed of Japan’s story where the BoJ was instrumental in turning a thriving economy, the second largest in the world, into a basket case for ideological reasons.
“Princes of the Yen” by Richard Werner covers these events.
You can watch it for free on YouTube.
https://www.youtube.com/watch?v=p5Ac7ap_MAY
The ECB created artificially low interest rates at the periphery of the Euro-zone from the start, encouraging them to go out and spend and inflate housing bubbles in Spain, Ireland, Greece and Holland.
The periphery had traditionally been seen as high risk, with the appropriate high interest rates. The interest rates falls at the periphery were very large, giving a very large impetus to spending, which performed as would be expected.
Years later it became apparent that it was everyman for himself and there would be no debt pooling. Interest rates corrected to the new reality and the Euro-zone crisis began.
The ECB forced Governments to bail out their own banks rather than creating the money itself.
The ECB seems to have been following the BoJ playbook, for economic transformation.
Create a crisis, let it drag on until the required economic transformation takes place.
Naomi Klein’s “Shock Doctrine” + Richard Werner’s “Princes of the Yen” = How it works
Canada, Australia and Scandinavian countries are being prepared by their Central Banks.
Create a crisis, let it drag on until the required economic transformation takes place.
China?
Perhaps.
The EU is an unelected cabal of corrupt corporatists. Thank god Britain kicked out this corporate state. The fact is they are just engaging in a brutal shakedown to punish the British for taking back their sovereignty. I wouldn’t give them one thin dime.
Meanwhile for the useful idiots on the continent, they are trying to force Monsanto poisons down the throats of every European nation too stupid to leave the Fourth Reich:
http://www.stltoday.com/business/local/eu-to-propose–year-license-renewal-for-key-ingredient/article_d7c0c45e-82ce-514f-81a3-2670c108b7a0.html
The fact that anyone on the left would support these fascists, shows the complete lack of class consciousness among the masses. The left in Britain should be ashamed that conservatives saw the craven nature of the EU, while they were duped into supporting a corporate state by race-baiting and other divide-and-conquer tactics.