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A Modest Proposal - The UK's Article 50 negotiations with the EU

So, the UK has voted for Brexit.

No doubt the leaders of the Leave campaign will shortly be pressing for a notification to be made under Article 50 to allow negotiations on the terms of the UK's exit from the EU to begin. How should we expect these negotiations to proceed?

 

A modest proposal

One must assume that, given the anticipated cordial and convivial relationship that we expect to continue with our former partners, the opening offer to be made to the negotiating team representing the interests of the 27 remaining member states would merely be to request that the UK departs on terms identical to those on which the referendum campaign was fought and for which the people of the UK voted. Therefore, the three main objectives would presumably be as follows:

1. To ensure that the UK is able to continue to access the single market on terms which are broadly identical to those currently granted to the UK as an EU member (i.e. full access without being required to be a member of the Euro or Schengen area) but without being required to adhere to EU laws or ECJ court decisions which, for example, regulate and ensure consistency of product standards across the EU;

2. To reduce the notional amount (i.e. the £350m figure)/the gross amount (i.e. the notional amount minus the rebate)/the net amount (i.e. the gross amount minus the amount remitted as part of the various EU regional investment programmes) representing the UK's current contribution to the EU to an amount totalling zero so that these monies can be redistributed entirely to other areas such as the NHS, compensating those now deprived of the aforementioned EU funding and reducing tax rates; and

3. To remove entirely the right to freedom of movement of EU citizens to the UK while preserving the reciprocal right of UK citizens to freedom of movement within the EU.

A bold proposal indeed. Do not, however, be surprised if our European colleagues baulk at this opening gambit. While the UK continues to be a major player in the global economy, indeed as of Friday the 6th largest economy in the world, the EU is facing an existential crisis of ever expanding proportion. Forces on the far right and far left across Northern Europe are admiringly observing the outcome of last Thursday's referendum and will pounce on any sign that the EU intends to treat such recalcitrance anything other than harshly. One must only view the EU's reaction to the threatened "Grexit" in 2013 and thereafter as ample demonstration of the EU's determination to take tough and, at times, economically self-defeating steps to preserve the integrity of the Union.

Therefore, it is clear that the Leave campaign have virtually no chance of achieving their intended aims, meaning that a finalised deal is likely to be worse than than the proposal sold to the British public. How much worse?

The leaders of the Leave campaign were (generally) consistent in their view that membership of the Single Market would continue to be both vital and relatively easy to achieve. Perhaps so, as both the "Norway" and "Switzerland" solutions permit access to the Single Market, albeit on the basis of continued fiscal contributions to the EU and freedom of movement, neither of which will be palatable to a British public who were expressly promised otherwise.

A nation of shopkeepers?

The UK however clearly has much greater leverage than either Norway or Switzerland. A nation of 65m customers is an enticing proposition for any nation or trading bloc keen to trade its goods and services. Moreover, the UK has a long standing current account deficit with the EU. In effect, the UK buys more from the EU than it sells into the EU. Surely this constitutes sufficient leverage to obtain a unique, British deal and extract the necessary concessions to appease an expectant public?

However, using a lack of productivity and the consequent 5-6% trade deficit with your largest trading partner, accumulated notwithstanding long-standing membership of the Single Market and Chancellor George Osborne's declaration in 2010 that the UK would embark upon an "export-led recovery", seems to me to be a deeply unimpressive negotiating tactic.

Yes, it is true that the UK buys more from the EU than it exports and if all trade were to be immediately cut off then EU member states would be worse off to the tune of several billion Euros. The fact remains, however, that this is a result of the UK simply being uncompetitive and its productivity sub-par in the global economy. Unless the UK considers implementing a North Korean style 'Juche' system of economic and national self-sufficiency (a prospect which is perhaps not entirely far fetched as, at the time of writing, Jeremy Corbyn clings to the leadership of the Labour party), the UK will have to find a trading partner or partners with whom to import their way out of the current and long-standing productivity deficit. The UK’s most obvious trading partner would, of course, be the EU (notwithstanding that the UK may ultimately sign trade deals with other nations, it is likely that UK consumers will still enjoy German cars and French wine) and under any trading relationship other than full single market access, imports will be more expensive, inevitably leading to increased prices for consumers.

Turning the page on the Anglo Saxon model

Perhaps, though, the UK provides an indispensable product or service that will have potential trading partners rushing to its door in pursuit of a free trade deal under any terms that the UK deems fit for a country of its global stature? Isn't London the global centre for financial services? Currently, yes.

However, a large part of London's growth to become the pre-eminent dedication for foreign banks and financial services providers has been due to its dual benefits as both an English-speaking, common law jurisdiction and its membership of the EU. A favourable time zone allows it to straddle the opening hours of all major financial markets from Asia to the US. EU membership allows foreign firms to establish in the UK and gain access to a market of 500m via an EU passport.

However, outside the EU and without access to the Single Market, this structural advantage disappears. So, Single Market access is vital. But what kind of Single Market will the UK be part of in the future? Following departure from the EU, there is no doubt that the UK will have virtually no influence over the development of the rules and regulations governing any aspect of the Single Market, including financial services. Sarkozy famously claimed following the 2008 financial crisis that the world had "turned the page on Anglo Saxon capitalism", meaning an end to a system of capitalism based on low regulation, low taxes and low government oversight. While this is true to some extent, without any UK representation in the EU institutions and Sarkozy likely to win the French presidency in 2017, we may see further moves towards a more protectionist financial system. A financial transaction tax? Greater regulation on transparency of trading? Break up of larger financial firms and more Government-led fiscal interventions? All are possible and all tend to erode the UK's previously dominant position as provider of financial services within the Single Market.

Est-ce que votre offre définitive?

So where does this leave the UK?

It is clear that activation of Article 50 has the potential to lead to protracted and perhaps acrimonious negotiations among former partners. The UK's domestic concerns will need to be considered in tandem with the domestic concerns of each individual EU state, the need to be seen not to reward potential "exiters" and the EU's existential prerogative. The negotiation coincides with what are sure to be difficult elections in Germany and France. With the world polarising and the far right on the rise, the above concerns are significantly magnified.

That the UK will find it impossible to deliver the promised deal is clear. Even under the most benign of political environments the promised deal is legally and logistically impossible.

The question, therefore, is: what kind of deal can be obtained? There should be no expectation of a favourable deal being made swiftly or even at all. Nor should there be any expectation that access to the Single Market will be any panacea as the market seems likely to continue to evolve and expand outside the UK's influence or veto rights. This is without even considering the issue of freedom of movement which the EU has consistently stated is a pre-requisite of full Single Market access and which may well be considered to be a red-line for the UK’s negotiating team.

As the negotiations progress and this becomes apparent, one must wonder at the reaction of the UK electorate as the above becomes increasingly apparent.

JFK once said that success has a thousand fathers while failure is an orphan. As someone who craves public acclaim almost as much as he craves power, it is fair to ask whether a Prime Minister Boris Johnson has the nerve to walk out into the world, across the Rubicon and, perhaps, over the precipice without the calming and reassuring hand of public opinion on his shoulder.

 

 

Twitter: @cpmcgonagle

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