The Cost of a Clean Brexit

The Cost of a Clean Brexit
Ben Shread, MOD via AP
The Cost of a Clean Brexit
Ben Shread, MOD via AP

London's expensive divorce bill will put its economic stability in jeopardy—a fact that does not change in the wake of Theresa May's departure.

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Two new complications will now likely distract commentary on the Brexit saga. One, Prime Minister Theresa May has resigned her office pending the Conservative Party’s decision on a new leader later this summer. Two, European Union parliamentary elections have created a more polarized political environment within the union. As tempting as it is to see in these events changing the face of Brexit, it would be a mistake to exaggerate their significance. The fundamental disputes that have thwarted agreement to date remain unchanged, while economic imperatives continue to impel all—on both sides of the Channel—to overcome frustration and seek some kind of post–exit relationship. The first of these fundamental considerations will ensure rough going on an agreement. The second one promises that a deal will eventually emerge, even if seemingly intractable differences will demand as much muddle as clear lines.

Such a combination of fundamental differences and imperatives may bring to mind a distant historical parallel: the sixteenth century exit of the English church from the Church of Rome. That England, too, was deeply divided, and could find little room for compromise. Just like the strains of today, that separation required fixes to a bewildering array of established associations, contracts, loyalties, legal obligations, and customs. The archbishop of Canterbury, for instance, had in his oath of office that he was, among other things, the Pope’s legate. Removing those few words required a ruling within the Church of England and vote in Parliament. Every step met resistance from one faction or another. Compromise was all but impossible. The sides distrusted each other completely. The Catholic side saw the action as an affront to God. The Protestant side saw the opposition as agents of foreign powers. It took about three hundred years, until the early nineteenth century, to resolve the matter. That’s when Catholic emancipation ended suspicion of a large segment of the population.

Three hundred years is a long time, and it would be a mistake to overwork the parallels. But today’s disputes carry similar, and possibly more secular, differences in what people consider important—differences that render agreement and compromise extremely difficult, if not nearly impossible. These divisions were clearly evident during the 2016 Brexit referendum. People mostly talked past each other and they continue to do so today.

The Remain side spoke some about internationalism, but mostly it focused on economics and so its legacy group continues to make that approach. It warned of the costs to Britain of separation. George Osborne, Chancellor of the Exchequer during the campaign, estimated that exit would require £15 billion more in taxes and £15 billion in cuts to government spending. Lord Darling, his predecessor as chancellor when Labour ran the government, spoke of a freeze in spending on the National Health Service. A ninety-page government pamphlet, distributed to every household in the UK just before the vote, predicted that the British economy would shrink 0.5 percent a year for four years after exit, joblessness would rise 1.6 percentage points, sterling would lose 16 percent of its foreign-exchange value, inflation would rise from 0.5 percent a year to almost 3.0 percent, and housing prices would fall some 18 percent. A lot of the loss would emerge, it said, from the weakened position of British finance and the attendant loss of many high-paying jobs.

The exit side almost entirely ignored economics. It concerned itself with British sovereignty and self-government. The EU, it claimed, not only imposed on Parliament’s historic prerogatives but itself suffered from a “democracy deficit” because appointed bureaucrats had more power there than an elected body. When confronted with the Remain side’s economic concerns, the Brexiteers either dismissed them as exaggerated or inverted them, claiming that British sovereignty was worth even greater costs if it were to come to that. Elements among the Brexiteers drew on historical precedent, arguing that the economy, once freed from EU constraints, could make attractive trade deals across the globe and possibly become the “Singapore of the north.” But mostly they sidelined the economic arguments of their opposition.

Prime Minister May’s “deals” all failed in Parliament because they could not bridge the divide. Indeed, her deals hardly built a bridge to anything. Mostly they centered around agreements to postpone deadlines and keep talking, which made no one happy. The Brexiteers saw in them a further concession of sovereignty, while the legacy Remain camp, which continued to focus on economics, saw May’s deals as the worst of all possible worlds. By prolonging the business uncertainties surrounding Brexit, they thwarted planning efforts. Even a break without an agreement, what the journalists refer to as a “hard Brexit,” held greater appeal than the options that May presented. If such a harsh break would have denied business and finance the advantages they once enjoyed on the continent, then it would at least have given decisionmakers something concrete around which to formulate alternative strategies. Worst was May’s last effort, what she and her counterparts in the EU called a “political declaration.” It offered nothing concrete but simply pledged to accept whatever solution was worked out over time by a group of technocrats. When Parliament rejected the declaration, members aptly described it as a “blindfold exit.”

Nor did her last desperate measures before resigning offer necessary bridge building. Her offer of a new referendum, though the idea had gained popularity among legacy Remainers, could hardly satisfy. It smacked of the much-criticized continental practice of offering the public referendum after referendum until it voted the way the elite wants. Even some die-hard Remain supporters balked at this. Besides, it is far from clear how the nation would have voted. She also tried to gain a majority vote in Parliament by approaching Jeremy Corbyn, head of the opposition Labour Party. Negotiations across the aisle, as Americans say, are rare in Britain, and had little promise anyway. Corbyn faces a mix of interests within his party and had little incentive to help May out of her bind. Her resignation changes none of those facts.

May looks especially inept and even a greater political/diplomatic talent could have built the necessary bridges during the last couple of fevered years. In fact, the only matter that has moved ahead quickly is agreement on a $50 billion “divorce bill” to Britain. The legacy Remainers could see it as a reasonable price, while the Brexiteers could view it as small price to pay for sovereignty. Beyond this, three main issues continue to hang between these two very different sets of priorities: 1) future rules governing trade, 2) the future of British finance, and 3) the fate of the border between the Irish Republic and the British province of Northern Ireland.

On trade, all sides have good reason to seek a deal of some sort. The economic ties are simply too compelling to make a so-called “hard Brexit” palatable, except perhaps for a few historically romantic Brexiteers. Almost 55 percent of UK imports come from the EU and 44 percent of the country’s exports go to what today constitutes the rest of the EU. Some 14 percent more of Britain’s exports occur under the auspices of EU treaties; in fact, several economic powers, Japan most notably, have constructed facilities in Britain with an eye to sales throughout the EU. The absence of a trade deal would jeopardize these major employers and major contributors to Britain’s gross domestic product. The EU faces similarly compelling realities. Britain is the second largest economy in the present union. It absorbs 20 percent of the exports of the rest of the EU and almost 10 percent of Germany’s exports. Thus, a deal would seem a common imperative, certainly for the EU and for the economically focused legacy Remainers. Even the sovereignty-obsessed Brexiteers have no objection to the prosperity that would spring from a good deal. But not any deal will do.

The legacy Remainers, especially those with internationalist inclinations, are in favor of what trade economists call a common market. It would allow the duty-free movement of goods and services, investment, and labor. It would insist on common standards for goods, regulation, and labor. This is close to the arrangements that Norway (which  is not an EU member) now has with the union. It would effectively reproduce the pre-existing environment when the UK was a willing member of the EU. Indeed, Norway even pays dues to the union. The EU would, of course, prefer this arrangement, too. It would retain all the control in Brussels despite an official British departure. For those in Britain who focus on sovereignty, however, this would be the worst of all options. London would remain subordinate and lose influence within EU circles.

Compromise could, however, form around a customs union. Such an arrangement would allow tariff-free trade between the UK and the EU, placing Britain and Northern Ireland behind a common tariff wall with the rest of the EU. It is in large part the arrangements Turkey has with the EU. It would answer for most of the purely economic concerns. A customs union could also satisfy the sovereignty-seekers in Britain because it would allow London to escape EU jurisdiction on product and labor rules and allow British restrictions on immigration from the continent. It would, of course, thwart that small group in Britain that would like the country to go off on its own to settle trade deals with the rest of the world and possibly become a new Singapore. Apart from such dreams, it would seem to answer most economic concerns on both sides of the Channel. A customs union with a bit of fudging might even answer important questions on British finance.

More than most any other economy in the world, finance in the UK holds an important role. It amounts to fully 6.5 percent of the economy, almost twice what it is in the rest of Europe and second only to the 8.0 percent finance amounts to in the U.S. economy. As an EU member, British establishments dominated finance throughout the union. London was the go-to place for large or complex financial needs from the Mediterranean in the south to the North Sea and from the Russian border in the east to the Galway Bay in Ireland. Her Majesty’s government wanted to protect this position with a quick agreement that would allow London to maintain the privileges it held when the UK was still a member. For the EU, however, has been a major sticking point. Though Brussels has good reason to keep British finance available to its business, it could not allow Britain what would amount to primacy in finance without some measure of control. A common market would have provided that control, but since that solution is opposed by significant British interests, a deal on finance would require a further compromise within a customs union.

Such a compromise would require something of a muddle to bridge the gap between demands for British sovereignty and EU control. The sides might accomplish that with Parliament as the official rule maker while unofficially pledging to follow EU guidance. Such a concession would hardly constrain London since international rules already set the standard for financial governance across the globe.

Such a muddle may prove to be unnecessary since an alternative fudge already seems to be developing. The delays in making a deal have British financial firms worried about their ultimate position. To protect themselves, several of them have already relocated part of their operations to Frankfurt, Germany, and elsewhere on the continent. Jobs have gone, but it seems that the “branches” on the continent, however legally constituted, still retain economic ties to their parents in London, which continue to benefit from the business. The EU hardly minds because continental business continues to benefit from the connections and expertise in London. By the time any prospective rule-making fudge goes into effect, this parallel development may make the informal guidance an entirely moot matter.

Then there is the Irish question, which is something that has bedeviled English politics in one form or another for the last one thousand years. In this case, the problem arises because the Irish Republic is an EU member. Brexit, except in a customs union arrangement, would require customs checks at all points of entry. Even in a customs union, an exit would require immigration checks. That would present a major problem at the border between the Republic and the British province of Northern Ireland. Dublin has expressed discomfort because it retains a vague national aim to unite the island someday. More problematic is the so-called Good Friday Agreement that ended Irish terrorism in Ireland and elsewhere. It calls for an open border between the north and the south. With a British departure, troublesome immigration controls at the border would seem to be inescapable.

Negotiators have floated some comprises, but none of them have been sufficient. The EU has said that the border could remain open if London would agree to impose EU rules on all products in Northern Ireland. Elements in England have rejected this “solution” because it would violate British sovereignty. It would impose a two-tiered regulatory and customs situation on Britain, in which some of its territory would follow one set of rules written in Brussels, while another part would follow a different set of rules written in London. Such a “solution” would have the additional defect of leaving the immigration question unanswered. It would, in other words, threaten the reason the exit camp wants to exit. The “solution” also worries Northern Irish politicians, who would see it as the thin end of wedge to move the province from a British to an Irish Republic affiliation.

Though these considerations would seem to present an impossible impediment to a clear agreement, this Irish question, consistent with history, might yield to a muddle. Even if a customs union were to fail, the sides could dispense with checks at the border by moving such checks on cross-border goods and services to the point of origin in both the Irish Republic and the UK. For the movement of people, the parties might model things along the lines of the U.S.-Canadian arrangements that predated the original NAFTA. During that long period of time Canadian and U.S. citizens crossed the border informally. Officially, border agents could ask to see a passport, and that rule was enforced for citizens of other countries. But mostly, immigration officials would simply ask if those crossing were American or Canadian citizens and, except on those rare occasions when a border agent had doubts, allow people through without any formal checks. It would be difficult to write such an arrangement into law much less a treaty, but it might work.

Meanwhile, the Brexit saga will drag on. Such muddles can only emerge after considerations of all the clear options have failed and done so repeatedly. May’s successor, however talented or not, will still face these same intractable problems. He or she would even have hard time calling another election—as some have suggested—in the hopes of getting a less divided Parliament. Britain’s fixed-election legislation stipulates that such a call must receive two-thirds majority in Parliament, which is hardly likely to occur while the existing Tory-Northern Irish coalition remains reasonably confident that it would lose power in such a vote. For the same reason, it is unlikely that Parliament could force an election with a vote of no confidence in the government. Since all the divisions that existed during the 2016 referendum remain, it is unclear whether a new Parliament would manage any better than the present one. Meanwhile, whoever emerges in leadership in the EU, and however impatient they may become with Britain, will still face economic imperatives that argue against precipitating a “hard exit.”

These suggestions about the ultimate outcome do not, of course, exhaust all the possibilities. They may be most probable, but with so many moving parts, all conclusions must be viewed as tentative at best. In fact, it is a bit presumptuous to make any forecast at all. Still, it is also only human to try to see the path ahead, and it is in that spirit that this analysis has proceeded. There is, however, one definite thing to say about the Brexit matter: It will churn on for a good deal longer, even if it doesn’t quite last for three hundred years.

Reprinted with permission from The National Interest. Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York based communications firm. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live.

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