Sunday, October 30, 2016
Hard or soft Brexit? Britain needs a middle way
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

To the frustration of many MPs, and the concern of many businesses, the shape of Britain’s post-EU future remains clouded in uncertainty. When Jeremy Corbyn said to Theresa May a few days ago that her cunning plan was that she did not have one, it was not just his own MPs who nodded in approval at a rare hit for the Labour leader.

The prime minister continues to insist that she will seek combine maximum possible access to the single market with controls on EU migration. The fact that the economy has so far held up well in the face of the Brexit vote, with third quarter gross domestic product rising by 0.5%, may strengthen her hand, and those of the Brexiteers in the government. It is, though early days, and Brexit will be a long process. Even more encouraging was the decision by Nissan to build the new Qashqai and X-trail in Sunderland. It has clearly been led to expect than any future deal will involve something close to existing single market arrangements for cars.

As I noted last week, second-guessing the government is probably not the most productive thing to do at the moment. Fortunately, there is plenty happening outside government, which one would hope will have an impact on the official negotiating position. Does Brexit have to be “hard” or, given that a “soft” Brexit – one involving continued unrestricted free movement – is unlikely, is there a middle way that would work to the benefit of both Britain and the EU?

Let me begin with some definitions. Economists at HSBC, in a useful recent report “Brexit getting harder”, took eight conditions and applied them to different arrangements between Britain and the EU. As an EU member Britain is in the single market, has duty free trade in goods, market access for services but cannot negotiate its own trade deals. It must adhere to EU social and employment rules, contribute to the EU budget, is in the Common Agricultural Policy (CAP) and cannot restrict EU migration.

Of the six other models HSBC looked at, the hardest were the WTO (World Trade Organisation) and Canada models. Under a WTO model none of the eight conditions of EU membership would apply. Under a Canada-style agreement, similar to the on-off-on comprehensive economic and trade agreement between Canada and the EU, there would be duty free trade in goods and partial access for services.

In between these extremes, if it is right to call EU membership an extreme, there were however other options. The most interesting of these is the so-called Continental Partnership, proposed a few weeks ago in a report from Bruegel, the Brussels-based think tank.

The continental partnership proposal, authored by Jean Pisani-Ferry, Norbert Rottgen, Andre Sapir, Guntram Wolff and our own Sir Paul Tucker, former deputy governor of the Bank of England, sees the Brexit vote as an opportunity for restructuring Europe in a more fundamental way. In essence, it would head towards an inner circle of countries committed to monetary and political union and an outer circle, including Britain, more interested in economic relationships, including trade and financial services, as well as security co-operation, while limiting free movement.

As the paper put it: “We propose a new form of collaboration, a continental partnership. The UK will want to have some control over labour mobility, as well as leaving behind the EU’s supranational decision-making. The proposed continental partnership would consist in participating in goods, services, capital mobility and some temporary labour mobility as well as in a new system of inter-governmental decision making and enforcement of common rules to protect the homogeneity of the deeply integrated market.

“The UK would have a say on EU policies but ultimate formal authority would remain with the EU. This results in a Europe with an inner circle, the EU, with deep and political integration, and an outer circle with less integration. Over the long-run this could also serve as a vision for structuring relations with Turkey, Ukraine and other countries.”

The authors have since come back with a follow-up, prompted by criticism that the continental partnership sounded a bit too much like allowing Britain to have her cake and eat it. They say, on the contrary, that it would not be a route to allowing EU members to restrict free movement of people, or risk what they describe as “political contagion”. Instead, they say, it would be the best way for the EU “to maintain strong economic and security cooperation with the UK, while defending themselves against dumping and vetoes”.

Will the continental partnership fly? From a British perspective it should, though the rest of the EU may see it differently. As Lord Hill, Britain’s former European commissioner, put it recently, it is a common view in Brussels that Brexit will not actually happen. For those who believe it will the language so far has pointed towards an acrimonious rather than an amicable divorce. Politics and punishment may take precedence over economics.

That leaves Britain to think about how to secure its best interests in future EU negotiations. Another useful paper, from the Centre for Economic Performance at the London School of Economics, sets out the four principles Britain should adopt.

The four principles: you get what you give; where negotiations start from matters; bargain from a position of strength, and invest in negotiation capacity, make a good deal of sense. So the author, Thomas Sampson, argues that a bold gesture like unilaterally removing Britain’s tariffs, as advocated by some, would remove an important bargaining chip.

Britain has the advantage of already being in the single market, which is the status quo, so any negotiation starts from that position rather than with a blank sheet of paper. But one potential advantage, the timing of the start of the notionally two-year Article 50 process, has been lost. Sampson says Britain should neutralise this by seeking an agreement on transitional trading arrangements between the EU and Britain, in which things would continue as now until such time as a new and comprehensive deal, which could take many years, was concluded.

There is, very clearly, a lot to play for. It is in Britain’s best interests, as well as those of the EU, to co-operate once the rancour fades. A hard and damaging Brexit would hurt Britain most, but it would also harm the EU. For both sides, there has to be a middle way.