Sunday, January 20, 2019
After that defeat, even more reason to hug the EU close
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

I worry about the future of hairdressers in this country. I say so because, if business people continue to tear their hair out at the current rate over the political shenanigans over Brexit, there will be nothing left for them to cut.

The House of Commons landslide defeat for the withdrawal agreement negotiated by the government and the EU may have been predictable but was nevertheless depressing. Most depressing, perhaps, was the extent to which it was celebrated not just by hard Brexiteers, as expected, but also by hard Remainers. At both extremes of the Brexit debate are people who will never be reconciled.

I say this not because the deal negotiated by the prime ministerís team was wonderful; it was not but no compromise agreement was ever going to be. Her address to the nation after her government had survived the confidence vote was as tone deaf as you would expect, and almost as bad as her ďcitizens of nowhereĒ speech to the Tory conference in October 2016. It is a canard to say that because more than 80% of people voted for the Tories or Labour in the 2017 election, the country is united behind Brexit. Many voted Labour because of its fuzziness on Brexit, a fuzziness which persists.

By the same token, the country is poorly served by Jeremy Corbynís stance. Though avoiding a no-deal Brexit is of paramount importance, insisting that the prime minister rules it out before he will agree to consensus-building talks with her is infantile. That would remove the tiny bargaining chip May has with the EU; that we could still shoot ourselves in the foot but it would hurt you a bit too.

Whether that works or not on the politically toxic issue of the Irish backstop, the prime minister deserves praise for the central aim of her approach to Brexit. It has been, certainly since the 2017 election catastrophe, to deliver on the result of the referendum while minimising the economic damage from doing from doing so.

That task has been made more difficult by her own over-hasty adoption of red lines. There was no need in the first flush of her premiership to rule out a modified form of single market membership or staying in a customs union. But minimising the economic damage has been the watchword since mid-2017. The withdrawal agreement was intended, as Michael Gove has said, to get Britain over the line on March 29, after which during a lengthy transition period the battle could be joined on how close a future relationship has with the EU. It was never part of the plan that the withdrawal agreement should fail, and fail so badly.

I still think, as do most City observers, that some form of the agreement will be adopted, after modifications, though that appears quite likely to require an extension of the article 50 process. The risk of a no-deal Brexit, while low, has not gone away. J P Morgan, for example, sees a 45% probability of Brexit on a deal close to the existing one, 25% for a second referendum, 15% a general election, 10% an extension of article 50 into the second half of the year and 5% a disorderly no deal. These probabilities are, of course liable to change, and I would put the risk of a no-deal Brexit a bit higher, but they provide a very useful barometer.

The influential Centre for European Reform argues that the only option for the prime minister in getting a withdrawal agreement through the Commons will be to further blur her red lines, so pushing Britain towards a softer Brexit. This could mean accepting a permanent customs union or an eventual Norway-style European Economic Area relationship. Both have so far been rejected by the prime minister but the clock is ticking.

In the meantime, it is worth rehearsing why Mayís broader strategy, of trying to hug the EU as close as possible while respecting the referendum result made sense, even if her withdrawal agreement clearly needs work. Let me provide a flavour of the advantages of keeping the EU close.

EU membership, and in particular the single market, has been a significant factor in increasing the openness of the British economy; a key ingredient of growth and competitiveness. In the past half century, most of which has been in the EU, Britainís exports have grown from 11% to 30% of gross domestic product. That openness increased with the creation of the single market in 1993.

The volume of Britainís good exports to the EU has grown by more than quarter over the past 20 years, a period which included the deepest post-war recession and a separate later eurozone recession. Exports of services to the EU have grown twice as rapidly in recent years as those of goods.

It is sometimes said that the single market is unnecessary because some countries outside it have seen faster growth in exports to the EU than Britain. It is, of course, nonsense. Britain had a high level of trade integration with the rest of the EU before the single market came into being, while others started from a low base.
The single market, by creating a single set of standards across a market of more than 500m people, was always intended to facilitate two-way trade. For a US or Chinese exporter to Europe it has meant the same product standards not 28 different ones.

That is also true of exports from the EU to the rest of the world. The creators of the single market, most obviously Margaret Thatcher as the political force behind it and Lord Cockfield, the British European commissioner responsible for its implementation, always saw one of it purposes as providing a stronger platform for exports to the rest of the world. Tie that to the trade deals negotiated by the EU and roughly four-fifths of Britainís exports are covered either by the single market or by EU trade deals.

There should be no surprise that exports to the rapidly-growing emerging world have increased more rapidly in recent years. The surprise for Britain is that they have not done so by more. Even now, Britain sells more goods to Ireland than to China and Brazil combined. Distance matters.

The openness afforded by EU membership, together with Britainís flexible labour market and relatively deregulated economy, has meant that Britain has been a magnet for inward investment. We have to hope that this does not now only apply in the past sense.

Will the prime minister, by hugging other political parties, be able to craft an exit from the EU that involves hugging it close? You would hope so, and it clearly makes sense. She is not, however, one of lifeís natural huggers.