Brexit or Breakup?

  Carl Bildt 

 STOCKHOLM – Even after abandoning its empire, the United Kingdom hesitated for decades to join Europe. But it eventually did, and in the past half-century it became a proponent of European Union enlargement, and a champion of key EU policies such as the single market.

But soon it will be one year since the UK decided, by a slim majority, to leave all of that behind. In the past 11 months, we have been told repeatedly that “Brexit means Brexit” – a phrase that leaves one none the wiser as to what Brexit actually means. But now that the UK has invoked Article 50 of the Treaty of Lisbon, the fog has started to lift. The UK has clarified some of its objectives for leaving the bloc, and we can begin to get a sense of how the process will play out over the next few years.

For starters, we know that the divorce will not be easy. Rather than pursuing a Norway- or Turkey-style arrangement, in which the UK would maintain some access to the single market or customs union, British Prime Minister Theresa May has opted for a “hard Brexit.” She has made it clear that controlling immigration and leaving the European Court of Justice’s jurisdiction are her primary objectives. And with her Conservative Party poised to win a solid majority in the general election on June 8, the UK will almost certainly stay this course.

In its negotiations with the EU, May’s government will want to discuss a new UK-EU partnership alongside the terms of the divorce. But, so far, the European Council has furnished its chief negotiator, Michel Barnier, with a mandate only for the divorce stage of the process. It will not expand that mandate to include talks on a future UK-EU partnership until the first stage nears completion.

Moreover, the remaining 27 EU member states’ finance ministries are demanding that the UK settle its financial obligations to the bloc, lest they get saddled with the UK’s bill. There will be haggling over what the UK owes; but, as a matter of principle, the EU can hardly budge much on this issue.

Thus, one can be virtually certain that the UK will formally leave the EU by the end of March 2019, and that it will not have a final agreement on a new partnership in hand. Barring a separate agreement on some kind of transitional arrangement, the UK could be heading for a brutal exit: new tariffs, severed institutional relationships, and diplomatic tensions.

On the other hand, with such an agreement, the UK could leave with a reasonable divorce settlement that includes guiding principles for a new UK-EU partnership, to be discussed in another round of negotiations. Assuming good will on both sides, such negotiations could possibly be concluded by 2022.

Any new partnership that emerges will most likely resemble the arrangement between Ukraine and the EU: something like the Deep and Comprehensive Free Trade Agreement, along with additional agreements covering complicated sectors such as transportation and agriculture. But while the DCFTA was a boon to Ukraine’s economy, a similar deal for the UK would represent a huge step backwards, not least because it would require a new border regime that would disrupt the integrated value chains on which many UK firms depend.

The UK will also have to establish a number of new agencies for regulatory issues that are currently being overseen by the EU, such as nuclear safety, pharmaceutical testing, aviation, and food standards. And, given that one of the UK’s top priorities will be to maintain its economic relationship with the EU – no other relationship is as important – whatever new agencies it creates will have to uphold the standards that the EU will demand. Beyond that, the UK will also have to pursue individual arrangements with all of the non-EU countries that are a party to any of the Union’s 48 trade agreements with the outside world.

There was once much talk about a post-Brexit free-trade deal between the United States and Britain. But enthusiasm has waned, and one now hears talk of the UK joining some kind of US-EU trade deal at a later date.

Another priority on the negotiating agenda will be the nearly five million EU citizens who have suddenly found themselves on the wrong side of the new divide, and whose immediate rights and future prospects will need to be addressed. Most of these people are in the UK, and most of them make important contributions to the UK’s economy. For example, Barclays Bank alone employs 3,000 citizens from other EU countries.

The devil will be in the details. The May government insists that it wants to control immigration, but no one really wants to see new visa barriers in Europe. Either way, many companies will have to start making adjustments, especially in the automobile and aerospace industries, which are highly integrated across borders. In fact, Lloyds of London is already establishing operations within the EU; and Goldman Sachs has announced that it is relocating some jobs away from London.

I sincerely hope that a brutal exit in the spring of 2019 can be avoided, and that the “deep and special partnership” that the UK talks about will materialize by, say, the spring of 2021. But, after some rather acrimonious conversations in recent weeks, one cannot be confident that either outcome will come to pass.

As for the remaining EU member states, we should not lose site of the fact that we need one another. In a couple of decades, we will constitute no more than 4% of the global population. The EU – with a renewed Franco-German axis at its core – will have to deal with its many other challenges, and chart its own future.

The same goes for the UK, which must decide if it still wants to be a part of Europe, albeit outside of the EU; or whether Brexit actually means Breakup. /project-syndicate