Making the Most of the Brexit Deal

Jean Pisani-Ferry

A chaotic Brexit, in which key questions about the relationship between the UK and the EU are left unanswered, may be avoided, but severe political and economic harm could still await both sides. What, then, accounts for the evident lack of urgency in taking the necessary steps to avoid such a scenario?

PARIS – On December 8, the United Kingdom and the European Union’s 27 members settled on some key aspects of the Brexit divorce agreement, opening the way for the decision, on December 15, to open a new chapter in negotiations, focused on addressing the future EU-UK relationship and transitional arrangements. This is good news, not least because it averts the worst-case scenario: a hard Brexit. But what lies ahead is much more challenging.

It seemed for some time that Europe would sleepwalk into hard Brexit. With the UK’s ruling Conservative Party deeply divided, and the EU seemingly unwilling to act strategically, the likelihood of a no-deal cliff-edge scenario appeared high.

Yet, in the end, the UK made critical concessions that allowed the negotiations to move forward. It agreed to pay much more to its EU partners than it had initially announced. And it committed to avoid the establishment of a hard border between Northern Ireland (part of the UK) and the Republic of Ireland (part of the EU), even as Northern Ireland retains full access to the British market.

The deal is a bitter pill to swallow for those who campaigned for Brexit in the name of saving money for the UK’s National Health Service. They will find it hard to tell voters that settling existing commitments to the EU will cost each British adult €1,000 ($1,189), if not more. And the latter-day Leninists who regarded Brexit as a way to complete the policy agenda initiated by Prime Minister Margaret Thatcher will find it hard to reconcile their vision of a deregulated Britain with the continued alignment of Northern Ireland’s regulatory regime with that of the EU.

But the fact is that a hard Brexit would have cost both the UK and the EU far more, in terms of jobs and prosperity. Even the threat of such an outcome was starting to cause damage, as private companies put investment on hold. The political consequences of a hard Brexit would have been dire as well. Both the UK and the EU would have lost substantial global influence at a moment when an erratic US administration is seeking to tear down the existing international order and an assertive Chinese leadership is beginning to use that effort to its own advantage.

Had the UK not acted to avoid such a scenario it would have lost the most, especially if it had ended up relying on a crumbling multilateral trade system to ensure access to foreign markets. In any case, because geography matters, the EU will remain Britain’s main market. And, because size matters, the UK will continue to depend on EU regulations, especially in services.

But averting a hard Brexit is just the first step. The question now is what sort of future relationship the two sides can agree on. And the answer is far from clear.

On the British side, the absence of a coherent vision for the future UK-EU relationship is astonishing. Prime Minister Theresa May’s speech in Florence in September remains the closest approximation on offer, but it left many important questions without a clear answer. And, as May’s legislative defeat in the House of Commons on December 13 underscored, the British government remains too divided to agree on a common Brexit agenda.

There is not much vision on the EU side, either. With the recent deal, Michel Barnier, the bloc’s chief negotiator, scored a tactical victory. But a template for future partnership is still nowhere to be found. The guidelines for Brexit negotiations issued last April by the EU’s heads of state and government certainly did not provide one. Instead, they established red lines, emphasizing the “indivisibility” of the “four freedoms” – free movement of goods, services, capital, and labor – that underpin the European single market. The December 15 declaration does not go much further.

For now, the EU’s negotiating stance continues to be shaped largely by the fear that too favorable an agreement would create incentives for other countries to follow the UK’s lead. Beyond that defensive attitude, lack of policy consensus has resulted in a preference for the status quo.

Policy wonks focus on weighing a “Canada option” (a free-trade agreement for goods) against a “Norway option” (a sort of junior membership in the single market). But both are unsuited to the UK-EU partnership. The Canada option would not address any of the fundamental issues concerning trade in services – a critical omission, given that the UK is a major supplier, and their provision requires a complex regulatory framework. And the Norway option would simply assume away the problem by requiring Britain to adopt passively any economic legislation adopted by the EU.

In a 2016 paper, my colleagues and I argued that the EU should regard Brexit as an opportunity to define a new model for partnership with countries that want strong economic and security links, without political integration. We further argued that, at a time when enlargement momentum has been depleted, the EU should work to diversify its relationships with neighbors. We proposed building a “continental partnership” involving deep economic integration based on a common regulatory framework, with the EU, the UK, and possibly others accepting the free movement of goods, services, and capital, but not of labor. We also argued in favor of a permanent process of policy consultation that would, as a counterpart to the UK’s submission to EU economic rules, give the British a voice – but no vote – in the creation of European economic legislation.

In official EU circles, the paper was received coldly, to say the least, with critics deriding the breach of the four freedoms. But the fact is that, while an integrated market for goods and services requires a degree of labor mobility, it does not imply that all people must have the right to cross borders and look for a job in the country of their choice. To pretend that it does is to confuse a citizen’s right (essential, to be sure, in a political and social community like the EU) with an economic necessity. This is bad economics and dubious politics.

Our critics also resisted envisioning a longer-term arrangement before the details of the divorce were settled. But this chapter is now being closed, meaning that it is time for the EU to think outside the box, and make an ambitious offer to Britain.

Any sensible agreement between the EU and the UK is bound to result in the latter losing much of the influence it currently enjoys in European affairs – an outcome that will surely diminish the appeal of following its lead. But even if a current EU member does decide it would be better off outside the EU’s “inner circle,” it is not the end of the world. It certainly isn’t a reason to cling to the status quo. /project-syndicate