The Corner

Brexit: An Oblivious Uncoupling

 British Prime Minister Theresa May yesterday announced that she was going for a hard (or hardish) Brexit. What she wants, she  said,  is “a bold and ambitious Free Trade Agreement with the European Union. This agreement should allow for the freest possible trade in goods and services between Britain and the EU’s member states. It should give British companies the maximum freedom to trade with and operate within European markets – and let European businesses do the same in Britain.”

What she does not want is continued “membership of the Single Market”, the ‘Norway option’ that I may just have mentioned one or two times in this very Corner.

Why not? Well, political pressure mainly, not least from the Hard Brexiteers in her own party, but her official explanation was as follows:

European leaders have said many times that membership means accepting the “four freedoms” of goods, capital, services and people. And being out of the EU but a member of the Single Market would mean complying with the EU’s rules and regulations that implement those freedoms, without having a vote on what those rules and regulations are. It would mean accepting a role for the European Court of Justice that would see it still having direct legal authority in our country.

It would to all intents and purposes mean not leaving the EU at all.

Tell that to the Norwegians, who have rejected EU membership, not once, but twice, and have no interest in joining it now. It’s a somewhat crude measure (and it understates the real degree of Norway’s integration within the EU’s structures), but, as a member of the European Economic Area  (EEA) and thus the EU’s Single Market, non-EU Norway has incorporated only some 20 percent of the EU legislation that is currently in force. Unlike EU member-states it has  no obligation to join the forced march to “ever closer [political] union”. It also has a right of reservation that, under certain circumstances, allows it to opt out of EU rules that would otherwise apply within its borders. It is  true that Norway has  no direct vote on those rules that affect it, but it does have  a role in shaping those rules, and where those rules are set above the EU level (as is increasingly the case  with supranational trade regulation) it has, unlike EU members, a vote and a voice in its own right. So far as immigration is concerned, Norway’s rules are more restrictive than those of EU members. It also has the right, under certain circumstances, to pull an emergency brake on immigration from elsewhere in the EEA. Finally, there is the question of the role of European Court of Justice. Let’s just say that it is somewhat less clear cut than May suggests.

We will never know  if the Norwegian option  (or a variant of it) could have been agreed (possibly, I reckon, after a  lot of shouting), but May has  now  killed it off. It would have been nice if she could at least have written it an accurate obituary.

So what now?

Over at EU Referendum, Richard North reminds his readers of just how complicated—and prolonged— negotiating May’s “bold and ambitious” free trade agreement (FTA) could turn out to be, especially considering all the other aspects of the divorce settlement that are meant to be settled within the two year period provided for via the EU’s Article  50 mechanism. It’s no surprise that May is already talking about the need for an additional transitional period.

By contrast, one of the charms of the Norway option was its  ability to offer an off-the-shelf solution, even if only as an interim step (as it happens, I’d  have been happier to keep it in place far longer, but that’s a separate and no longer relevant debate). This  would have minimized disruption to the UK’s trading relationship with the  EU and, with a bit of luck, could have been put in place at a pace that minimized the period of uncertainty that Brexit was always going to involve, uncertainty that cannot be good for the British economy. All that’s certain now is uncertainty. 

And if there is no deal?

May: “no deal for Britain is better than a bad deal for Britain”.

Sure, but what would no deal mean?

Pete North cites some comments from J.P.Morgan:

The notion that the UK can simply “fall back” to WTO rules as providing an alternative (as summarised in “no deal is better than a bad deal”) is, in our view, very dangerous. Significant parts of the UK service sector would, under these conditions, lose their ability to provide services to EU-based counterparties overnight. Much of the plumbing that supports trade in goods and services on a day-to- day basis would be left without defined administrative processes and legal foundation. The imposition of tariffs is almost a side show relative to these issues. In addition, the UK is threatening that under constrained market access it would reinvent itself as a pseudo-Singapore of Northern Europe via low corporate tax rates and a ‘new economic model’. We note that the success of such low-tax entrepots has typically been at least partially based on the ability of firms to access markets in their locale, not on the withdrawal of that access. And, as we wrote yesterday, it is far from clear that there is a durable political commitment to the UK becoming a permanently low-corporate tax, low-regulation locale.

J.P. Morgan backed the campaign to keep Britain in the EU, but even so….