Could a hard Brexit be an opportunity for the EU?

Theresa May’s decision to announce pretty extreme red lines has limited London's negotiating position considerably. The EU-27 can use Britain’s confrontational strategy to prove that they are indeed capable of a unified response.

May Juncker

Do opposites really attract? Photo:REUTERS/Francois Lenoir/KNE

by the Know Nothing Enquirer   15/02/2017              

It took Theresa May 7 months to publicly announce in detail what Brexit actually means. After the referendum she insisted that “Brexit means Brexit” while not going into further detail. So her January speech and a government White Paper (which essential lists the same points) finally made clear that she is actually serious about a hard Brexit, even though she insisted there should be exemptions for parts of the economy that are beneficial to the UK. This includes the “greatest possible access” to the single market, a “bespoke” deal with the customs union, cooperation over intelligence and defence and paying an “appropriate” contribution to the EU budget in return (i.e. far less than now). In other words, she wants a clear cut from the EU - a hard Brexit - while retaining certain benefits. And despite most Leave voters made their decision mainly by the single issue of immigration, her vision is to make Britain “even more global and internationalist, in action and spirit” - of course without accepting the free movement of people in the EU to appease those who helped her into office. Although the speech and the White Paper roughly outline the governments strategy of aiming for a hard Brexit, both are pretty vague and merely highlight the UK government’s concern about negotiating secrecy. Or maybe rather their lack of options? After all Theresa May threatened the EU if they deny the UK access to the single market “we would have the freedom to set the competitive tax rates and embrace the policies that would attract the world's best companies and biggest investors to Britain”. She also mentioned that “[EU] voices calling for a punitive deal that punishes Britain and discourages other countries from taking the same path” would be “an act of calamitous self-harm for the countries of Europe. And it would not be the act of a friend”. This sounds more like a declaration of war than reaching out to friends.

 

In Brussels and the European capitals most focus lay on these words. The EU has argued consistently before and after the referendum that giving Britain a better deal outside of the union would be unacceptable. Not only would it be a disastrous signal to the populist movements in Europe but it would question the entire European project. Giving in to the demands of the UK would not only make Brussels look extremely weak but also give an incentive to eurosceptics in, for example, France or the Netherlands, to leave the union. After all, the EU is currently experiencing several crises - the ongoing Greek debt crisis, a lingering banking crisis, the refugee crisis, the Ukraine crisis and now the new US administration questioning the existence of the EU - and three important elections in 2017. And of course Brexit has to be added to that list too. Despite the pressing issues Jean Claude Juncker has to spend several hours a day on Brexit related issues. So May calling the EU’s position not friendly and “punitive” has been interpreted as a very aggressive signal.

 

But why is the British government choosing this tough talk? Firstly, it seems like the hardline Brexit ideologues in the government have gained more influence. Secondly, the referendum result hasn’t had too severe effects on the economy yet. This might have convinced May that the economic and political (i.e. a possible second term in office and securing a spot in history books as the Brexit Iron Lady) benefits of a hard Brexit will outweigh the economic shock resulting from breaking ties with Britain’s - by far - largest trading partner. Lastly, the Brexiteers might have underestimated the unified response by the 27 EU member states. During the campaign they were eager to highlight that German car makers and lobbyists would help Britain negotiate a favourable deal in order to defend their exports to the UK. Their argument was that Britain’s large trade deficit with the EU would be an incentive to give the UK the same trading advantages as an EU member states without paying membership fees and freedom of movement of workers. Needless to say German car makers are one of the biggest supporters of the EU. They would be foolish to risk their largest market - the EU - from falling into further political turmoil. So the unified response by political and business leaders from the EU-27 has forced May’s government to adopt a more hardline approach to keep the Brexiteers promise of severely limiting EU immigration. Although the government has failed to provide any credible plan on how it will manage immigration from EU countries in the future.

May’s decision to draw pretty extreme red lines has limited the negotiating position of Westminster considerably. At this point there only seem to be two realistic outcomes. Either a clean cut with the EU or a semi-integrated, “Norway style” Brexit. In the first scenario the government deems the benefits of gained sovereignty and reduced immigration to outweigh the potentially huge costs of increasing red tape and possible tariffs on trade between the immensely interconnected regions. May has said repeatedly that “no deal is better than a bad deal”. While this might just be blusterous talk, it is in line with her increasingly hardline view on Brexit. In the second scenario London either fails to negotiate a deal with the EU or a bad deal is rejected by parliament. The UK then decides to strike an interim deal (which might end up being permanent) similar to Norway. This, of course, would be unacceptable to right-wing Tories, Ukip and the eurosceptic press who would rebel against May and possibly trigger an early election. Considering the weak state of the opposition and its inability to win an election any time soon, May might be motivated to listen more closely to the Brexiteers - even if it means leaving the EU on bad terms, as well as sacrificing economic growth and jobs.

 

If May decides to continue her hard Brexit strategy - which is very likely - tensions between the EU and Westminster can only increase. The UK might want to position itself as a tax haven to compensate for lost trade with the EU, including aggressive trade policy and reducing environmental regulations. Further, the coalition of Tory Brexiteers and the eurosceptic press will blame the likely recession resulting from Brexit on Europeans wanting to punish Britons. This could justify more extreme policy and hawkish rhetoric.

 

So how could this possibly be an opportunity for the EU? Clearly the remaining EU member states will suffer from a hard Brexit. The exporting countries will lose trade, Eastern European countries will be unhappy about toughened immigration laws, Ireland will find a hard border unacceptable, Spain’s relationship with Gibraltar might further escalate and all will be unhappy about either paying more into or receiving less from the EU budget. Additionally the first bloc of countries, mainly Germany, the Netherlands and Scandinavia will lose an important ally advocating free trade. Even the president of the EU commission is sceptical about possible benefits for the post-Brexit EU. He recently pointed out in an interview with DLF that he is convinced that the UK will attempt to split the EU to prevent the EU-27 from creating a unified response. Obviously the new president of the United States won’t help to bring the two parties together.

 

But then again things aren’t looking that bad for the EU. Brussels has the upper hand in the negotiations. It is in charge of the negotiating timetable and can force May to stick to the rules laid out in Article 50 of the Lisbon Treaty - which are not in favour for her. The EU already insists that the UK can only start negotiating trade deals with non-EU states once it has left the EU. Another reason why May’s “no deal is better than a bad deal” talk will prove to be a mere bluff. Further, as the EU is in charge of international trade for all member states it has years of expertise of negotiating trade deals. Westminster has little time to build up an efficient international trade department that is capable of negotiating complex trade relations not only with the EU but also with other countries to replace existing EU trade agreements. Obviously they will find it difficult to negotiate the same terms outside of the largest market in the world. And negotiating all these trade deals at the same time once Britain leaves the EU will be extremely challenging. In other words, May depends on the EU-27 to show goodwill and negotiate an interim deal that will have to include access to the single market and free movement of people. She will also have to accept that the UK will have to continue paying into the EU budget, including pension funds for long after Brexit. The remaining European countries can use Britain’s confrontational position to prove that they are indeed capable of a unified response. Plus the absence of Britain in the union might also make other projects easier, such as closer cooperation in defence and intelligence or even a European army (which Britain has vigorously opposed in the past). The military threat from an increasingly aggressive Russia and America’s newly found love for isolationism might help to convince them even more. So the European project’s future isn’t all that gloomy. But May’s increasingly stubborn demands and her red lines should be deeply worrying for the British public.

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