By Alasdair Macleod*
The EU cannot afford to prevaricate over Brexit because a bad Brexit risks causing it immeasurable harm. Not only does big business in Europe want a Britain with which it can freely trade, but confidence in the European Project is rapidly diminishing. The EU is a mega-state that is fading, and no one knows how to ensure its survival. Inevitably, the failings of the EU are catching up with it, and Britain’s leaving exposes the financial consequences of decades of bad management, capital destruction through wasteful redistribution and the lack of any contingency planning.
Britain’s €8bn annual contribution to the EU budget is almost the same as the cost of administering the whole Brussels establishment, so Brexit will create a budget shortfall that is almost total, which Brussels will have to make up from the remaining members. Inevitably, some of the redistribution to Brussel’s pet projects will end up being cut as well. It is for this reason that the Brussels politicians hope for a capital payment from Britain.
The Commission also has a commitment to redistribute member funds estimated at €238bn. It must have assumed prior to last year’s referendum that Britain would vote to remain and pay its share. Instead, it voted for Brexit, and the Commission will have to find the money from a capital contribution either from Britain, somewhere else, or cancel some of the projects. With these problems, the Commission is in a difficult position, wrong-footed by Brexit. And when Theresa May says no deal is better than a bad deal and means it, it really could mean an end to Brussels as we know it.
EU Politicians are in Panic Mode
Concerns over the EU’s finances are almost certainly behind the wild statements being made by some EU leaders. According to Jean-Claude Juncker, Theresa May is living in another galaxy, which begs the question about his own galactic residence, relatively speaking. After requests from several member states, which suddenly realise they are going to lose subsidies, the Commission has mechanically increased its demand for an up-front payment by Britain from €60bn to €100bn. This is despite the EU’s own legal advice from the Commission’s lawyers that no money can be claimed. France, Hungary, Italy, Spain, and Poland also want Britain to continue to pay their farmers after Britain has left the EU.
It’s become like an opera buffa, a satire on a barely tangential relationship between the EU Commission and British democracy. Jean-Claude Juncker, prefacing a recent speech in French said somewhat absurdly that English is losing its importance in Europe due to Brexit, despite it being the most commonly spoken. This is the mentality against which Britain will be negotiating.
The politicking of the senior commissioners is far removed from democratic reality. When David Davis for the UK sits down opposite Michel Barnier for the EU, does he counter the demand for an up-front payment of €100bn with a lesser amount, or a counter-claim for Britain’s share of the estimated €154bn of assets owned by the EU, which the EU side fails to mention? A claim on EU assets is equally flaky. Davis can only accept a position in accordance with his legal advice, or at least not very far adrift from it, because he has democratic accountability, though Barnier does not. Both the EU’s and Britain’s lawyers say there’s no capital liability for Britain, and there’s no mention of it in Article 50, or articles referred to in it. Capital payments and asset claims are just a try-on.
The British position is that no treaty is better than a bad treaty, so most of the movement in negotiations must come from the EU side. As their treatment of Greece illustrated (conveniently reminded to us last week by Yanis Varoufakis in his new book, Adults in the Room), the EU might be obstinate to the point of destruction. Fortunately for Britain, it is not in the position Greece was, and can afford to walk away.
But the Commissioners know of no other approach other than to bully. Remember that when Ireland refused to ratify the Nice Treaty in a referendum, the EU told them to vote again, and get it right. They did the same again to Ireland over the Lisbon Treaty. Denmark was told to hold a second referendum on Maastricht, and to get it right as well. Perhaps they thought that by upping the cost of leaving, the UK might back down and go for a soft Brexit, or even decide to stay after a second referendum. So, when Juncker had dinner with Theresa May on 26th April and was told plainly Britain’s point of view, he threw his toys out of the pram.
All they have achieved is to get the British electorate’s collective backs up, just as Obama did when he said Britain would go to the back of the queue on T-TIP. Thanks to these threats, it is now likely that Mrs. May will have an even greater landslide victory in the upcoming general election, with an increased number of ardent Brexiteers for MPs.
All that is for public consumption. Fortunately, behind the scenes the officials doing the real negotiation are quietly making progress. Politicking is one thing, practicality is another. According to Daniel Korski, who was deputy head of the No 10 Policy Unit, writing in an article for last Wednesday’s Daily Telegraph, EU negotiators now accept it is in everyone’s interest to avoid a cliff-edge. Many months ago, Iain Duncan-Smith reported that German manufacturers had secretly agreed with Angela Merkel’s administration that any trade barriers would be minimal. The reality behind the rhetoric is European business, which after all employs EU residents and collects and pays the bulk of the taxes, will determine the outcome.
In theory, Britain has two years from March before formally leaving, though Article 50(3) allows for this period to be extended by agreement. This opens the possibility for transitional arrangements if need be. Furthermore, the EU side will be able to ratify the decision on the new basis of qualified majority voting. This means the support of Germany, France, Italy, and Spain for an agreement should be sufficient, so Britain is likely to target these governments behind the scenes, along with their major corporations. The reality is European businesses want to protect their markets and investments in the UK, and perhaps to use the UK after Brexit as a springboard for global business.
Therefore, expect covert briefing by the British for the major European car manufacturers, the banks, and any other major multinationals based in these countries. Contentious issues, such as agricultural subsidies and citizens’ rights, while important, are unlikely to stand in the way of an agreement. However, the procedures of the EU, which involve all 27 nations being consulted, usually involves protracted lead-times. The only way trade and the rights of affected citizens can be agreed within the two-year time scale is for the Commission to initially work with Germany, France, Italy, and Spain to complete negotiations, keeping consultations with the other states to the bare minimum, before presenting a final solution to the other states. Otherwise, a lengthy time extension will almost certainly be required.
There can be little doubt where the power lies. Britain can walk away, the EU cannot. Britain’s Commonwealth members rejoice at Brexit. Furthermore, Britain can rapidly come to a Most Favoured Nation (MFN) agreement with China, which would take decades for the EU to achieve. China is already sending freight by rail to Europe, including the UK. A quick MFN deal with China opens a trade network which will eventually include the whole of Asia and those parts of Europe not bound by the EU. In the fullness of time, this is likely to be a far better arrangement for Britain than being restricted by the EU’s trade agreements. Combining the Commonwealth and Asia in a massive liberated trade arrangement has the benefit of making the UK a suitable base for European companies selling services into what promises to become the largest trading area in the world.
Being free of the EU is a no-brainer, and the British electorate is beginning to understand it. The City is also anticipating the new opportunities with growing relish.
All this assumes that there isn’t a banking or financial crisis by March 2019. Nobody will be immune to a banking blow-up in Euroland, but from the British point of view there must be an urgency to get out of the EU before it happens. It also assumes Theresa May gets the electoral mandate she seeks on 8th June.
About the author:
*Alasdair Macleod is the Head of Research at GoldMoney.
This article was published by the MISES Institute