Blog Post

The Continental Partnership proposal: a reply to five main criticisms

The proposal for a Continental Partnership (CP) has received a great deal of attention. Two of the authors, André Sapir and Guntram Wolff, clarify some misunderstandings and respond to five key criticisms. They argue that the CP does not offer a way for EU members to restrict freedom of movement, nor is there a great risk of “political contagion”. Indeed, a CP arrangement could be the best route for the remaining EU members to maintain strong economic and security cooperation with the UK, while defending themselves against dumping and vetoes.

By: and Date: September 27, 2016 Topic: European Macroeconomics & Governance

As Europe comes to terms with the UK electorate’s decision to leave the EU, there is great debate about the future of EU-UK relations. In this context, together with three colleagues, we recently proposed the creation of a Continental Partnership (CP) to structure the relationship between the UK and the EU after Brexit. The CP offers a relationship considerably less deep than EU membership but much closer than a free-trade agreement (FTA). So far, a FTA has been considered the default option for post-Brexit relations, even though it would also require considerable negotiation. We argued that deep economic integration between the EU and the UK could continue even without the full freedom of movement of workers, as long as a single set of rules and laws was respected and enforced in the other three dimensions of the EU single market (the free movement of goods, services and capital). We also proposed that the UK should be given a consultative role in single-market policymaking, although the EU would keep ultimate authority over the law-making process.

The CP would therefore consist of two groups of countries. On the one side are the EU member states, which share supranational institutions and participate fully in all EU policies, including the single market’s four freedoms. On the other side are those outside the EU, like the UK and possibly other European countries such as Norway, Switzerland, Turkey or Ukraine, which would not join supranational institutions and would not participate in all EU policies, especially the freedom of movement for workers. The CP would be governed by a new inter-governmental system. Its aim would be to seek not only deep economic integration (with limited labour mobility) between all the participating countries, but also potentially close cooperation in matters of foreign policy, security and defence.

Our proposal should be viewed as dealing not just with the EU-UK relationship, but with the organisation of Europe over a longer time horizon.

Thus, although motivated by Brexit in the short term, our proposal should be viewed as dealing not just with the EU-UK relationship, but with the organisation of Europe over a longer time horizon. In the next 15-20 years, the balance of economic and geopolitical power in the world will alter significantly in favour of countries outside Europe. If our part of the world is to keep a seat at the new top table, it will have to find ways to create a partnership between the EU and non-EU states.

Our proposal for a two-tier or two-circle Europe – with the EU as the inner circle and the other European countries as the outer one – has generated a lot of interest throughout Europe. Reactions have generally been either strongly positive or strongly negative.  Among our defenders, some saw a possibility to transform the inner circle, the EU, into a closer grouping of countries sharing a political project. Meanwhile, others saw the possibility to dissociate economic integration, to which they generally subscribe, from political integration, which they reject. Many also saw our proposal as useful for dealing with countries like Turkey and Ukraine, which do not belong to the EU but are seeking deeper economic ties with it. There is widespread recognition that EU enlargement has largely run its course and that another approach will be needed to deal with the EU’s neighbours.

We believe that the EU and the UK share common interests, in particular in the longer term. The two sides need to define a common vision at the start of a negotiation.

There was, however, much less consensus when it comes to the idea of applying this looser organisation of Europe to the relationship between the EU and the UK. On the EU side there are basically two objections to our proposal as far as applying it to the UK is concerned. One is mainly tactical: the timing of our proposal is considered to be wrong. By offering the UK access to the single market on terms that reflect some of the red lines of those who voted for Brexit, it is argued that we weaken the hand of the EU side at the start of a difficult negotiation. We will not discuss this issue in this blog post. Suffice it to say that our intention was not tactical but strategic: we believe that the EU and the UK share common interests, in particular in the longer term. The two sides need to define a common vision at the start of a negotiation which risks being not only difficult but also acrimonious if there is no such shared perspective.

The other, more fundamental objection concerns the substance of our proposal. Commentators on the EU side worried that its two core principles could be perilous for the functioning of the EU. These are:

  1. allowing countries in the outer circle not to participate in the freedom of movement of workers while enjoying the other three single market freedoms
  2. giving non-EU members a voice, though not a final say, in single-market policymaking

The four freedoms are at the core of the EU political project and are not negotiable for countries wanting to be part of the EU.

Before we respond to five main arguments against our proposal, we will first make one overarching clarification. We are not suggesting that EU members could be given the possibility to opt out of freedom of movement for workers – one of the four single market freedoms. This is a misunderstanding of our proposal, in which all the countries belonging to the EU would continue to be bound by the entire acquis. Thus they would still have to abide by all four freedoms without any restrictions, including the free mobility of workers. The four freedoms are at the core of the EU political project and are not negotiable for countries wanting to be part of the EU. In addition, the free movement of workers is economically indispensable for countries in the euro area, where the exchange rate is no longer available as an adjustment mechanism.

Besides this misunderstanding, there are five main criticisms which have been directed towards our proposal from the EU perspective. (This blog does not deal with reactions on the UK side.)

1. Does a soft Brexit risk political contagion?

Some commentators have feared that our proposal would lead to “political contagion”, with some EU countries demanding the same treatment as those in the outer circle. For example, Guy Verhofstadt, the leader of the ALDE group in the European Parliament (EP) who was recently appointed as EP negotiator on Brexit, has said that the UK cannot get a deal on free movement  because other EU countries may follow. (Please note this was not said in reaction to our proposal.) Likewise, the official position of the European Commission, endorsed by EU heads of state or government in Bratislava last week (without the UK), is also that the four freedoms are inseparable. So, since the UK seems unwilling to accept completely unrestricted labour mobility, the “political contagion” argument is de facto driving the UK to a hard Brexit.

We disagree with this “political contagion” view about a compromise on freedom of movement. It seems to ignore the fact that limits on the free movement of workers would only be an option for countries that are outside the EU, as explained above. Thus our proposal does not offer a way for the UK to first negotiate with its EU partners the right to limit the free circulation of workers and then to decide to remain a member of the EU. This is a legitimate concern on the EU side, but it would not be possible within the Continental Partnership framework.

There is no question in our mind that the UK would only be able to give up on the complete adherence to the four freedoms by losing its status as an EU member. This would mean losing the right to vote on EU laws but having to obey them, and also an obligation to continue paying into the EU budget. This situation of having to leave the EU to be able to limit labour mobility does not strike us as particularly attractive for most current EU members.

We believe that few, if any, EU countries would want to follow the UK’s lead.

The crucial point is the difference between belonging to the inner circle of the CP (the EU)  and being in the outer circle of the CP (outside the EU). This is not just about whether countries have to abide by all four freedoms or can introduce limits on the free circulation of labour. The countries in the outer circle also have fewer rights than those inside the EU since they cannot vote on EU legislation which applies to all CP countries. We believe that few, if any, EU countries would want to follow the UK’s lead and lose their member of the European Commission, where EU legislation originates, and their seats at the Council and the European Parliament, where EU legislation is adopted, simply because they would want to limit labour mobility with other EU countries. Therefore, in our view the risk of “political contagion” is small.

Consider the 27 current EU members besides the UK. Nineteen already belong to the euro area, which is a clear sign of their commitment to the EU as a political project. Among the remaining eight countries, all but one (Denmark) are committed to joining the euro when they can and the vast majority seem to be committed to the EU as a political project.  It is therefore difficult to see how they would benefit from a status where they have less access to EU labour markets and no decision-making power. Nonetheless, there may be a few non-euro area countries which, like the UK, are only interested in economic integration and in fact reject the EU as a political project and the free movement of workers. Perhaps these countries joined the EU only because there was no alternative way to participate in the EU single market at the time. If an alternative like the CP were to exist, these countries may prefer to leave the EU and join its outer circle. However, in our view this would not amount to “political contagion” but instead to “political clarification”.

We do not see the negotiation with the UK as a substitute for reforming the EU to make it more attractive and resilient.

More profoundly, we disagree with the view that pushing for a deal that is very disadvantageous for the UK will be a way to guarantee political consensus for political integration in the remainder of the EU. On the contrary, a political union needs to be based on the free choice of its member nations to stay. It needs shared political goals and clear benefits from membership. To put it another way, we do not see the negotiation with the UK as a substitute for reforming the EU to make it more attractive and resilient.

2. Would the UK gain at some EU members’ expense?

Many workers from Central and Eastern Europe have moved to other EU countries, including the UK, to take up employment. For these countries, the deal we propose may entail a cost. They might understandably consider it a bad deal to continue granting the UK free access to their markets for goods, services and capital while their citizens lose free access to the UK labour market. This is one of the reasons why our proposal indicated that participation in the EU budget would be vital for countries in the outer circle.

As far as the UK is concerned, it would be perfectly legitimate that it made a special budgetary contribution earmarked for low-income EU countries as a compensation for their reduced emigration possibilities and the entailed loss in economic wellbeing. Such a contribution could sway the Visegrad Four (the Czech Republic, Hungary, Poland and Slovakia), whose governments have recently declared their opposition to allowing the UK access to the single market without free labour mobility. In addition, these and other EU countries from Central and Eastern Europe would probably wish to maintain close ties with the UK on security grounds.

3. Could the UK engage in regulatory and social dumping?

Some critics feared that the UK and other countries belonging to the outer circle of the CP would gain free access to the EU market for goods, services and capital without being bound by EU regulation. Could they therefore undertake regulatory competition? Again this is a misunderstanding of our proposal. All countries in the CP, whether they are inside or outside the EU, would have to abide by all existing EU single market regulation. We also discussed the need to enforce regulation throughout the entire area in a homogenous way.

All countries in the CP, whether they are inside or outside the EU, would have to abide by all existing EU single market regulation.

We would argue that for the EU it is actually beneficial that the UK remains inside the EU’s regulatory framework. If that was not the case, the possibilities for “dumping” policies may actually be larger, which could come at the expense of some EU countries. Regulatory competition could, however, take place in areas where there is no EU regulation (as is already the case for all EU countries).

This raises questions about the possibility of future EU regulation in areas that are not currently subject to EU rules, or future regulation that is stricter than current regulation. How would the UK would react to such a possibility as a CP member? In keeping with the spirit of our CP proposal, we would envisage that upon leaving the EU the UK remains in the integrated market, except as far as the free movement of workers is concerned. This means that it would retain all EU single market legislation. Over time, as the EU and the euro area deepen and additional single market legislation is introduced, the UK would have to make a decision. Does it want to retain its CP status and apply all EU legislation, or does it want a looser relationship with the EU? If it decided to depart, the UK would lose all its privileged access to the EU single market.

4. Does the Continental Partnership offer a viable governance structure?

Other criticisms of our proposal worried about its governance. We admit that our envisaged CP council, where the UK and other non-EU CP members would be consulted on EU legislation, creates a new layer in the EU legislative process, which is already cumbersome.  We are open to other forms of organisation but would insist that some form of a relatively close consultation is necessary among CP countries. However, this right to consultation should never mean having voting rights in the EU legislative process.

5. Do we believe that Brexit will really happen?

A final criticism is that we do not seem to believe that this divorce is actually happening. On the contrary, we take Brexit as a given. But we argue for a soft rather than a hard Brexit, for partnership rather than mutual ignorance.  The immediate reaction when a partner tells you that he or she wants to leave is usually denial and anger. With time, the focus normally shift to finding an arrangement that limits the damage for the children. After Brexit as well, the focus should be on establishing a framework to manage mutual interests between the EU and the UK, and possibly other non-EU countries in Europe.

We take Brexit as a given. But we argue for a soft rather than a hard Brexit, for partnership rather than mutual ignorance.

We believe that our CP proposal provides such a framework. The UK would need to continue to pay into the EU budget and it would need to accept all EU laws concerning the economy without having a vote on them. Both are necessary. Without contributing to the budget, no access to the single market can be granted and without a fair application of all laws, an integrated market cannot function. Reduced political influence is the price to be paid for being outside of the core club. In our view, it makes more sense to define the price in this sense than through an approach to economic access that would hurt the economy on both sides.

Finally, our proposal should not be read as meaning that we rejoice at Brexit or at limiting the free movement of workers. It is the British voters who have made this choice. They have effectively called for a new relationship between the UK and the EU, though they were not asked whether they wanted a soft or hard Brexit. This is the choice that the UK Government and its EU partners are now facing.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Upcoming Event

Jun
2
12:30

Substance requirements for financial firms moving out from the UK

In the run-up to Brexit, UK-based financial firms are considering how to organize their operations across the future divide between the UK and EU27. This event will discuss the regulatory requirements on how self-sustaining the operations in the EU should be, and implications for the single market and third countries.

Speakers: Gerry Cross, Simon Gleeson and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

Uuriintuya Batsaikhan
DSC_0794

UK economic performance post-Brexit

What’s at stake: Almost a year after the UK voted to leave the European Union, its economic performance has showed mixed results. The risks of a Brexit-induced recession do not seem to be materialising. On the contrary, up until the end of 2016 the UK saw a continuation of strong consumer spending and strong output in consumer-focused activities. However, the UK economy is showing signs of slowing down in the first quarter of 2017, with weak growth in the services sector and business investments. In addition, strong consumption growth started to cool down as individuals’ purchasing power declines due to a weaker exchange rate. This leads to a question whether it is the beginning of the Brexit slowdown. We review the contributions made on this topic in the last year.

By: Uuriintuya Batsaikhan and Justine Feliu Topic: European Macroeconomics & Governance Date: May 15, 2017
Read article More on this topic More by this author

Blog Post

André Sapir

International arbitration is the way to settle the UK’s Brexit bill

The UK-EU financial settlement risks becoming a toxic stumbling block in Brexit negotiations. But there are actually much more important issues to discuss. To diffuse the issue, both sides should agree to independent international arbitration.

By: André Sapir Topic: European Macroeconomics & Governance Date: May 11, 2017
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

Brexit will change millions of lives. Our leaders must do more than posture

From the land border with Ireland to expats’ pension rights, there is much to negotiate.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 8, 2017
Read article More on this topic More by this author

Podcast

Podcast

How will Europe's banking system respond to future challenges?

After the financial crisis, the EU has taken measures to create conditions for a safer banking sector. One of the key measures to do that is the creation of the banking union. How successful has the implementation of the new framework been so far? How will issues in the Italian banking sector be addressed? And how will Brexit change the European banking sector?

By: The Sound of Economics Topic: Finance & Financial Regulation Date: May 5, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: what are the possible liabilities?

The EU-UK financial settlement will be a complex part of the Brexit negotiations. Here the authors estimate that at end-2018 the EU will have outstanding commitments and liabilities totalling €724bn. Most of these relate to spending after the UK’s likely departure date, but are tied to commitments made during the UK’s EU membership.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

Brexit bill negotiators must answer these 12 questions

Is Brexit a divorce, or is the UK leaving a club? This is the first question to answer as negotatiors discuss the key aspects of the EU-UK financial settlement. The authors present various scenarios, and find that the UK could be expected to pay between €25.4 billion and €65.1 billion. But the final cost can only be calculated after extensive political negotiations.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article Download PDF More on this topic

Working Paper

WP_2017_03 cover

Divorce settlement or leaving the club? A breakdown of the Brexit bill

To bring transparency to the debate on the Brexit bill and to foster a quick agreement, the authors of this Working Paper make a comprehensive attempt to quantify the various assets and liabilities that might factor in the financial settlement.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article More by this author

Blog Post

Giuseppe Porcaro

29 charts that explain Brexit

From financial services to the creative industry, from trade to migration, this selection of charts maps out the troubled waters of Brexit, and provides a compass through blogs and publications Bruegel scholars have written on the topic.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: March 28, 2017
Read article More by this author

Parliamentary Testimony

House of Lords

Brexit: EU budget

On 25 January 2017 Zsolt Darvas appeared as a witness at the House of Lords Select Committee on the European Union, Financial Affairs Sub-Committee.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, House of Lords, Testimonies Date: March 7, 2017
Read article More on this topic

Blog Post

Schoenmaker pic
Nicolas Véron

Brexit should drive integration of EU capital markets

Brexit offers EU-27 countries a chance to take some of London’s financial services activity. But there is also a risk of market fragmentation, which could lead to less effective supervision and higher borrowing costs. To get the most out of Brexit, the EU financial sector needs a beefed up ESMA.

By: Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 24, 2017
Read article More on this topic

Blog Post

unnamed
simone

Brexit goes nuclear: The consequences of leaving Euratom

The UK Government has confirmed that it will withdraw from Euratom. But what does Euratom actually do? And what will happen when the UK leaves? The authors find major risks, potential costs and open questions.

By: Enrico Nano and Simone Tagliapietra Topic: Energy & Climate Date: February 21, 2017
Load more posts