Opinion

Is Europe drifting towards a hard Brexit?

Theresa May's recently announced that she will trigger Article 50 no later than March 2017. Guntram Wolff debriefs May's speech and the implications for the future of EU-UK relations.

By: Date: October 6, 2016 Topic: European Macroeconomics & Governance

This op-ed was originally published in Nikkei Veritas “Market Eye”. It was also published in RzeczpospolitaNikkei Asian Review, and Nikkei Report. It will also be published in L’Expansion and in La Stampa.

nikkei-veritas

Expansion logo

la-stampa-logo-italy

nikkei

nikkei

Rzecszpospolita

Theresa May has finally spoken. In a major speech, she has set out her plans to trigger Article 50 and negotiate Brexit. The announcement has brought clarity on the timetable for negotiations, which will start no later than March 2017 and probably last for 2 years. But May also gave the clearest information yet about the British government’s aims, setting out some key “red lines”. Of course, such lines are drawn in sand, not stone, and they can change in the course of negotiations. But compromise is politically difficult, so we should expect the UK to fight for its position.  It is therefore worth unpacking what these red lines imply for the future of EU-UK relations. The signs are not good those for those who support a “soft Brexit”.

The first and most important point is about sovereignty. As Prime Minister May puts it: “We are going to be a fully-independent, sovereign country, a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts.” And she continues: “We will be free to pass our own laws….And we are not leaving only to return to the jurisdiction of the European Court of Justice.” These statements are clear and have clear implications for the nature of the future relation between the EU and the UK. There cannot be anything even closely resembling the deep integration of the single market.Far-reaching integration like the single market needs much more than a shared set of standards and rules. It also needs a uniform enforcement of these rules through supranational institutions like the European Court of Justice and the European Commission.

Far-reaching integration like the single market needs much more than a shared set of standards and rules.

This is not just a theoretical observation but an issue with immediate economic consequences. So-called passporting (the ability to provide banking services across borders) is only conceivable within a supranational jurisdiction. And it is not only financial services that are concerned. In many other sectors, such as healthcare, it is shared standards and their enforcement that are most important in facilitating international trade — not tariffs, which are already low. Just as vital is the supranational surveillance of competition and state aid, without which unfair competition and dumping can become a real threat to business and consumers.

What other arrangement is possible? One obvious alternative is a free trade agreement.

Since anything closely resembling single market membership has been excluded by the British PM’s choice of red lines, one question naturally arises. What other arrangement is possible? One obvious alternative is a free trade agreement. The PM immediately mentioned the mantra of “Global Britain”. But with almost 48% of UK goods exports going to the EU, the first priority for the UK would surely be to forge a deal with the EU. Such a deal would exclude large parts of the services sector, in which the UK is relatively strong. But the UK’s hand will be weakened further by the fact that no EU country sends more than 14% of their total exports to the UK. The EU could well try to leverage that relative strength in negotiations.

The negotiations for the CETA agreement with Canada started more than seven years ago.

However, there are also potential pitfalls on the EU side. Even in a scenario where the EU institutions were willing to engage with the UK and develop a mutually-beneficial trade deal, no outcome can be guaranteed. For a start, trade negotiations can take a long time. The negotiations for the CETA agreement with Canada started more than seven years ago. Moreover, even with cooperative EU institutions, it is far from certain that any trade deal would be implemented. Although EU law formally gives the EU an exclusive competence on trade negotiations, this supremacy is now in question. In particular, after the European Commission’s decision to allow all EU member states to pre-approve the CETA deal, it has become unclear whether the EU is actually still able to forge meaningful new trade deals. As a consequence, Britain may leave the EU without a new trade deal in place, and with uncertain prospects of a new deal anytime soon.

The consequences of such a “hard divorce” could be painful for business and citizens, but there are also some reasons for hope. The PM has announced that the British government will enact a law to incorporate all EU law into UK law. That could offer the basis of an interim trade agreement. However, the UK would have to fully follow EU law to minimise disruptions until a new arrangement was agreed. In this case, of course, the UK’s regained “sovereignty” would remain an illusion.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More by this author

Podcast

Podcast

Surprising priorities for Europe and China

Bruegel’s Alicia García-Herrero and Robin Niblett of Chatham House discuss a new joint report on EU-China relations. How easy was it to find common ground with Chinese partners? And what should be the priorities for economic cooperation between Europe and China?

By: The Sound of Economics Topic: Global Economics & Governance Date: September 13, 2017
Read about event More on this topic

Past Event

Past Event

EU-China economic relations: looking to 2025

This event will see the launch of a report on EU-China relations and discuss issues such as trade and investment, industrial cooperation and innovation and global governance

Speakers: Victor Chu, Ian Davis, Alicia García-Herrero, Dame Clara Furse, Tony Graziano, Anatole Kaletsky, K.C. Kwok, Lawrence J. Lau, Ina Lepel, Hanna Müller, André Sapir, Robin Niblett, György Szapáry, Jean-Claude Trichet, Zhang Yansheng, H.E. Ambassador Yang Yanyi, Liu Xiangdong, Gunnar Wiegand, Guntram B. Wolff, Huang Ping and Elena Flores Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 13, 2017
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: Carlos Sallé Alonso, José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Matthias Buck, Grégory Claeys, Zsolt Darvas, Jean Luc Demarty, Maria Demertzis, Anna Ekström, Lowri Evans, Ferdinando Giugliano, Sandro Gozi, Peter Grünenfelder, Reiner Hoffmann, Levin Holle, Kate Kalutkiewicz, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Matti Maasikas, Steven Maijoor, Reza Moghadam, Nathalie Moll, James Murray, Johan Van Overtveldt, Julia Reinaud, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Jean-Claude Trichet, Reinhilde Veugelers, Nicolas Véron, Ida Wolden Bache, Liviu Voinea, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre Date: September 7, 2017
Read article More on this topic More by this author

Blog Post

Africa and Chinese rebalancing

What’s at stake: China and Africa have developed close economic ties over the past 20 years. The need to rebalance the China-Africa relationship was also a prominent topic in the context of the recent Kenyan elections. But if the drivers will shift relatively more towards domestic consumption, what will the impact be on Africa? We review recent contribution to this debate.

By: Silvia Merler Topic: Global Economics & Governance Date: August 28, 2017
Read about event More on this topic

Past Event

Past Event

Europe's global positioning and its trade implications for Asia

This event, taking place in Hong Kong will discuss Europe-Asia relations in the context of global developments.

Speakers: Alicia García-Herrero, Peter Mandelson, David Tweed and Guntram B. Wolff Topic: Global Economics & Governance Location: Bloomberg Hong Kong Office 25/F, Cheung Kong Center, 2 Queen's Road, Central, Hong Kong Date: July 7, 2017
Read article Download PDF More on this topic

External Publication

Review of EU-third country cooperation on policies falling within the ITRE domain in relation to Brexit

What is the possible future relationship between the EU and the UK in light of Brexit? The report provides a critical assessment of the implications of existing models of cooperation between third countries and the European Union on energy, electronic communications, research policy and small business policy.

By: J. Scott Marcus, Georgios Petropoulos, André Sapir, Simone Tagliapietra, Alessio Terzi, Reinhilde Veugelers and Georg Zachmann Topic: European Macroeconomics & Governance Date: July 5, 2017
Read article More on this topic More by this author

Podcast

Podcast

Global trade and Europe

Multilateral trade has generated a huge amount of wealth, and lifted many around the world out of poverty. But there is also growing awareness that globalisation is creating “losers”, and this risks feeding a backlash against multilateral trade. We explore the benefits and risks of multilateral trade, and ask how Europe should behave in a shifting context

By: The Sound of Economics Topic: Global Economics & Governance Date: June 30, 2017
Read article More on this topic

Blog Post

Can EU actors keep using common law after Brexit?

English common law is the choice of law for financial contracts, even for parties in EU members with civil law systems. This creates a lucrative legal sector in the UK, but Brexit could make UK court decisions difficult to enforce in the EU. Parties will be able to continue using English common law after Brexit, but how will these contracts be enforced? Some continental courts are preparing to make judicial decisions on common law cases in the English language.

By: Uuriintuya Batsaikhan and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More by this author

Parliamentary Testimony

House of Commons

Exiting the European Union Committee

On 19 April 2017 Zsolt Darvas appeared as a witness at the Exiting the European Union Committee, the House of Commons, United Kingdom.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, House of Commons, Testimonies Date: June 20, 2017
Read article More on this topic More by this author

Blog Post

Brexit and the future of the Irish border

The future of the Irish land border has been thrown into uncertainty by Brexit. The UK's confirmation that it will leave the EU's single market and customs union implies that customs checks will be needed. However, there is little desire for hard controls from any of the parties involved. This is especially true for Theresa May's potential partner, the DUP. Creative solutions are needed to reach a solution.

By: Filippo Biondi Topic: European Macroeconomics & Governance Date: June 19, 2017
Read about event More on this topic

Past Event

Past Event

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 Date: June 2, 2017
Read article More on this topic

Blog Post

How export growth achieved adjustment of massive trade deficits in the euro area

The reduction of current account deficits in euro-area countries since the 2008 crisis is strongly driven by increases in exports that dampened the effect on production of the fall in demand and imports.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 31, 2017
Load more posts