Proposal #3

Time to Abandon Illusions

 

There is almost no possibility that the UK can negotiate a new and “bespoke” deal with the EU. The EU27 have made it clear many times that they will reject any deal that threatens the integrity of the EU’s Single Market. Nor will the EU accept the introduction of double standards whereby the UK is able to access parts of the Single Market without accepting all the obligations that come with being a member state. The European Council “Guidelines” of April 2017 are clear. In the very first paragraph, under the heading “Core Principles“, we read that “[p]reserving the integrity of the Single Market excludes participation based on a sector-by-sector approach”.[1] If there is an article of faith in the EU’s negotiation stance, then this is it.

 

As if that were not enough of an obstacle to a “special” EU-UK trade deal, we should also recall that free trade agreements signed by the EU with other countries, such as Canada and South Korea, contain within them Most Favoured Nation (MFN) clauses. If the EU were to offer the UK an agreement that went further than existing FTAs, then all countries with whom they have an existing MFN agreement would have a right to the same treatment.[2]

 

If the UK is not a full EU member state, then it can seek to join alternative organizations, such as the European Economic Area (EEA). Or it can negotiate a new free trade agreement with the EU. This latter option will not give the UK access to the Single Market, as many seem to think. But nor would it merely offer the UK the very minimum. In the April 2017 “Guidelines”, the EU27 accepted that whilst a new relationship between the EU and the UK “cannot offer the same benefits as Union membership”, “strong and constructive ties will remain in both sides’ interest and should encompass more than just trade”.[1]

 

This is the position agreed upon by the EU27 and as we have already explained, changing such a position would require a new agreement between the EU27. Such a change might necessitate a change in the EU’s treaties, which would trigger a series of domestic ratification procedures for which there is no appetite whatsoever in Brussels or in national capitals across the EU. As if this in-built rigidity were not enough, the political context is also unfavourable to any special treatment for the UK. There is no desire among the EU27 to make Brexit appear a soft or attractive option. Faced with open hostility in Poland, simmering anger in Greece, and ambivalent feelings across the rest of the block, EU member states are aware of the fragility of the European integration process. One way of strengthening it is to hold firm in negotiations with the UK. Whilst the stakes are higher for the UK, they also high for the EU.

 

The EU’s position makes a deal difficult to achieve only if the UK wants “to have its cake and eat it”, a phrase which alludes to the desire to retain the advantages of membership but without the costs. From any perspective, this seems unreasonable. This famous phrase, attributed to Boris Johnson, is instructive. It expresses a wish to make a show of Brexit whilst leaving anything of real substance unchanged. There is some precedence for this, namely the opt-outs negotiated by the UK and by other member states such as Denmark. Governments have generally honoured these opt-outs in theory but have ignored them in practice. This is an instance of what the Danish political scientist Rebecca Adler-Nissen has called “late sovereign diplomacy”.[3]

 

The opt-outs allowed governments to signal to their own citizens at home that they were outside of domestically sensitive policy areas. At the same time, national officials played leading roles in the very policy areas that their political masters had negotiated opt outs for. As Adler-Nissen observes, “[n]ational opt-outs are pragmatically circumvented in the consensus-oriented Council of Ministers”. The British role in security cooperation in Europe is a case in point: at the time of the Amsterdam Treaty in 1997, the UK carefully negotiated its role in this area, securing an “opt-in” deal which allowed the government to decide its participation on justice and home affairs issues on a case by case basis. Whilst it is generally thought that the UK is “out” of security and border-related cooperation in the EU, in practice the UK government actively involved in policy developments, in the development of a European asylum policy for instance.[4]

 

Given these precedents, we can see why some view Brexit as just an extreme version of the commonly used opt-out system. The Financial Times columnist Janan Ganesh laid out precisely this vision in a column earlier this year. In his words, the goal of Remainers should be “to shape Britain after exit, not to overturn exit… [I]t is possible to do the first job so thoroughly that, over time, it amounts to the same thing as the second”. Post-Brexit, Ganesh writes, “pro-Europeans can salvage most of what they want. It is a matter of steering the evolution of British laws and institutions towards the EU norm, until the gap between membership and non-membership withers”.[5]

 

Viewing the difference between EU membership and non-EU membership as insignificant is symptomatic of the wider problem of Remainers in the UK, discussed elsewhere on The Full Brexit (see Analysis #9: Why is Brexit Proving so Difficult to Implement?). There is simply no grasp of the fact that control over laws and political decisions matters a great deal to some people and that they are willing to tear up much of what has become taken for granted since the UK joined the EC in order to achieve it. The slogan “having your cake and eating it” came from deep within the ruling class; it was not popularized by ordinary Brexit voters. For Ganesh and others, Brexit need be no more than a postmodern simulacrum, something that provides the illusion and trappings of sovereignty but does not connect to the real nitty gritty of the UK’s deep integration into the constitutional and economic ways of “ever closer union”.

 

These fanciful notions merely reveal the cavalier treatment given by some commentators and politicians to the key themes of the Brexit vote. To paraphrase the postmodernists, we are not in the realm of the simulacrum, we are in the domain of the real.[6] We urgently need a vision for Brexit that is realistic given the positions publicly adopted and communicated by the EU. This vision must also be achievable given the constraints and obligations of the Article 50 process, which Theresa May unwisely triggered before giving any serious thought to the final destination for a post-Brexit Britain. And finally, this vision must be founded on clear principles of what is just and right, and embraces the change that will come from Brexit.

 

The Case for a Clean Break

 

Brexit means leaving the European Union, which means leaving both the Single Market and the Customs Union. Any alternative to this will undermine the commitment to “take back control” (see Analysis #2: Popular Sovereignty and “Taking Back Control”). Indeed, it could well leave the UK in a situation where its government and citizens have less control than before. This would be the case, for instance, if the UK sought to adopt a Norway-style model by joining the European Economic Area.

 

Contrary to what many people think, exiting the Single Market and the Customs Union does not mean autarky. The UK will not suddenly become like Enver Hoxha’s Albania in the 1970s and early 1980s or North Korea today. In spite of this, fear of being “left out in the cold” exerts an iron grip on the British political class. This is because they have lost touch with their own citizens, and compensate for this loss by building close ties with their European peers. It was striking that during the referendum campaign in 2016, even some of the most ardent Leavers refused to accept that exiting the EU meant that the UK would be out of one of its most favoured clubs. Many, such as Daniel Hannan, assumed it would remain in the single market anyway. Others spoke glowingly about the warm embrace of the “Anglosphere” that supposedly awaited the UK once it had left the EU.

 

As its final goal, the UK government should aim for a standalone free trade agreement with the EU. As this is realistic and it most likely to be what the UK is offered once negotiations move to the “second phase”. It is therefore possible to plan for it in advance. In truth, all free trade deals are “bespoke” to some extent, as no two economies are identical. This makes direct comparisons between what the UK would negotiate and what Canada has negotiated (the Canada-EU trade agreement, CETA) misleading. The challenge for the EU and the UK will be to establish a framework that manages the likelihood of regulatory divergence. For the EU and Canada, and generally for the EU’s bilateral trade deals, the goal is regulatory convergence.

 

Notwithstanding what the EU27 European Council “Guidelines” say, it is reasonable to suppose that some sector specific deals might be possible. This would be in areas where participation would be through a simple cash payment, and where the regulatory issues to relatively simple. One example is the European Research Area (ERA). The ERA includes at present a number of non-EU member states that participate as associated members, such as Turkey and Iceland. The same applies for the Erasmus “plus” exchange scheme, which Israel currently participates in along with a number of non-EU countries. In areas dominated by complex regulatory architecture, such as finance or pharmaceuticals, there is no likelihood of tailor-made deals.

 

A free trade agreement of this kind would lead to major disruptions for businesses. It would not cover services to the same extent as goods and important non-tariff barriers – which for services will include dispute settlement measures for highly regulated sectors - are likely to persist after any deal has been signed. Given the importance of services to the UK economy, this would be a serious change of environment requiring real adjustment. However, what is currently proving so destabilizing for many sectors of the UK economy is the uncertainty about outcomes and fear that there is no strategic thinking going on anywhere in Whitehall on the UK’s long-term economic strategy.

 

Businesses are able to calculate the relative costs and benefits of a new framework for UK-EU relations, and they can make decisions about how the balance of these costs will affect their margins. They are not, however, able to model the deep political uncertainty that surround the negotiations today. Nor can they make contingency plans for the multitude of possible outcomes on the table at present, from the preserving the status quo all the way through to a complete “no deal”.

 

Certainty about the end destination, combined with policies designed to manage and shape the transformation that the UK economy will undergo as a result of Brexit, will fundamentally change the way that businesses think about the UK’s economic future. Seeking a new free trade agreement would anchor expectations and would allow people to start thinking about the UK economy post-2019. It could signal a new departure for the British economy and not a downward spiral.

 

The Need for a Full Brexit

 

The disruption caused by the move from EU Single Market and Customs Union membership to a much more limited free trade agreement will be mitigated in part by the clarity provided by the government seeking a realistic goal that avoids a chaotic “no deal” exit from the EU at the end of March 2019. However, at the same time, this disruption is an opportunity for a radical overhaul of the British national growth model. Embracing this opportunity is what we mean by a Full Brexit.

 

It is a curious fact about the current debate that opponents of Brexit vigorously defend the economic status quo in the UK, as if it were some sort of utopia. Quite the opposite is true. The British growth model is broken and this is an opportunity to try to fix it. Thus far, there has been far too much focus on the impact of Brexit on trading relations. Trade is important but to focus on it exclusively is a mistake. The relationship between trade and national growth rates is by no means clear. What is much clearer is that growth rates in the long term depend upon advances in productivity. Growth through substantial and sustained increases in productivity, combined with a policy framework designed to distribute wealth more easily throughout society, is what really matters in the medium to long term.

 

The workings of the British growth model are not a mystery. The UK economy relies on an expansion of the labour market for growth, not on increases in productivity. Low productivity dampens wages whilst a reliance on an expanding labour force makes the UK economy structurally dependent upon high levels of net migration into the UK. Immigration was a big issue in the EU referendum not because British people are naturally racist or xenophobic. It is because immigration is at the heart of the British growth model. As a result, the UK experiences life in the Single Market through the prism of EU nationals coming to live and work in the UK. Other EU member states – with different growth models – experience the Single Market in other ways e.g. through violations of the labour code or through high levels of emigration.

 

The great advantage of the UK growth model is the high level of employment it provides, albeit often of poor quality (part-time, zero-hours, fixed term contracts). The downside is the low productivity, the dampening effect of this on wages, and the consequent reliance on private debt as a way of maintaining consumption patterns. The shift from manufacturing to services goes a long way to explaining the low productivity levels in the UK economy, but we should also focus our attention on the relationship between productivity levels and the structure of labour markets. An open and unregulated labour market changes incentives for employers: why spend time and money training an employee if you can easily find a replacement at any point? Similarly, if you are unlikely to be able to get rid of someone, then you have a powerful incentive to invest in proper training for them.

 

Two British economists, Steven Nickell and Patrick Layard, found in a 1999 study that job security was closely correlated with strong productivity performance. They argue that this is for at least two obvious reasons. Productivity gains “depend crucially on the co-operation of workers” and on their “ideas and suggestions”. “They will be withheld”, they observe, “if individuals feel their jobs are at risk as a consequence”. The second reason is that “substantive participation requires more training, and this is only worth providing if the employment relation is long-term”.[8]

 

Much of the debate around immigration in the UK has focused on fiscal matters (are immigrants a burden on the taxpayer or not) and on whether high levels of net migration make it more difficult for UK nationals to find work or if they pull down wage levels. Evidence suggests that immigrants are net contributors in fiscal terms and that there is little ‘crowding out’ effect in the labour market. There is some evidence that the impact on wage levels differs according to skill levels: some downward pressure on in lower skilled sectors, which disappears in higher skilled sectors. We pay less attention to the relationship between labour market structures and productivity but this is where immigration plays an important indirect role. Open and flexible labour markets – such as the UK and US labour markets – rely on systematic expansions in the supply of labour, which has the effect of limiting incentives within businesses to innovate and to invest in their own employees.

 

Growth models are not static and the British one has experienced some change in recent years. Most important has been the introduction of the National Living Wage, introduced in April 2016. This policy has reduced the share of low-paid employees in the British workforce, from 20.5% in 2015 to 18.4% in 2017.[9] In spite of these positive developments, the UK economy remains a low skilled and low pay economy. The NLW has led to a clustering of wages just above the minimum floor set by the legislation. It has also led to people in low paid jobs experiencing marginal increases in pay but substantial increases in work responsibilities, affecting the quality of jobs.

 

There is also no evidence that the NLW has encouraged “pay progression”, with movement up salary scales as difficult as before. The British low productivity/ low pay economy is alive and well, and this fundamentally shapes how wealth is distributed. The real question to ask of national growth models is how they affect the distribution of wealth between labour and capital. In the UK case, the share of wealth paid out in the form of wages has shrunk since its peak in the 1970s. Added to this declining wage share is the enormous discrepancy within wage income, with salaries at the top end rising far more than those lower down.[10]

 

The move out of the Single Market is a chance to build a fundamentally new British growth model, focused on raising productivity levels. This can be done through investment in training and through measures that force businesses to invest rather than to hoard cash. The goal of this new growth model should not just be wealth creation, as aggregate increases can occur alongside huge increases in inequalities. The goal should be to raise of the standard of the population as a whole. Raising the general competence of society, rather than just creating a framework for competition where the most able succeed and the others fail, is the goal most consistent with living in a democratic society.

Measures to achieve this goal are easier to implement outside of the Single Market, as policies can be extended to all UK nationals but do not need to also be extended – de facto – to all other EU citizens, which can have the effect of making good measures practically impossible. An example of this is the elimination of tuition fees at UK universities. UK higher education has long been a popular destination for young people from EU member states. For them, the high quality of education received is combined with an intensive language experience that will prove hugely beneficial for their future careers. Given that any change in the fee structure for UK students would have also be extended to EU nationals for reasons of non-discrimination, a policy on scrapping tuition fees rapidly becomes impractical as long as the UK remains a member state of the UK.

 

This is not to suggest that the goal of the policy is to favour British students at the expense of non-British students. It is simply that for any redistributive policy introduced by a national government and funded through nationally levied taxes, there are budgetary constraints. A policy is only feasible if its target audience in some way corresponds to the body of people who fund it through taxes levied on their income and their purchases. The same logic would apply to any significant effort made by the UK government to improve the professional training offered to young people entering the labour force. Given the centrality of education and training to raising productivity levels, this point is not just of theoretical interest. It goes to the heart of whether a government can transform its national growth model. It can, but it is significantly harder to do so whilst remaining within the EU.

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References

[1] European Council, “European Council (Article 50) Guidelines for Brexit Negotiations”, 29 April 2017.

[2] Rachel Kent and Dominic Hill, “Does CETA provide a workable model for market access in the financial services industry?”, HoganLovells Brexit:Hub, 3 April 2017.

[3] Rebecca Adler-Nissen, Opting Out of the European Union: Diplomacy, Sovereignty and European Integration (Cambridge: Cambridge University Press, 2014).

[4] Rebecca Adler-Nissen, “Behind the scenes of differentiated integration: circumventing national opt-outs in Justice and Home Affairs”, Journal of European Public Policy 16:1 (2009), p. 69.

[5] “Remainers can shape Britain once it is sovereign”, Financial Times, 21 February 2017.

[6] This language comes from Jean Baudrillard’s book, Simulacres et Simulation (Paris: Galilée, 1981). Of course, for Baudrillard the simulacrum is real.

[7] See Duncan Bell, “The Anglosphere: New Enthusiasm for an Old Dream”, Prospect, 19 January 2017. See also Mike Kenny and Nick Pearce, Shadows of Empire: The Anglosphere in British Politics (Cambridge: Polity, 2018).

[8] Steven Nickell and Patrick Layard “Labour Market Institutions and Economic Performance”, in Orley Ashenfelter and ‎David Card (eds.) Handbook of Labour Economics, vol. 3 (Cheltenham: Edward Elgar, 1999), p. 3065.

[9] George Bangham, “The national living wage has caused the biggest fall in low pay in 40 years – but how is this improving people’s living standards?”, Resolution Foundation, 27 October 2017.

[10] Lucio Baccaro and Jonas Pontusson, “Rethinking Comparative Political Economy: The Growth Model Perspective”, Politics and Society 44:2 (2016), p. 185. See also Luccio Baccaro and Chris Howell, Trajectories of Neoliberal Transformation: European Industrial Relations Since 1970 (Cambridge: Cambridge University Press, 2017).

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About the authors

Christopher Bickerton is Reader in Modern European Politics at the University of Cambridge. Richard Tuck is the Frank G. Thomson professor of government at Harvard University.

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This work represents the views of the authors only. It originally appeared as part of the authors' A Brexit Proposal (2017), available in full in our Archive section. It is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.