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Breaking Good

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Dynamics in London have forced Theresa May to seek an exit from the European single market. Yet behind the scenes, she is hoping to keep extensive access. It’s time for the EU to define its interests.

© REUTERS/Yves Herman

The British government took seven months to present its strategy for Brexit after the United Kingdom’s historic decision on June 23, 2016, to leave the European Union. The strategy goes much further than many on the continent had expected. Prime Minister Theresa May announced her country’s intentions to pursue complete separation from the EU’s single market and customs union in a landmark speech she gave at Lancaster House to Europe’s assembled ambassadors on January 17, 2017.

A complete withdrawal did not necessarily have to follow the Brexit vote. Departure from the EU could have taken may forms. A soft Brexit, for example, was the preferred option even of some outspoken “Brexiteers” – an EU-UK relationship that would allow the retention of market access like Norway’s ties via the European Economic Area or Switzerland’s bilateral agreements that grant restricted market access. Such partial integration, however, requires the implementation and application of EU law, acceptance of binding judicial oversight, contributions to the EU budget, and free movement of persons – none of which May seemed ready to accept, though she indicated that some, limited financial contributions may be thinkable.

But even within this hard Brexit strategy, there are different ways to organize EU-UK cooperation. This spans from the complete absence of a formalized trade relationship – thus reverting to the WTO framework including tariffs – to a regular free trade agreement without tariffs, all the way to an expansive free trade regime (like the EU recently signed with Canada, known as CETA) or an association agreement (Ukraine).

The question now is for the EU-27 to define the bloc’s ties with the UK in the case of a hard Brexit. In a rare show of unanimity, they made clear in the wake of the referendum that partial participation in the single market without freedom of movement or the acceptance of EU regulations would not be tolerated. This still stands. But there are different options within the hard Brexit scenario, and that leaves many questions still to be decided in EU-UK negotiations. It is set to be a strong test of this unity among the 27.

Single Market through the Back Door?

Access to the single market remains the most important issue for EU-UK negotiations. Even in a hard Brexit, the UK continues to have great interest in minimally restricted access to the EU’s single market – it has been the project of all British EU policy heretofore. The UK exports 47 percent of its goods to the EU-27, making these partners far more important to the British economy than the United States. EU member Ireland alone receives nearly twice as many British exports as China.

The British government has two strategies for economically cushioning its hard Brexit strategy. First, it will attempt to reach an extensive free trade agreement with the EU before the two-year deadline for exit negotiations has expired. London wants this agreement to mirror the regulations of the single market – with regard to mutual recognition, the free movement of services, and access to EU financial markets – one-to-one, to the degree possible.

Such a single market membership through the back door would put the EU in a situation it has until now successfully thwarted: The UK would enjoy continued, unrestricted access to the world’s largest market without having to abide by its rules or perform its duties. This strategy has been fed by the belief in the UK that the EU – given the continuing crisis in certain eurozone countries and considering the importance of the city of London – would suffer more under a hard Brexit than vice versa. It also highlights just how starkly different the power balance and the relationship is perceived on the continent.

Second, London plans to replace the loss of its access to the EU’s other free trade agreements with the largest possible number of bilateral agreements with third countries. The UK received support from US President Donald Trump; the avowed Brexit supporter threw himself behind the speedy construction of a US-UK free trade agreement, as this also fits into his preference for bilateral rather than multilateral trade agreements. With such a transatlantic deal as an example, the British government wants to negotiate further free trade agreements before its exit, above all with long-time partners like Australia, New Zealand, and Canada, and perhaps with India and China as well.

Such a Global Britain strategy is constructed to link an EU exit with new possibilities rather than high costs. In the short term, this strategy appears to be working among the British public: According to a January survey from the polling institute YouGov, 57 percent support May’s plans, including full exit from the EU single market and customs union. Further, a majority are convinced that the EU will suffer more than the UK from a breakdown in negotiations. May has yet to prepare her population in any way for the real costs of the hard Brexit strategy.

Disconnect across the Channel

For the EU-27, such a strategy appears to be based in fantasy, given that it contains contradictory goals. Limiting access to one’s most important trade partner is a bad way to begin a global free trade initiative. The economic dependency is asymmetrical, after all: UK exports to the EU stand at 47 percent, while exports from other EU member states to the UK average well below 10 percent. Furthermore, it is hardly realistic to believe that the EU and the UK will manage to negotiate an extensive free trade agreement parallel to all exit formalities in the two-year timeframe, especially when a similar free trade agreement with Canada (CETA) has taken more than ten years and is still not completely ratified. Nor would the EU accept a free trade agreement that corresponded to single market access without its usual requirements. Basic principles for any deep free trade agreement would at minimum include implementation of EU regulations in areas with full market access and a dispute resolution mechanism tied to the European Court of Justice.

Similarly, the US requires on average more than four years to negotiate and ratify a free trade agreement. The only exceptions have been agreements in which Washington could dictate the terms entirely. The UK, under extreme time pressure and more dependent upon the resolution of a US-UK agreement than the US, would likely pay a high price for speed.

Negotiations between the EU and UK therefore start out heavily mortgaged. Even the hardest type of Brexit with a reintroduction of tariffs has entered the realm of possibility – whether through failed negotiations or British unwillingness to accept any basic mechanisms to retain privileged access to the single market. The danger is that the British government will blame any and all costs of their hard Brexit strategy on EU unwillingness to grant them a “fair deal.”

The UK as a Third Country

How does this all shape the EU’s position? First, the British tendency toward a hard Brexit also has benefits for the remaining 27 EU countries. The division between members and non-members remains untouched. It will be clear from the very start of negotiations: Brexit makes the UK a third country; partial integration like Norway or Switzerland is practically excluded. Conversely, this also means that the central aspects of the single market like mutual recognition or the free rendering of services cannot become part of the future EU-UK free trade agreement. Trade agreements similar to those with other third countries – regulating everything from tariff-free trade all the way to far deeper cooperation – are possible as long as the UK accepts the typical conditions, including conflict mediation.

Second, the EU-27 need to resolve their communication deficits. The EU stance of “no negotiation before notification,” whereby the EU has refused to start the process before the UK has invoked Article 50, has until now left all public communication on Brexit to the British. Given both the Europe-wide reach of the British media and the EU’s traditionally weak communication skills, the British government has a significant advantage in shaping public opinion on the matter. These negotiations will also influence the European conversation within individual EU states. Therefore, the EU-27 should create their own carefully constructed communications strategy.

Third, patience is an important element. As soon as the UK announces its intention to leave the EU (expected by the end of March, if the House of Lords plays ball), the clock starts ticking on the two-year deadline. This can only be extended by unanimous decision. If there is no resolution, the UK reverts to the status of any other WTO signatory. Therefore, it is above all the UK who is dependent upon an extensive free trade agreement, or at the very least an intermediary solution. The closer the deadline nears, the more the EU can pressure the UK into accepting European rules to retain a limited form of access to the single market.

Fourth, the EU remains interested in close cooperation with its British partner on issues unrelated to the single market, especially domestic and foreign security policy. This is another area where the Trump factor has altered the calculus of European interests. The more the new US administration seeks to distance itself from the EU (and NATO) and the more it breaks with traditional positions on foreign and security policy, the more important it will be to keep a united European position, including the UK. This affects, for example, sanctions against Russia and policy toward Ukraine, the Israeli-Palestinian conflict, Syria, and Iran. Cooperation on foreign and security policy must be kept separate from tough negotiations on economic affairs, in the interest of both parties.

Last but not least, it is the EU’s responsibility to protect the various special interests of individual states in Brexit negotiations. This includes the treatment of EU citizens in the UK or the status of Gibraltar. The border between the Republic of Ireland and Northern Ireland in particular will take on a special importance as it becomes an EU external border via Brexit. The openness of this border as it currently stands is decisive not only to Irish economic health overall, but also to the Northern Irish peace process. Twenty percent of Northern Ireland’s residents also have Irish and therefore EU citizenship. Notwithstanding May’s statements for maintaining an open Irish-British border, as soon as the UK exits the customs union and single market, it will be necessary to reinstitute some sort of border controls. Here the EU needs to insist on a solution that will allow the border to remain open in the future – thus demonstrating to individual member states the value that EU membership can have in representing their individual interests.