The lessons of Brexit: Annual report 2018

Annual report
04 February 2019

In 2018 the British were obsessed with Brexit but the rest of the EU had much else to worry about. Although the migration crisis abated, EU governments could not agree on how to handle irregular immigration. France’s President Emmanuel Macron struggled to convince fellow leaders that the eurozone needed radical reform in order to guarantee it a secure future without radical reforms to the way it was managed. Poland and Hungary were in conflict with EU institutions because of their disregard for the rule of law. Russian misbehaviour continued to worry a number of member-states, while US President Donald Trump’s threat of a trade war caused most of them to fret. Perhaps most alarming of all, the Italians elected a right-wing populist government that seemed on a collision course with the EU on issues such as eurozone spending rules, migration and Russia.

And on top of all that, EU leaders faced the unwelcome distraction of Brexit. They all regret it (some more than others) and they all want the problem out of the way as soon as possible. They now realise that Britain’s departure is not quite the existential threat they once feared – no other member-state is anywhere near following the UK out.

That realisation may have made parts of the EU too complacent about Brexit. One senior Commission official commented in 2018 that with the British pebble removed from the EU’s shoe, he and his colleagues could get back to the necessary task of integration. Yet those who see the UK as the principal obstacle to a more federal, united Europe are surely mistaken. The vote for Brexit was simply an extreme and particularly unfortunate example of a phenomenon that stretches across much of the continent. Right-wing, populist forces in many member-states – including those in Central Europe – are antagonistic to some or all of immigration, trade liberalisation, cross-border financial transfers, supranational rules and the institutions of Brussels.

The excision of the British pebble appears to have created modest difficulties for right-wing populists: since the referendum, support for the EU has grown in many parts of Europe, as voters have seen what a mess the UK is in. But many parts of European society remain fundamentally EU-sceptic. And despite the best efforts of Macron, who has found very little support among his fellow leaders, the EU is not making much effort to undertake serious reform.

Indeed, the first major lesson of Brexit is that European integration – in the old sense of grand new treaties that transfer powers to the Union – has stopped. From the Single European Act (ratified in 1987) to the Lisbon Treaty (ratified in 2009), five major treaties endowed the EU with substantial new powers. There will probably never be another such treaty. Any new document would have to be ratified by every member-state, with four or five of them certainly resorting to referendums. It is virtually certain that at least one of the referendums would have a negative outcome. EU leaders know this, which is why, if integration is required – for example to improve the way the eurozone works – they will resort to small, low-key inter-governmental treaties among the relevant member-states. The eurozone countries have already done this in recent years, with mini-treaties establishing two bail-out mechanisms, the European Stability Mechanism and the Single Resolution Fund.

The challenge of anti-EU populism to European integration will wax and wane from year to year, but will remain potent. The May 2019 European elections will remind leaders of populism’s strength. The European Commission is undoubtedly right that in order to tackle the root causes of right-wing populism, the EU needs new powers in areas like eurozone governance and managing migration; the EU’s poor performance on those issues has boosted support for the likes of France’s Marine Le Pen, Italy’s Matteo Salvini and Austria’s Heinz-Christian Strache. Yet the paradox of European integration is that anti-EU populists will often be strong enough to prevent the steps towards more integration that would undermine support for their own parties; voters and/or parliamentarians in many member-states would be likely to block the transfer of substantial new powers to the EU.

Therefore while the EU is a very long way from unravelling, it is likely to soldier on with insufficient means to tackle the many complex challenges it faces.

Leaving is like joining
At the time of writing, in January 2019, the final result of the Brexit process remains unclear. No particular outcome looks likely, but many seem possible: the deal Theresa May negotiated; that deal modified to produce a much softer Brexit; Britain leaving the EU without any deal; or a second referendum that could lead to the UK remaining a member.

However, two-and-a-half years after Britain’s referendum, some lessons of the Brexit process are becoming clear. One is that leaving the EU is like joining it. Countries wanting to join engage in ‘accession negotiations’, but that is a misnomer. The accession process in fact involves the EU imposing its terms on the country concerned. If it does not like those terms it does not have to join. The details can be debated but not the basic deal that the EU offers. Every country that has joined the EU has put up with this unequal ‘negotiation’ in order to get into the club.

Leaving the EU is a similar process. Once the departing country has set its red lines for the future relationship, the EU decides what kind of deal will work. Then the exiting country has to accept those terms – if it wants a deal, and it will, since leaving without one would be hugely damaging to its economy. It is true that the Irish border has made Britain’s exit particularly complicated; the Withdrawal Agreement’s provisions for Northern Ireland to stay in much of the single market, and for the whole UK to stay in a basic customs union with the EU, would not be relevant to other countries exiting. But any member-state leaving would have to accept the EU’s strictures on process (the Withdrawal Agreement must come before discussions on future relations) and substance (the departing country must promise to pay the money the EU claims it is owed).

How not to leave the EU
Exiting the EU is a process in which the departing country holds very few cards – the money it owes being one of them. So Brexit was always going to be an unequal negotiation. But the British have handled their exit particularly badly, thereby exacerbating the weakness of their position, in at least three ways.

First, May’s government made strategic and tactical errors in the conduct of the negotiations. The prime minister set out her red lines for the Brexit talks in a speech to the Conservative Party Conference in October 2016, excluding a role for the European Court of Justice, freedom of movement and membership of the single market. She made that speech without having thought through the consequences; no official was allowed to read it in advance (later she added no customs union to her list of red lines).

In that speech the prime minister was trying to curry favour with Tory eurosceptics, especially when she said that “if you believe you are a citizen of the world, you are a citizen of nowhere – you don’t understand what citizenship means”. For much of her prime ministership, May has made minimal efforts to build bridges with the 48 per cent of Britons who voted Remain, or to the businesses that fear a distant relationship with the EU. But having embarked on the path towards a hard Brexit, she then spent the following two years learning that such a course would be very damaging to the economy; rather late in the day, she sought to change direction towards a softer Brexit. That meant blurring some red lines and provoking supporters of a hard Brexit.

Another tactical error was to send the EU her Article 50 letter, activating the withdrawal process, in March 2017. It is true that she was under pressure from both her eurosceptic backbenchers and from the EU to get a move on. But she sent the letter too soon, because she had no plan for Brexit. She should have waited till she knew what she wanted. And once the letter was sent, the clock started to tick: the UK would automatically leave on March 29th 2019, with or without a deal. The ticking clock put the EU in a very strong position.

May never developed a proper strategy for Brexit, in the sense of determining the desired ends and the means needed to deliver them. So she took far too long to work out what she wanted. All through the Brexit talks, the texts that the two sides discussed were EU texts. The UK failed to produce its own proposals, which allowed the EU to set the agenda. When May finally came up with a blueprint for the future relationship, in June 2018 – the so-called Chequers plan and its associated white paper – it was too little, too late to make much impact on the EU. The plan’s section on customs (allowing the UK to set its own tariffs at the same time as eliminating border controls between the UK and the EU) was regarded as unworkable by the EU (and many British officials). The provisions that would allow the UK to stay in the single market for goods by aligning with EU rules were more serious; but they failed to take account of EU concerns that the British could distort the level playing field by undercutting continental firms in areas such as social and environmental rules or competition policy.

As one EU negotiator put it: “If the UK had produced the Chequers plan a year earlier, and met our concerns about the level playing field, it would have been hard for us to reject it.” But coming when it did, in the form it did, the plan was rejected.

The explanation for these tactical errors, of course, was May’s fear of upsetting her party’s hard-Brexiteers. Especially after she lost her parliamentary majority in the general election of May 2017 – which left her dependent on the votes of Northern Ireland’s Democratic Unionist Party (DUP) – she lacked the authority to take on her right wing. She was painfully slow in developing a plan because she could not get her fissiparous party to unite behind a common line – and when she did finally concoct a model for the future relationship, key ministers such as Boris Johnson and David Davis resigned.

The second reason why the UK was in an especially weak position was that its government was divided – while the EU played a blinder in uniting behind the solid, sober and serious leadership of Michel Barnier, the Commission’s chief negotiator. He made a big effort to stay in touch with the 27 capitals – and the European Parliament – and therefore won their confidence. His ‘Task Force 50’, working closely with the Germans and the French, set a firm line, which to the UK was hard and to the EU was principled. Some of the member-states had reservations about this line but they still went along with it. They understood that if they kept together they would achieve more of their objectives. The UK tried hard to work with its ‘friends’ – such as the Dutch, Swedes, Irish and Poles – to soften the EU’s stance, but with little success.

In 2018 the EU was disunited on countless issues, but not on how to handle the British. Meanwhile May and her top officials were greatly weakened in the negotiations by the continuing Tory civil war over Europe. Quite often, May would tell her EU partners one thing, her Brexit secretary (David Davis, or later on his replacement, Dominic Raab) would tell them another and her officials would have a third point of view. To take just one example, in early November 2018, Raab said to Ireland’s foreign minister that the UK expected the right to pull out of the Irish protocol after three months – contradicting what other British ministers and officials were saying. That civil war – and the often crude and thoughtless comments coming out of the mouths of senior politicians and commentators (such as Foreign Secretary Jeremy Hunt’s comparison of the EU and the USSR at the 2018 Tory conference) – did a lot to tarnish the UK’s reputation and lose it goodwill.

The third reason why the UK weakened its hand in the Brexit talks was the sheer ignorance and incompetence of its political leaders. For most of the time since the referendum they have failed to level with the British people about the painful trade-offs that Brexit would inevitably entail: if the UK wanted close economic ties with the EU it would have to forego sovereignty, and if it wanted regulatory autonomy it would have to accept barriers to trade with the EU. May eventually understood the trade-offs but did not explain them to the people. Indeed, for much of the Brexit process she would not accept what experts told her. For example, late in 2017 she was still saying that the entire future trading relationship could be negotiated before Brexit happened (in fact trade talks will not start until after Brexit and are likely to take around five years).

The EU did not have a problem with the British officials that it dealt with, but became frustrated with the inability of their political masters to allow them to negotiate. The persistent tendency of UK politicians to make gross factual errors grated. For example, many of them said that trading on WTO terms would not be so bad since that was how the UK traded with the US, ignoring the fact that UK-US trade is facilitated by dozens of US-EU agreements covering areas such as data, aviation, financial services and pharmaceuticals. And then David Davis said (shortly after resigning) that it would not matter if the UK left without a deal, since it could use the transitional period to negotiate a free trade agreement (FTA) with the EU – apparently unaware that without a deal there is no transition. Whatever the result of the Brexit process, the appalling performance of the UK’s political class – and in particular the narcissistic Tory psychodrama on Europe – has permanently stained its reputation, and not only in Europe.

Politics, principles and precedent
Any member-state contemplating an exit in future years will pay close attention to the EU’s priorities during the Brexit talks. They may be described as the ‘three Ps’ – politics, principles and precedent. Note that economics was not a priority – a point that many British eurosceptics have failed to understand. Because the British have always tended to see the rationale of the EU as economic, they assumed that EU leaders would also prioritise future trading ties. Brexiteer ministers assured the British people that the EU would not do anything that could endanger its trade surplus in manufactured goods with the UK. They were wrong.

The most important driver of the EU’s response to Brexit was politics. The French and German governments, and others too, saw Brexit as potentially an existential threat. If the British flourished outside the EU, others might think seriously about leaving. “We don’t want Marine Le Pen to say, ‘Look at the Brits, they are doing just fine, let us join them’”, said a French official. Every EU government which had to worry about a powerful eurosceptic movement made this point.

By the end of 2018 the risks of Brexit setting off a chain reaction appeared minimal; arguably the EU had overdone its effort to ensure that departure did not appear to be an agreeable process. Whatever the final outcome, it was evident that Brexit would inflict a degree of economic pain on the UK. But the EU was taking no risks.

The EU also cared deeply about its principles. One of the most important is that the ‘four freedoms’ – free movement of goods, services, people and capital – are indivisible. Thus if Britain wanted free movement of goods – as its Chequers plan proclaimed – it would have to take the other freedoms too. That is why Barnier told the British that they could have a deal modelled on Norway’s (fully in the single market) or a Canada-style FTA (completely outside the single market), but nothing in between. The EU rejected the Chequers plan for this reason, and others – including fears that the British would distort the level playing field, and that, whatever they promised, they would simply refuse to be rule-takers for very long.

The political declaration on the future relationship that was agreed in December more-or-less sticks to the Barnier approach, though it is so vague that with some effort one can read into it what one wants. The declaration is certainly a rejection of Chequers and it spells out that the British shall not have frictionless trade – a key aim of the Chequers plan – post-Brexit. British officials can claim that that declaration will lead to something between Norway and Canada, if not Chequers.

Another key principle for the EU is that no third country can have as close a relationship with the Union as a member, or a quasi-member such as a Schengen country that is outside the EU. This reinforces the EU’s point that a state cannot be partially in the single market. More controversially, the EU has also applied this principle to future co-operation with the UK on policing, justice, security, foreign policy and defence – areas where the UK has been surprised to find the EU wanting to keep it at some distance.

A closely-related priority for the EU has been to attach great importance to precedent. This may not be entirely unrelated to the fact that many of the key officials on the EU side, notably in the European Commission and the German government, are lawyers. Precedent gave the EU yet another reason to reject the Chequers plan: if the British were allowed into the single market for goods, without free movement of labour, the Swiss would insist on the same deal (Switzerland currently accepts free movement as the price of participation in the single market for goods, albeit reluctantly). And if the British could have their cake and eat it, what would stop Austria, say, from insisting that it be excused freedom of movement? As for security, if the British were allowed to participate in EU defence institutions, how could the EU stop a third country such as Turkey requesting the same privilege? The obvious answer is that the EU could simply say no, but that has not made EU leaders less precedent-focused.

The EU has tended to put politics, principle and precedent ahead of pragmatism, and certainly ahead of economics. In some national capitals, particular ministries (such as those responsible for trade, defence or police co-operation) thought the EU’s line on Brexit was too hard, but such views made little impact. The member-states’ input into the Brexit talks was managed on a centralised basis by prime ministers’ and presidents’ offices; the sectoral interests represented by particular ministries were largely excluded.

Few of the key officials in Brussels or national capitals dealing with Brexit are economists (nor are the important politicians). When one discussed Brexit with them, it was apparent that maximising future trade and investment flows was not a priority. The British expected industrial lobbying to soften the EU’s stance, but it did not. National officials, including in Germany, liked to report that business lobbies were pressing them to be tough on the integrity of the single market. “We have been urged not to let the British pick holes in the single market, lest that precedent lead to the whole thing unravelling,” said a Berlin official. “Business leaders tell us that the strength and integrity of the single market is much more important than the loss of a bit of trade with the UK”. In fact some individual firms, such as Airbus (for which friction on the UK-EU border will be a major headache), did speak out for a closer future relationship than that envisaged by the EU, but they do not appear to have made much impact.

Forget about the geopolitics
Just as few EU negotiators are economists, very few of them have experience of foreign policy, defence or security issues. Indeed, one lesson of the Brexit process is that the EU does not attach great importance to the geopolitical implications of a country leaving the EU. Macron has said that, with an increasingly threatening geopolitical environment, Europe needs to develop “strategic autonomy”; Chancellor Angela Merkel has added that the EU must take more responsibility for its own security.

Yet without very close collaboration with the UK, post-Brexit, the EU will struggle to fulfil such aims. The UK is one of only two countries in the EU that has a broad range of defence capabilities, and is willing and able to use them. It has a first-rate diplomatic network, intelligence services that are second to none in Europe and great expertise in policing and counter-terrorism.

So one might have expected the EU to take a hard line on the future economic relationship, to show that Brexit does not pay, but – out of self-interest – to have been more pragmatic on security. Given that almost nobody in the UK voted to leave because of European co-operation on foreign and defence policy, even a eurosceptic Conservative government could be open to pragmatic ways of plugging in the British, post-Brexit.

But this has not been the EU’s approach. Principle and precedent have dominated its thinking. The UK cannot have as close a relationship to Europol as Denmark, which opts out of police co-operation, because it is a third country. It cannot take part in the European Arrest Warrant since that is only open to member-states. And if the UK was allowed military liaison officers in the EU’s defence planning institutions, other third countries would ask for the same privilege. As for the Galileo scheme to build a network of European navigation satellites, the EU says that a third country such as Britain can use the system but cannot be part of the management or gain access to the encryption technology, lest the US asks for the same (the EU talks less about the industrial advantages of excluding UK-based firms from bidding for Galileo contracts).

Many European defence experts and quite a few ministers on the foreign and defence side of EU governments are worried about the British being kept at arm’s length. They argue that the EU does need to create unique and bespoke arrangements to plug in the British, because it needs their capabilities. Otherwise, they say, the EU cannot be serious about strategic autonomy. Yet the political declaration agreed in December reflects little of this thinking. Given the declaration’s non-binding and very vague format, however, it is not too late for national governments to push for close ties when the security relationship is negotiated.

Did the EU push the UK too hard in the Brexit talks?
Given that the final outcomes remain unclear, it is far too soon to make a definitive judgement. In any case, the abysmal performance of the UK’s government and political class makes it difficult to criticise the EU; during the two-and-a-half years since the referendum, the UK has done little to earn goodwill. But there are certainly Britons who voted Remain in June 2016 who would vote differently in another referendum, because of the perception that the EU has bullied the UK. They don’t like the fact that one side has held most of the cards in this negotiation, and they bridle at the hauteur of some EU officials (it is not only Britons who sometimes take exception to the tone of these officials).

Put all this to EU officials, and they respond, of course, that their task is to ensure a smooth Brexit that protects the Union’s interests; their job is not to nurture British public opinion – especially since that opinion has been so poorly managed by UK politicians, many of whom have repeatedly lied to voters.

British MPs, and not only right-wing Tories, have found it difficult to accept that Northern Ireland should be left – in economic terms – closely aligned with the EU. But once both sides had agreed, in December 2017, that for the sake of the peace process there should no border controls between Northern Ireland and the Republic, there had to be an Irish protocol that left Northern Ireland in some kind of regulatory union with the EU.

On the Irish issue the EU did in fact show flexibility in November 2018. Driven by the desire to avoid customs checks on goods travelling from Great Britain to Northern Ireland, May erased her earlier red line and asked for the backstop to put the whole UK in a basic customs union with the EU. At first the EU said no – though if maximising trade with the UK had been a priority, it should have said yes. The EU worried about the legality of putting an arrangement which could end up permanent into a treaty that, according to Article 50, should only cover the process of exiting – and not the future relationship.

Furthermore, France and several other countries had major worries that without automatic provisions for the UK to update its social and environmental rules in line with those of the EU, British firms could exploit the customs union to distort the level playing field.

In the end Merkel helped to persuade the 27 to accept May’s request, despite its questionable legal basis. May’s problem was that although her customs union reduced the need for controls across the Irish Sea (some would still be necessary, to check for compliance with single market rules), in an unsuccessful attempt to win over the DUP, she alienated her party’s right wing, since the customs union would make FTAs with other countries nigh on impossible. Never mind that every serious piece of economic analysis, including the government’s own, puts the benefits of FTAs with the BRICS countries and the ‘Anglosphere’ as minimal, compared with the costs of leaving the single market and the customs union.

The biggest lesson of the Brexit process is that any effort to leave the EU will turn out to be much more complicated, time-consuming, expensive and damaging than its advocates ever suggested. Even Brexiteers have to admit that the opportunity costs are enormous: the UK’s top officials and politicians (not to mention thinkers and journalists) have been focused on Brexit, rather than on the many other serious challenges the country faces – such as the housing shortage, knife-crime, poor infrastructure and a shocking record on productivity. If any good comes out of the Brexit drama, it may be the inoculation of other European countries against any attempt to leave the Union.

Charles Grant

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