Where are we going?

Gerald Holtham explores the practical implications of Brexit






EU

Leaving the EU seems to open a period of great uncertainty for the UK and Wales.  There are many possible roads but you would have to be reckless to follow most of them.  The range of sensible choices is in fact quite narrow.

Let’s get down to practicalities.  The UK cannot close an adequate deal with the EU in two years.  There are too many complicated matters to sort out including financial obligations, Ireland and a range of collaborations: in police matters, security, academic and industrial research, atomic energy and more.  Specific trade deals in goods, services and agricultural products are more likely to take seven years than two on all past form.

Businesses are unanimous that a crash-out with no deal would be disastrous, disrupting heavily integrated supply chains in industries like motor cars and threatening agriculture, pharmaceuticals and financial services, which all depend on the EU market.  Wales is particularly exposed to disinvestment in cars production and meat farming.  From airlines to merchant banks there is concern already and the start of a movement out of the UK to the Continent.  A few economists and politicians contest that a move to WTO status would be ruinous but the evidence is against them.  Anyway, why take the risk?

It follows that an interim arrangement is required.  It cannot be too bespoke because that would just push the problem of complicated negotiation to a new place without resolving it.  The interim arrangement can only be hand-me-down.  The obvious, perhaps the only, possibility is remaining in the European Economic Area for a limited period of two to five years, preserving access to the single market.  It would involve paying a sub and accepting the rulings of the European Court of Justice, albeit over a more restricted area than hitherto.  It would require some freedom of movement of Europeans with jobs in the UK but does not imply acceptance of benefit tourism, the bogeyman of the right-wing press. Other important collaborations would remain in place.

Being in the EEA does not entail membership of the Common Agricultural Policy or the Common Fisheries policy which the UK would leave when it left the EU.  In the long run being out of those might be a good thing but it makes urgent the need to negotiate trade agreements for agricultural produce before leaving the EU or as soon afterwards as possible.  If those negotiations cannot be concluded before leaving, keeping the Irish border open means remaining in the EU customs union during the interim period, since the single market does not cover agricultural produce or services. Contrary to a common misunderstanding the EEA and the Customs Union are not the same thing; you can be in either without being in the other. In the longer run the UK might wish to leave the customs union to negotiate its own bilateral trade deals but that would be after specific trade agreements had been negotiated with the EU to resolve the issue of the Irish border.

Freedom of movement across the Irish border would mean that control over immigration, so dear to many in the UK, could be only internal  – we don’t stop you coming in but we throw you out if we find you’re illegal.  Control could not be exercised at the border itself – at least not the Irish border.  That simply extends an existing situation.  Our large cities are full of young people from all over the world, including Latin America , which is not in the EU or even the British Commonwealth.  They come in as students or tourists and stay.  An estimated 150,000 illegal immigrants enter the UK each year, though many stay only a few years before going home.  Tighter internal controls, including perhaps identity cards as well as tougher penalties on illegal employment would be necessary if the government were really serious about reducing immigration.

In the further, post-interim future there are a few more options.  The UK could rely on bilateral deals as Switzerland has done.  Yet it may be that the UK could not achieve the same access to the single market with no customs formalities and regulatory inspections unless remaining in it as part of the EEA.  While membership of the customs union could be a temporary interim arrangement, EEA membership could turn out to be permanent.  Some payments to the EU for administration of the single market would be permanent in that case but the UK would not contribute to CAP.  EEA membership would facilitate freedom of movement of UK nationals within Europe.  Current EU law permits the UK to exclude EU nationals without a job or means of support and that ability is likely to be strengthened not diluted in future.  

The political downside of the EEA is that the UK would be presented as a “rule taker” bound by single market regulations but no longer party to making them.  There are arrangements, however, for EEA members to participate in making policy. As an important participant in the single market the UK would certainly be able to voice opinions and make representations.  It would be in the interests of other countries to take account of those representations at least sometimes.  The European Court of Justice would still have a locus in adjudicating on trade matters between the UK and EU but would lose the ability to rule on other matters in the UK or on trade between the UK and third countries.  The UK would also have repatriated control over agricultural support and, to some extent, over fisheries, although it would need to reach agreement with neighbouring countries on the latter.  Since the single market does not cover tourism we could allow our beaches to become filthy again if we so chose or a future government decided it was too expensive to do otherwise.  Other internal regulations could be altered too and we could nationalise railways if we wished.

Is such an outcome worth all the trouble of leaving the EU and preoccupying the British government for between two and seven years?  Arguably it is not but the referendum has taken place, the milk has been spilt.  There is no point in crying over it or worrying about sunk costs.  The objective must be to select the best trade off and the best outcome available from here.

If further consolation is required it lies in the fact that EU countries within the Euro area may wish one day to resume the march to ever closer union as this is widely perceived to be necessary to support the single currency.  Whatever the merits of that, it is hard to deny that it runs counter to the insular instincts of many people in the UK.  Britain would always be the awkward member looking for exceptions, derogations and special treatment.  The EU and the UK are better off without that friction and annoyance.  Of course the corollary is a certain loss of British influence in world affairs but a period of quiet and retreat from trying to be one of the world’s policemen may not be bad for the country.  The rest of the world is likely to cope with the loss.  

 

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Gerald Holtham is an IWA Trustee and Hodge Professor of Regional Economy at Cardiff Met .