Where are we going?

Gerald Holtham explores the practical implications of Brexit

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.  


All articles published on Click on Wales are subject to IWA’s disclaimer.



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

23 thoughts on “Where are we going?

  1. If it looks as though we will not eventually leave the EU – as is now seemingly most likely – it would be sensible to stop wasting time acting as though we were, and expend that energy in dealing what have been seen as problems in the UK’s relationship with the EU.

    It would then be eminently sensible – in order to avoid future similar debacles – to strengthen Wales’ direct relationship with the EU, cutting out Westminster as far as possible. Westminster’s record on significant matters such as this is woeful, and we would benefit from dictating terms in certain fields as opposed to accepting decisions made by others.

  2. Excellent article: of course if we achieve the least worse outcome it will not be the result almost anyone voted for in the referendum. The desired outcome of most brexiters is unachievable. When that is widely understood can the milk be mopped up and squeezed back into the bottle?

  3. First and foremost, an article on ‘Brexit’ focusing on the practicalities of where we are now is a welcome breath of fresh air.

    The sad irony is that there is a broad consensus, in Britain and in Europe, and among ‘Leavers’ and ‘Remainers,’ that reciprocal links should be retained in many respects. Most people want an agreement on visa free travel and mutual recognition of the rights of existing expatriates, and, at least in principle, a preferential trade deal. The problem is that the EU insists on linking these to absolute freedom of movement and an impertinent demand for a ‘divorce payment’ by the UK to the EU. Such conditions are politically unrealistic in the UK, and the EU surely knows it. A Conservative government that agreed to any such thing would be handing the keys to Downing Street to Jeremy Corbyn, while a Labour-led Coalition that even tried it would revive UKIP spectacularly overnight.

    So the EEA option is a non-starter in the UK – and probably in the EU itself. The small print of Articles 50 and 218 of the Treaty of Lisbon is more important on this point than some media commentators imply.

    Professor Holtham is therefore correct in his understanding that we should not be looking to a some ‘Great Treaty of Brexit’ in place by 2019 so much as to a long series of lower level agreements on specific issues over the next decade or so. That this is not a satisfactory situation, and that it would be better for all concerned to have greater clarity from the start, is beyond dispute, but the EU seems more concerned about its offended ‘amour propre’ than about the best interests of it’s own subjects.

  4. JWR the best interests of the EU is a bad if not rotten deal for the UK. A good deal for the UK would be an invitation to other countries to follow us.Since they hold most of the cards it should be obvious that this isnt going to turn out well for David Davies et al.
    Why do people keep assuming that other countries interests must coincide with their own? The neocons ( Gove, Fox and Davies) waged war in Iraq to establish a democratic model in the middle east. They were surprised that Iraq`s autocratic neighbours helped ensure that the plan didnt succeed.

  5. JOJ, the EU was founded on the – correct – assumption that free trade is good for all. There is therefore a difference between the interests of the subjects of the EU, for whom some form of trade agreement would still be beneficial, and the interests of the rulers of the EU, who feel obliged to adopt the ‘pour encourager led autres’ attitude you describe. Supporters of the EU should be outraged that the latter has triumphed so cynically over the former. Its opponents are not in the least surprised and consider that this is the EU revealing its true colours.

    The parallel with Iraq is not exact because the neocons were in principle right that a functioning liberal democracy is the best hope for any polity. Their mistake, as some of us said at the time, was imagining that a functioning liberal democracy can be conjured out of nothing where there is no existing civic culture in place. The same mistake has been countless times throughout the whole process of post-War ‘decolonisation,’ but no one wants to talk about it.

  6. How can we discuss the way forward when no one in Mess-Minster has any clear idea of a way forward. Sadly we get what we always get from Mess-Minster, muddled thinking with no clear idea of what to do to move forward. But hell we have just under two years now to sort everything out so everything will be okay in the end surely.

    Our economy is down because of Brexit. Banks and the jobs that go with them have already started a slow migration to the EU mainland. The only thing we can really be clear about is Project Fear is going to materialise to some extent.

  7. Well there is a debate to be had on whether the continuation of the EU is in the interests of its subjects or not but its rather academic in the current context. The negotiating position of the EU is not going to be subject to a plebiscite. It will be determined by governments and officials.
    I think the Iraq parallel is quite good. The West assumed support from Arab countries and Turkey.

  8. JOJ, you are correct that the decisions will be made by the governments and officials of the EU, and so the interests of its subjects are academic in the present context.

    We also agree that Iraq is an example of how not to do things, even if our reasons for that might differ.

  9. The mistake all Brexiteers/Brouts seemingly make is to take it as read that it’s about the money and therefore the end point of Brexit will reflect that. The EU is more than just about money. Trade was identified as a tool by which to maintain peace. My feeling is that there’s no member of the EU who thinks that aim comes cost free and so a Brexit that maintains the integrity of a UKless EU will figure higher in negotiations than a desire to maintain/maximise UK- EU trade.
    Just in the past week or so it’s likely that the integrity issue has become even more important for three of the poorer EU members Estonia, Lativa and Lithuania and their electorates.

  10. JOJ: I doubt if the milk can be mopped up and put back in the bottle. The Conservative Party would have to be out of office because their rank and file would not stand it. Could any British government propose what would be seen as a national humiliation?
    JWR: I am not clear why EEA membership is ruled out. It is not impertinent of the EU to demand that we stick by our commitments to projects agreed by us and for pensions of civil servants who served during the 40-odd years that we have been members. No doubt some of the numbers being cited for our leaving bill are excessive but what stops agreement is that the UK government will not come up with a counter-proposal. It has acknowledged liabilities in principle but is afraid that any number it quotes will lead to a furore in the Conservative party and the right-wing press. Hence it is paralysed and can’t negotiate. In those circumstance saying we’ll stay in the EEA for some years postpones the issue because as such we’ll continue to pay a (reduced) sub anyway. Only the pension contribution will remain after that and it can’t be determined until the date of our leaving the EEA (if we do) is settled.

    I don’t think there is a lot of choice. It’s either an EEA interim arrangement or a hard crash-out. The Labour Party has accepted that reality.

  11. Professor Holtham, you answer your own question about the political impossibility of the EEA option in the UK: public opinion, especially but not only on the Conservative side, would not wear a settlement that has none of the advantages of leaving and most of the disadvantages.

    There is also the European side of the coin. Any agreement under Article 50 needs to be ratified by practically everyone in the EU, including some who have expressed hostility to almost any viable deal. Bilateral deals under Article 218, by contrast, are relatively easy to approve. No one seems to have noticed this.

    The only circumstance in which someone leaving an organisation assumes a share of its ongoing liabilities is when it receives a share of its assets. Since, in theory at least, the assets of any solvent organisation are greater than its liabilities, that means the EU should be paying us.

    Otherwise, there should be no more liability for future commitments than there would be if one sold one’s shares in a company or resigned from a golf club.

    CapM, in fact most people who voted ‘Leave’ did so on the basis of non-economic rather than economic arguments. It was the ‘Remain’ side that talked money most of the time – and rightly so, because it was their only strong point. The notion that the post-War peace in Europe owes anything at all to the EU rather ignores the fact that another Franco-German War was made impossible by the military occupation of Germany by two external superpowers. In any case, who would want to join any club when the reason cited for its existence is that it might help stop two of the other members cutting each other’s throats?

  12. @JWR
    Are you seriously suggesting that in the quarter century plus since the two occupying superpowers left Germany you’ve been anticipating a Franco German war to kick off!
    Because to me that’s the conclusion to be drawn from the analysis you’ve put forward.

  13. @JWR
    My comment at Aug 1st 10:40 identifies peace as the main driver for the existence of the EU.
    You introduced this rather bizarre idea of a potential Franco German war.
    France and Germany are not the only members of the EU and as far as I know there have been no wars between any EU member states or between member states and their next door neighbours.
    You might think that this situation has nothing to do with the existence of the EU but I doubt that the governments of the member states contributing input into the European Commission’s Brexit negotiations are quite so blasé.
    Hence for them it’s not just about the trade money. Unfortunate though that may be for many Brexiteers/Brouts.

  14. CapM, you were the one that introduced the bizarre notion that peace was the main driver of the existence of the EU, and was there a greater threat to peace within Europe when it was founded than Round Four of the Franco-German wars? If so, to what were you referring?

  15. JWR No-one has been able to explain to me what the advantages of leaving the EEA are. They have certainly never been explained to the British people who were not consulted on that issue so it is impossible to say what public opinion is on the matter. Contrary to your assertion, being in the EEA preserves most of the economic advantages of membership of the EU while taking us out of the CAP, reducing the cost of subscription.

    Being out of the EU itself has the advantage that we are not always in the role of obstructing the other Europeans if they choose to integrate further. We are not good members, forever demanding derogations, “money back” or other exceptions while doing nothing constructive to reform institutions in great need of reform. Reform would require engagement and coalition-building while our politicians prefer to preserve the EU in the role of scapegoat. Given the insular attitudes of many people in the UK, which are not compatible with continued European integration, we are more trouble than we are worth as EU members and membership of the EEA is perhaps the most suitable arrangement that can be reached.

    From your attitude to the UK meeting its liabilities, I suppose that were you to leave a golf club you would demand repayment of your subscription for the portion of the year that you were not a member. And you would do so even if you had voted at the AGM for spending on a new club house. Anyway, this is a dead argument. If you break an implicit contract you have to pay; even David Davis has accepted that the UK has moral obligations for things like pensions that it should discharge.

  16. Professor Holtham, without wishing to go over well trodden ground, the great advantage of leaving the EU is that we regain the Sovereignty of Parliament. That may not matter to some, but it matters a great deal to most of us. Membership of the EEA would be giving up that advantage.

    Some in Europe do indeed view us as “bad Europeans,” but that misses the point that most of us have never viewed ourselves as Europeans at all. Given this difference of perspective, it is best we go our separate ways amicably.

    Your golf club analogy is wrong. We have given the required notice and are paid up until the notice period ends. After that, they are on their own.

    As for the Eurocrats’ pensions, that is a matter for the pension fund into which they have been paying – oh, wait a minute…

  17. @JWR
    “CapM, you were the one that introduced the bizarre notion that peace was the main driver of the existence of the EU,…. ”
    I suggest you read the preambles of the Treaties that established the European Coal and Steel Community, European Economic Community and European Union. there’s something quite “bizarre” about them all.

  18. JWR
    You put your finger on it. If there is no pension fund it is pay as you go. We enjoyed their service for 40-odd years and now we absent ourselves from the implicit contract to pay their pensions? Fortunately even the Conservative Party does not propose to do that. It will make a severance payment as indeed it should.
    Parliamentary sovereignty? Brexiteers complain that they were misled in 1975. They wanted a common market not an incipient political union. Very well, that is what the EEA offers. Now it turns out some don’t want that either . Why? Because they are “not European”. So there we have it. The objection to institutional co-operation with our neighbours is absolute. To what can that be attributed beyond simple narrow-mindedness if not xenophobia?

  19. Professor Holtham, as you should know, the objection to cooperation with our neighbours is far from absolute. Many of us who voted ‘Leave’ would prefer some form of preferential trade deal or were at least open to the possibility. The EU seems disinterested, except on terms that rather negate the point of leaving. So be it. That is their choice.

    You should also know the actual meaning of the word “xenophobia,” a word that has been thrown around far too carelessly. It means fear or hatred of foreigners, not saying that one is not one. There is nothing in saying one is not European that says or implies that one hates or fears Europeans, just as saying one is not American does not imply one hates or fears Americans. It is a plain statement of fact. These false accusations of hate poisoned the debate last year and continue to do so. A man in a responsible position should know better.

    What you say about the EU pension scheme confirms that it is the sort of thing for which a Ponzi or a Maxwell would be sent to jail. The British government do not as a rule offer free compensation for the victims of such schemes. In any case, the difference is that, unlike the victims of Ponzi and Maxwell, the employees of the EU knew that they were not paying into an investment fund.

  20. They were, however, promised a pension as a condition of employment. And as a member government and full participant in the Council of Ministers, the British government was party to the promise. It was, if you like, a promoter of the Ponzi scheme. (A scheme that does not differ from the state pension system in the UK, which is also unfunded). That is why we must pay.

    Being in the single market involves accepting the regulation of goods and services ruling in that market. if you regard that as a sufficiently serious infraction of national sovereignty to forego the economic benefits, well we shall just have to agree to differ.

    As for xenophobia, I accept your rebuke. I regret my drafting succumbed to irritation.

  21. Professor Holtham, please, no rebuke was intended. That would be presumptuous.

    The substantive issue is a legal one. The EU is a separate legal entity. It is solely responsible for meeting its contractual obligations to its employees. If the member governments had offered specific guarantees that underwrote those obligations, then it would be a straightforward matter for the courts, not negotiation. That does not, however, appear to be the case, and it is unlikely that the legal advisers of the member governments would let such a thing get past them. They would be professionally negligent if they did.

    There is a difference between a single or common market established by treaty among sovereign states and a “superstate” transcending the sovereignty of its member states. There are now quite a few examples of the former without the latter. That is the compromise on which most British people could probably agree.

  22. On the more general point, the fact that most of the public sector pension and social security systems of the West are also, in effect, Ponzi schemes is no excuse. It is another example of the legal double standard between public and private sectors that seems to apply everywhere, and a major weakness in the global economy that will one day have disastrous consequences.

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