Brussels Gets Brexit Wrong — Again


Theresa May, the British prime minister, recently sent a letter to Donald Tusk, president of the European Council, announcing that the UK would withdraw from the EU under the procedures set out in Article 50 of the Lisbon Treaty. Her letter noted that, even though withdrawal was irrevocable, the UK seeks to forge the closest and most cooperative arrangement possible with the EU moving forward. Although Article 50 prevents the EU from blocking Brexit, it offers little by way of guidance on how the exit negotiations should proceed.

The treaty provides that if the parties fail to reach an agreement within two years, the EU treaties “shall cease to apply” to the UK unless both sides agree to an extension. If not, all relations under the EU are severed, even if other obligations, such as those under the World Trade Organization, remain in place. Still, Article 50 of the Treaty contemplates that withdrawal from the EU need not constitute a clean break, given that in working out the terms of withdrawal, the parties may take into account “the framework for [the UK’s] future relationship with the Union.” The treaty also provides that the EU will entrust its side of the negotiations to the head of its negotiating team, who in this instance is Michel Barnier, a French politician. At this point, everything is up for grabs.

The Brexit process has now been launched, and the different attitudes taken by the two sides to the negotiations are, indeed, striking. In her well-crafted letter, Prime Minister May sought to preserve good relations with the EU after the breakup. There was of course no denying that the UK left Brexit because of its unhappiness with the dominant position that the EU Commission in Brussels held over economic and social matters in Britain; the Commission has the ability in many important areas, such as employment law, to require each member state to harmonize its laws with the EU’s directives. That direct control from the center was in stark contrast to the earlier plan of a smaller European Economic Community, which stressed four freedoms involving the movement of goods, services, capital, and people across national boundary lines. In June 2016, the UK voted to leave the EU in large measure to avoid the Union’s control on matters of economic regulation and the movement of people, especially immigrants, across national boundaries.

At the time, alarmist commentators thought that the UK exit showed that populist and isolationist forces would lead the nation to turn inward. But May’s conciliatory message took exactly the opposite tack: It stressed the importance of keeping—indeed, expanding—free trade relations with the EU as the UK seeks, without any impediment from the EU, to expand its trading relationships with the rest of the world. She wrote about “the deep and special partnership” between the UK and the EU; and the EU, she continued, is the UK’s “closest friend and neighbor.” Finally, she proposed that “it is necessary to agree [on] the terms of our future partnership alongside those of our withdrawal from the European Union.”

Unfortunately, the EU’s Barnier, echoing Germany’s Angela Merkel, took a frostier tone. He, of course, recognized that both sides would lose from the failure to reach an agreement within the two-year period. But he then adopted a needlessly tough negotiation stance that increases the odds of a breakdown. He stressed that the EU had to show “unity” in dealing with the crisis, and then blamed the UK for introducing “uncertainty” into the ongoing relationships with the EU member states. Most critically, he then announced that it would be “very risky” for the two sides to negotiate the terms of their future relationship until they sorted out the mechanics of leaving. In so doing, he explicitly rejected May’s proposal for parallel negotiations on the two issues. His dubious assertion that the EU was not legally in a position to negotiate with a still-member state—because it is not yet an outsider—would seem to contradict the language of Article 50. In order to complete the divorce proceedings, he insisted that the parties first settle, to the last penny, the sums that the UK owes to the EU for obligations previously incurred as a member. He then set that figure at €60bn (£51bn) to cover the key items of account: budget commitments, pension liabilities, loan guarantees, and EU spending on UK projects.

It is hard to imagine a more counterproductive opening gambit. Barnier’s call for unity is a thinly disguised claim that the remaining 27 EU members remain in lockstep like any other cartel. In so doing, Barnier was likely trying to forestall a situation in which other EU members might wish to negotiate or withdraw from the EU. More modestly, he might also have been trying to prevent some backsliding into a “multispeed Europe.” That idea has gained some traction inside the EU. The multispeed position starts from the premise that compulsory harmonization might not sit well with all 27 EU members. Thereafter, it contemplates a set of arrangements in which different EU members might have more or less close arrangements with the center. The approach, which could move the EU back in the direction of a free-trade zone, has been suggested in part to reduce the likelihood that other member nations might be tempted to leave the EU.

That intriguing idea seems dead for the moment. Barnier, like Angela Merkel, insists that the UK cannot “cherry-pick” among the four freedoms of movement–of goods, services, capital, and people–“because that would have disastrous consequences for the other 27 member countries.” But it was this uncompromising dogmatism that fueled Brexit in the first place. A more sensible approach would welcome the decision of other EU members to weaken Brussels’ control over their internal affairs, because, in the long run, the EU is more stable as a free-trade zone than it is as a top-down organization. The recent and prolonged economic stagnation inside the EU is a product of the same harmonization tactics that undermine competition among states in the EU.

The sequencing of negotiations is always critical to their long-term success. In this regard, nothing in Section 50 mandates Barnier’s position of sequential dealings. Indeed, the better reading of the text is that future relationships should be negotiated at the same time as withdrawal. Proceeding along dual lines should make any transition less painful. But the Frenchman Barnier’s hardline position is a classic illustration of cutting off one’s nez to spite one’s face. The virtue of the EU was economic integration by the removal of trade barriers, not heavy-handed top-down control. By deciding to postpone the negotiations until the separation is complete, Barnier has made it more difficult to reestablish economic integration from trade that will work to the benefit of both sides. EU members obviously benefit from the excellence of the UK’s financial and banking services, and the EU clearly benefits from having open access to the UK for the sale of the EU’s goods and services. The first priority should be to see how much these arrangements can be safeguarded after Brexit is concluded.

Putting divorce first complicates all these business arrangements. In particular, it is unclear whether, and to what extent, Article 50 authorizes the payment of any sums between members at the time of exit. But even if these side payments are required, it is as yet unclear whether the UK could make demands on the EU for a return of excess moneys. Regardless of whether side payments are off the table, the UK is sure to demand the right to challenge each of Barnier’s claims in a process that could take legions of skilled expert witnesses to sort out in some judicial proceeding. Those obligations, however determined, are more or less fixed as of the date of the UK’s withdrawal from the EU. A sensible procedure is to make, if warranted, some prompt preliminary down payment, after which the balance plus interest could be paid later. The delay is no big deal for money payments. But delay is an enormous matter if ordinary business arrangements are put on hold for years until the dispute over transfer payments is resolved.

Barnier thus has his priorities backwards. As a general matter, it should be relatively easy to resolve most of the economic and social issues so long as the EU, Barnier, and Chancellor Merkel back off their all-or-nothing stance. The knottiest question by far is how the refugee and immigration issues interact with the principle of free movement of persons across the EU. In part because of Merkel’s decision to take about one million refugees into Germany, the EU’s expanded membership has complicated that problem. One sensible way to deal with this matter is to partition the refugee problem from the movement of citizens across lines for the usual purposes of business, travel, and retirement. Unfortunately, that might not happen if the EU hard-liners have their way.

© 2017 by the Board of Trustees of Leland Stanford Junior University

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  1. Fake John/Jane Galt Coolidge
    Fake John/Jane Galt

    The EU are an arrogant bunch.  They will make Britain pay to prove a point that should not be proven and to scare the other members into line.  I hope the US reaches out and makes agreements with the British that puts the EU in its place.

    • #1
  2. The Reticulator Member
    The Reticulator

    Richard Epstein: Barnier, like Angela Merkel, insists that the UK cannot “cherry-pick” among the four freedoms of movement–of goods, services, capital, and people–“because that would have disastrous consequences for the other 27 member countries.”

    Might have disastrous consequences for some of the excess bureaucrats.

    • #2
  3. Steve C. Member
    Steve C.

    It’s all about the money. And revenge, but mostly money.

    • #3
  4. Brian Clendinen Member
    Brian Clendinen

    What else due you expect from a organization whose goal is to resurrect the USSR. I would expect nothing less from any pinko leading negotiations. The only thing shocking about Mr. Epstiens piece is he seems a bit surprised by this hardliner stance. Anyone who has followed EU politics over the years knows this is nothing new and we were more hoping it would not follow this hardline path but thought it most likely would.

    Now I would say the odds are over 50% that two years from now Britain will trade under WTO rules. Hopefully with the whole EU with the preferred trade partner destination. However I am not even sure now if the Fascist will want to give their companies even that. All I can say is U.S. businesses start pushing hard right now.  There is going to be a lot of new business opportunities in the UK to export goods to them since EU firms are going to get screwed over royally.

    • #4

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