Brexit likely to be a soft Brexit

Around half a year ago now a narrow majority of the British population voted to leave the European Union (EU), but it is still fully unclear as to how this separation is to be implemented: will it be abrupt and radical even though this would have severe repercussions for the economy – on either side of the English Channel? Or is it more likely that Brussels and London will be able to hammer out some sort of compromise that will allow the transition to occur as gently as possible and keep the negative economic repercussions within bounds? Will it be a “hard” or a “soft” Brexit? This is the question that is in the limelight at the moment and speculation as to the outcome is currently shifting from one extreme to the other, depending on the news flow.

The starting position is very difficult: Prime Minister Theresa May would like to get immigration into Great Britain back under national control. But the so-called free movement of workers within the EU makes this impossible at the moment. The EU insists that the free movement of workers is an integral part of the single market idea. If a country does not accept this, it can no longer be a member of the single market. But if Great Britain were to lose access to the single market completely, then trade between the EU and Great Britain would be subject to tariffs again. Banks domiciled in the UK would also lose their EU passport and whole business lines would presumably have to be relocated to other EU countries. This would be the “hard” Brexit – certainly not a desirable outcome.

So essentially it is a matter of to what extent Great Britain can remain part of the EU single market as a non-member of the European Union (EU) while simultaneously limiting immigration from other EU countries. This dilemma was played down completely during the referendum campaign. But Leave supporters claim that other non-EU members nevertheless have access to the single market. They cite Norway, Switzerland and Turkey as possible models. A free trade treaty between Great Britain and the EU is also conceivable, they say. But are these models really suitable for a Great Britain outside the EU?

  • Norway is indeed almost fully integrated in the EU single market. Besides tariff exemption and the bank passport the free movement of workers is also completely unrestricted. In return for access to the single market the country also pays contributions to Brussels and these are hardly any lower than those paid by EU member states. So it is unclear what Great Britain would gain with a “Norwegian model” compared to the current status quo. The Norwegian model differs little from full EU membership. In addition, the country is obliged to implement laws made in Brussels that affect the single market but without having any say in their formulation. This model would be at most a “fig-leaf” solution.
  • Switzerland has signed up to a large number of individual bilateral agreements with the EU, which limits the EU’s influence on selected sectors of industry. Brussels’ directives do not necessarily have to be implemented in national law. Nevertheless, the freedoms of the Swiss vis-à-vis the EU are limited. The so-called “guillotine clause” ensures that if one agreement is broken then all other agreements are also no longer valid. So Switzerland also has to accept the free movement of workers and pays EU budget contributions. At the same time, the agreement does not cover the banking sector. If transferred on a one-to-one basis, the “Swiss” would be a worse alternative for Great Britain then the “Norwegian model.”
  • Turkey has signed a bilateral customs union agreement with the EU. Within this common customs area certain goods are exempt from tariffs. But access to the single market is severely restricted and the EU-Turkey agreement is limited to trade in manufactured goods. In addition, it is very asymmetrical. De facto Turkey has to implement the EU’s foreign trade policy. It is also obliged to open its market to third countries with which the EU signs free trade treaties but without automatically enjoying the same free access to these countries. This makes this model an unattractive option for Great Britain. The bank passport would also be lost. On the other hand, the Turkish model does not involve paying contributions to the EU or accepting the free movement of workers, which Great Britain would welcome.
  • A free trade treaty with the EU, for example along the lines of the CETA agreement between the EU and Canada, would presumably allow Great Britain to come closest to realising its desire for access to the single market without the free movement of workers, but it would probably fail due to the “time factor.” In the past, it has taken years for free trade treaties negotiated with the EU to come into effect. Precisely the CETA agreement has shown just how easily such negotiations can get bogged down. But according to the EU Treaty only two years are available for the exit negotiations and this may be reduced to as little as one and a half years because of the ratification procedure that will have to be carried out at the national level. An extension of the deadline is unlikely because of the European elections that are due to be held in early summer 2019. By then Brexit should have been completed

None of the models sketched out above fits Great Britain well as the country would have to make excessively great concessions. If a “soft” Brexit is to be pulled off, then the negotiations with the EU will have to produce a “UK model” for which the existing models can only provide points of reference. But both sides would have to make concessions, which will not be easy given the hard-line positions that have been pegged out so far. Many Leave supporters in Great Britain even believe their country is in a very good negotiating position as they think that Brussels will not allow a “hard” Brexit out of self-interest because the negative economic repercussions would be at least as great for many EU countries as for Great Britain itself. After all, the other EU countries, above all Germany, sell far more goods to Great Britain than conversely, so goes this line of argument.

Naturally, this view is only correct to a certain extent. It is undoubtedly beyond dispute that Great Britain is an important trading partner for each of the other EU states and a “hard” Brexit would presumably be painful for individual branches of industry, for example the German car-making industry. Nevertheless, the importance of the EU as a sales market for Great Britain is of a completely different dimension compared to the importance of Great Britain as a sales market for the EU. Last year Great Britain’s exports to the EU accounted for almost 12 per cent of British gross domestic product – in the other EU countries this was around 3 per cent. So Great Britain would have to show a greater willingness to make comprises in the exit negotiations as it would have far more to lose from a “hard” Brexit. However, the EU is also unlikely to be completely unwilling to compromise as it also has an interest in keeping trade relations running as smoothly as possible with Europe’s second-largest economy.

Indeed, London’s negotiating stance has shown some sign of movement in the past few weeks. Not only has a court ruling given the predominantly pro-EU Parliament a decisive say in the exit process, but there are also the first tentative signs of willingness to compromise within the ranks of the government itself. Brexit Minister Davis did not categorically rule out payments to Brussels or limited acceptance of the free movement of workers. If this is a reflection of London’s official negotiating line, then a “soft” Brexit has become far more likely.

But the road there will be anything but smooth: a “UK model” may not be tailored slavishly to any one of the existing models. For example, a “Norwegian model light” in which the completely free movement of workers is ditched, or a “Turkish model plus” in which the customs agreement is extended to the service sector could be regarded as being too accommodating in the countries lending their names to the models as well as in some EU member countries. Nor will it be possible to invent a fully new architecture for relationships between Great Britain and the EU as this would easily go beyond the scope of the available time frame. There is a not insubstantial risk here that Great Britain will exit the EU without having obtained an agreement, in other words in a disorderly manner, allowing a “hard” Brexit to occur unintentionally and presumably also without any preparation. Brussels and London are both undoubtedly facing a tricky tightrope act.

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