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The Cost of a Clean Brexit

June 9, 2019 Topic: Politics Region: Europe Tags: BrexitTheresa MayBritainEuropean UnionTrade

The Cost of a Clean Brexit

London's expensive divorce bill will put its economic stability in jeopardy—a fact that does not change in the wake of Theresa May's departure.

More than most any other economy in the world, finance in the UK holds an important role. It amounts to fully 6.5 percent of the economy, almost twice what it is in the rest of Europe and second only to the 8.0 percent finance amounts to in the U.S. economy. As an EU member, British establishments dominated finance throughout the union. London was the go-to place for large or complex financial needs from the Mediterranean in the south to the North Sea and from the Russian border in the east to the Galway Bay in Ireland. Her Majesty’s government wanted to protect this position with a quick agreement that would allow London to maintain the privileges it held when the UK was still a member. For the EU, however, has been a major sticking point. Though Brussels has good reason to keep British finance available to its business, it could not allow Britain what would amount to primacy in finance without some measure of control. A common market would have provided that control, but since that solution is opposed by significant British interests, a deal on finance would require a further compromise within a customs union.

Such a compromise would require something of a muddle to bridge the gap between demands for British sovereignty and EU control. The sides might accomplish that with Parliament as the official rule maker while unofficially pledging to follow EU guidance. Such a concession would hardly constrain London since international rules already set the standard for financial governance across the globe.

Such a muddle may prove to be unnecessary since an alternative fudge already seems to be developing. The delays in making a deal have British financial firms worried about their ultimate position. To protect themselves, several of them have already relocated part of their operations to Frankfurt, Germany, and elsewhere on the continent. Jobs have gone, but it seems that the “branches” on the continent, however legally constituted, still retain economic ties to their parents in London, which continue to benefit from the business. The EU hardly minds because continental business continues to benefit from the connections and expertise in London. By the time any prospective rule-making fudge goes into effect, this parallel development may make the informal guidance an entirely moot matter.

Then there is the Irish question, which is something that has bedeviled English politics in one form or another for the last one thousand years. In this case, the problem arises because the Irish Republic is an EU member. Brexit, except in a customs union arrangement, would require customs checks at all points of entry. Even in a customs union, an exit would require immigration checks. That would present a major problem at the border between the Republic and the British province of Northern Ireland. Dublin has expressed discomfort because it retains a vague national aim to unite the island someday. More problematic is the so-called Good Friday Agreement that ended Irish terrorism in Ireland and elsewhere. It calls for an open border between the north and the south. With a British departure, troublesome immigration controls at the border would seem to be inescapable.

Negotiators have floated some comprises, but none of them have been sufficient. The EU has said that the border could remain open if London would agree to impose EU rules on all products in Northern Ireland. Elements in England have rejected this “solution” because it would violate British sovereignty. It would impose a two-tiered regulatory and customs situation on Britain, in which some of its territory would follow one set of rules written in Brussels, while another part would follow a different set of rules written in London. Such a “solution” would have the additional defect of leaving the immigration question unanswered. It would, in other words, threaten the reason the exit camp wants to exit. The “solution” also worries Northern Irish politicians, who would see it as the thin end of wedge to move the province from a British to an Irish Republic affiliation.

Though these considerations would seem to present an impossible impediment to a clear agreement, this Irish question, consistent with history, might yield to a muddle. Even if a customs union were to fail, the sides could dispense with checks at the border by moving such checks on cross-border goods and services to the point of origin in both the Irish Republic and the UK. For the movement of people, the parties might model things along the lines of the U.S.-Canadian arrangements that predated the original NAFTA. During that long period of time Canadian and U.S. citizens crossed the border informally. Officially, border agents could ask to see a passport, and that rule was enforced for citizens of other countries. But mostly, immigration officials would simply ask if those crossing were American or Canadian citizens and, except on those rare occasions when a border agent had doubts, allow people through without any formal checks. It would be difficult to write such an arrangement into law much less a treaty, but it might work.

Meanwhile, the Brexit saga will drag on. Such muddles can only emerge after considerations of all the clear options have failed and done so repeatedly. May’s successor, however talented or not, will still face these same intractable problems. He or she would even have hard time calling another election—as some have suggested—in the hopes of getting a less divided Parliament. Britain’s fixed-election legislation stipulates that such a call must receive two-thirds majority in Parliament, which is hardly likely to occur while the existing Tory-Northern Irish coalition remains reasonably confident that it would lose power in such a vote. For the same reason, it is unlikely that Parliament could force an election with a vote of no confidence in the government. Since all the divisions that existed during the 2016 referendum remain, it is unclear whether a new Parliament would manage any better than the present one. Meanwhile, whoever emerges in leadership in the EU, and however impatient they may become with Britain, will still face economic imperatives that argue against precipitating a “hard exit.”

These suggestions about the ultimate outcome do not, of course, exhaust all the possibilities. They may be most probable, but with so many moving parts, all conclusions must be viewed as tentative at best. In fact, it is a bit presumptuous to make any forecast at all. Still, it is also only human to try to see the path ahead, and it is in that spirit that this analysis has proceeded. There is, however, one definite thing to say about the Brexit matter: It will churn on for a good deal longer, even if it doesn’t quite last for three hundred years.

Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York based communications firm. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live.

Image: Reuters