Since the Brexit negotiations began, I couldn’t work out why they were so acrimonious. Free trade is mutually beneficial. Restricting it is mutually harmful. What is there left to argue about?
The answer comes from British intelligence. At least that’s what the EU is worried about.
Within hours of Michel Barnier’s economic adviser giving a presentation to EU officials about Theresa May’s Chequers plan, the British had seen it too. And now, the Telegraph has written about part of the content.
The presentation revealed the most important thing you’ve read about Brexit: the EU is mortified by the idea that Britain will succeed post Brexit. Not just theoretically. It expects it to happen.
And it’s willing to damage its own economies, the British economy, and world trade to stop Brexit from being a success. It wants to cut off its nose to spite its face, as long as it does some damage to Britain too. Just so it can point out the damage.
Here’s how the Telegraph summed up the presentation:
The slides warned that leaving the UK free to diverge on services, while promising to remain closely aligned on goods regulations, would give the UK a damaging competitive advantage over time.
The Commission warned that – on the basis of its assessments – the UK alignment in the single market for goods would lead to a “level of erosion in the Single Market” over a 15-year period roughly equal to the impact of a ‘no deal’ exit for the UK – or 8-9 per cent of GDP.
In other words, if the EU allows a mutually beneficial Brexit, the single market will lose about as much GDP growth as Britain would lose under a hard Brexit. 8-9% of GDP over 15 years.
As the EU sees it, Brexit is an attempt to steal half a per cent of EU GDP per year.
Now the estimates are as accurate as those predicting a recession in Britain after the referendum. But as you know from that experience, bad economics drives policy. We have to argue about what politicians are thinking, not what’s actually the case.
And don’t forget, the EU’s estimates don’t take into account the effect of my two smuggling companies. Shifting goods under the Irish border and across the Channel is sure to dent official European GDP even more.
The point is, the EU doesn’t want a competent competitor on its doorstep. It’s not worried about the damage Brexit will do. It’s worried how much of a success it’ll be.
Britain’s remain campaigners are so dramatically undermined by this it’s priceless. They’re warning about the disaster of Brexit while the EU is terrified it’ll be a roaring success!
Well, which is it?
Why Brexit will succeed, according to the EU
According to the Telegraph’s summary of the presentation, the EU is worried that the plan for regulatory alignment on goods, but a divergence on services, will allow the UK to get too much of a competitive advantage.
In short, we’d undercut the EU, leading to better economic performance in Britain over time.
But this doesn’t just expose how much better off Britain would be under Brexit. It also shows how the EU is holding back prosperity on the continent. Which is not good news for the future of the EU.
Barnier is refusing to consider May’s deal because it violates the single market, “our greatest asset”. How can it be an asset when leaving allows you to take a huge chunk of GDP with you by outperforming the economies in the single market?
The biggest effect of Brexit, if we pull it off, will not be for Britain. It’ll be exposing the effects the EU has on the countries stuck in it.
The euro currently gets a limited amount of blame for keeping southern Europe in the economic doldrums. Countries there used to rely on devaluing their currency to recover from their wacky fiscal and economic policies.
In his book The Euro Trap, the economist Hans-Werner Sinn explained how often some countries which are now inside the eurozone made use of this pressure valve:
From the time the Bretton Woods system collapsed (1973) to the virtual introduction of the euro (1999), the lira devalued against the deutschmark by 80%, the peseta by 76% and the French franc by 52%.
In the EMS period (13 March 1979 to 31 December 1998), Italy devalued thirteen times and revalued once, France devalued six times and Spain four times.
To Italians, it’s clear the currency is holding them back. That’s one reason the mini-BOT currency proposal was popular.
But if the Italians see Britain booming after leaving the EU, it’d be too much to ignore.
And that’s the pickle the Europeans find themselves in. If they take a hard line against Britain, it harms their existing trade relationship and the economies of Europe. And exposes them as anti-trade in the midst of a trade war with Donald Trump, who they criticise for being anti-trade…
A soft line under May’s proposal would expose the EU as destroying economies inside it. The UK’s freedom would allow it to outperform.
A hard Brexit is the awkward in-between, which politics tends to deliver in standoffs.
Another Brexit referendum?
The riots in Sweden are providing the tailwind that eurosceptic parties there needed. The Sweden Democrats might become the biggest single party after the September elections.
The only country dumb enough to buck the anti-immigrant trend in Europe is Spain. And it’s already struggling under the strain.
Local governments are complaining the new left-wing national government is letting them deal with the costs of national immigrant-friendly policies. Socialists arguing about costs is a hilarious sight. But it’s not all fun and games.
A German family friend videoed a long stream of immigrants traipsing past her holiday home in Spain, presumably on the way to her actual home in Germany.
This is how things began to turn in immigrant-friendly Austria during my visits in 2015. The emerging implications of allowing in the immigrants changed everything.
The EU elections in May remain the key. If the EU itself is undermined by the national and right-wing backlash, everything could change.
But let’s explore for a moment the effect of another Brexit referendum in all this. Apparently that’s looking increasingly likely.
The Remainer side correctly suspects that no single Brexit plan would have the backing of a British majority vote. So any Brexit referendum is likely to vote Remain.
The are some creative proposals to get around this. A two-question approach would ask about Brexit first, and then about the type of Brexit. Do you like it hard or soft?
If a second referendum leads us back into the EU, just at a time when euroscepticism is getting out of hand across the continent, things could get very ugly in Europe.
A British eurosceptic influence in the EU Parliament would be incredibly disruptive when combined with the elections in May.
The stakes are rising. It is time to prepare for trouble.
Until next time,
Nick Hubble
Capital & Conflict
Category: Brexit