Brexit: What’s next?
VoxEU Blog/Review Europe's nations and regions EU policies

Brexit: What’s next?

In this blog based on a speech at the House of Commons in April 2019, Pascal Lamy argues that there has been a fundamental misunderstanding in the UK of the political and economic trade-off that Brexit implies. 

Editor’s Note: This blog is the text of a speech delivered to the Henry Jackson Society at the House of Commons in London on 29 April 2019.

Good evening, ladies and gentlemen. It is always a pleasure for me to be back in this temple of democracy where I have appeared from time to time along the many years you nicely summarised. Let me thank the Henry Jackson Society for providing the occasion of this discussion, which I will introduce as clearly as possible, as the tradition of this House requests.

I think the starting point is very uncontroversial: Brexit is a bit of a mess. My own view, for what it is worth, is that it always was to be at least a bit of a mess, maybe not as big a mess as it is now. In order to answer this “what’s next” question, we need to understand why it is such a mess.

My answer to this question is very simple: Brexit is a mess because of the fundamental misunderstanding in the UK, and to some extent on the continent, about the trade-off that Brexit implies. That, I think, is the core of the matter.

At first sight, as historians may say, Brexit is only one of many episodes in the very complex relationship between Great Britain and the continent. Looking at the last 70 years of this relationship, which has of course deeper and longer historical roots, it looks as if the British have an attraction towards the continent for economic reasons, but that they also have a political repulsion to a European union. This often gives rise to a sort of “plug and unplug” narrative; it started with the UK remaining unplugged. Then, after a bit of the time, at the end of the 1970s, the British plugged in. In 2016, when public opinion moved the other way, they decided to unplug.

The problem for Great Britain was, and remains, to be “in” economically and much as possible and “out” politically as much as possible.

This is the implicit trade-off, which was the great game of British diplomacy. To want as much economic integration as possible, as you can expect from the British economic culture forged by Adam Smith and Ricardo, but on the other side to avoid as much as possible being bound politically.

That’s the first sight, and Brexit according to this view is just an unplugging exercise.

However, this first sight is wrong. The reason why we are in this situation is that in the meantime, the relationship between economic integration and political integration has changed enormously. Economic integration and political integration in the EU are much more entangled today than they were 10 years ago, were much more entangled 10 years ago than 20 years ago, and so on. So what has dramatically changed is this deep connection between economic integration and political integration. Thus, if I may use a simple formula, Brexit is not about unplugging, it is about unscrambling. Unplugging and unscrambling are two very different concepts. The former has a mechanical flavour, while the latter has an organic  flavour.

Organic and mechanical work very differently, and nowhere is this understanding more obvious than in this extraordinary confusion between the Customs Union and the Internal Market. It is a huge confusion in this country, and notably in this House if I may. And it’s somehow also probably a confusion on the EU side; I wouldn’t criticise Barnier at all, but I am not sure the subtleties regarding this distinction between the Customs Union and the Internal Market are always clear in Brussels.

What is the difference between a custom union and a single market? The answer to that is that we created the Common Market as a customs union in 1957. For 10 years, we had a Customs Union and custom duties within the Customs Union. That lasted until the late 1960s, when we removed customs duties within the Customs Union. We had a Common Market. When we arrived with Jacques Delors in Brussels on the 4th of January 1985 we had a plan in mind, which was moving this Common Market into a Single Market. Getting rid of borders was the outlined narrative of this strategy. We had internal borders while in a customs union at the time. We only removed borders in 1992, after a long and complex process of regulatory convergence, harmonisation, mutual recognition, whatever technology you use, in order to make sure regulations do converge. This is what we did between 1985 and 1992. So that in 1992 we were able to remove borders because there was enough stock and trust that regulatory standards in every part of the European economy and, to some extent, social life were similar, or at least similar enough to be able to remove these  borders.

So this is what we have to understand, because exiting the EU is not exiting a custom union; that’s not the real problem, to be frank. Exiting the EU is about exiting the Single Market. That’s the name of the game, which is why, symmetrically to how creating the Single Market removed the borders, leaving the Single Market is recreating a border which had been removed. The problem being that this old obsolete equation that you have to take as much economic integration as possible and as little political integration as possible fundamentally changed when the Single Market was created. There is now, and there has to be, a trade-off between economic integration and political integration. You cannot have one without the other and vice versa; a trade-off needs to be there. This is why if I have to define the trade-off of Brexit in simple terms, it is:” how can the UK exit politically as much as possible and economically as little as possible?”. That’s the equation.

And the reason why Brexit is a mess is that there is no answer to this question today in the UK. I am not saying that there cannot be an answer to it. After all, within the EU, not all member states have the same view of what is the right trade-off between economic integration and political integration. But they all have decided to remain “in”.

In other words, it is not possible any longer to negotiate economically without negotiating politically. The reason behind this is that deep economic integration is about aggregating collective preferences, which is a political process. For example, if we have a single regulation on data privacy in the EU and it is different from the US one and from the Chinese one, this is not science, this is politics. This is feelings, philosophy, and culture. It is somehow about morals, quite far from the initial economic efficiency approach to the Internal Market. 

That’s where we are, and the reality is that the progressive economic integration of the EU has made it more politically costly to exit. This translates into the fact that exit means that there has to be a border, and the problem of this border is how thick will it be. A real exit, which means taking back control of sovereignty in regulating the country and using this sovereignty to disalign the UK’s from the EU’s regulations, will be costly. A real Brexit means a costly thick border. A thin, less costly border will lead to accusations of ‘BRINO’ by Brexiters. If there is a little of this border, it is not going to be that costly while if there is lot it will be very costly, and the EU will set the thickness of the border in proportion to the degree of regulatory divergence on the UK side. 

This is where there is a trade-off between exiting politically, becoming sovereign and paying the price of that, which is the price of a thick border. The UK has decided to Brexit but does not know what its position is on how much economically and politically, and this, in my view, is the basic reason why you have this impasse in Parliament. The absence of any notion of what this trade-off could be creates a lot of fear at the two extremes. The next stage, which would be the real negotiation of the EU-UK trade relationship, will in fact be framed by the compromise of how much to exit economically and how much politically. As a consequence, assuming there is a part of this Parliament which is ready to accept what is on the table, you also have among Brexiters a fear of being cheated in case of a small economic exit, as they know full well that it will mean that the political exit will also be rather thin. You have the exact symmetric position on the side of Remainers, who hope that if Brexit happens, the damage will be limited by avoiding significant use of the UK’s recovered capacity for regulatory divergence.

The reason why this is the case can be found in the wrong interpretation, in my view, that was taken by the British government of Article 50. Article 50 says if a country wants to exit the EU, it negotiates a withdrawal agreement in view of the nature of the future relationship between it and the continent. For reasons of political expediency, the British government decided that withdrawal was one thing, and the future relationship was another. Withdrawal was one thing because there was such fear on the Brexiters’ side they would be cheated that they put a lot of pressure on exiting rapidly and quickly. Article 50, with its two-year timeframe for exiting, was thus seen a kind of insurance. We will see what comes next, but of course this doesn’t work because the fundamental question of how much politically and much economically will appear in the second phase. Only in the future regime relationship between the UK and UK will how much you can use your regulatory sovereignty and how much you are ready to pay for a thin, medium, or thick border be discussed.

Coming back to “what next”, I think there is still a possibility, and I am not going to say whether it is a high possibility or low possibility or a high probability or low probability, that the British prime minister gets her deal through Parliament before the EU parliamentary election. The reason for that is that if the polls are right, it doesn’t look good for the Tories. I think there is still a chance because it may create a sort of discipline that “we better avoid this carnage”. After all, only 60 votes were missing, which is much better than the first vote. Parliament’s acceptance of the withdrawal agreement would also avoid the strange situation of a country wanting to leave the EU but electing European parliamentarians who will decide on the future governance of the EU for the next five years. Unless the present European Commission survives until a Brexit agreement is approved. That’s a first possibility.

The second possibility, and this is where I come back to my unscrambling image, is to reduce the level of uncertainty which still lies for the next phase. For the moment we have a withdrawal agreement and we have good words and nice music about what we would all like to do in the future, but frankly speaking more appropriately for a Sunday night banquet and not really related to what we really have to do on Monday. What you really have to do on Monday in this case needs to be framed in a more precise way so to narrow the spectrum of possibilities for the next stage, which is too wide for something to be decided in this country, as it includes every option, from total exit at high cost to a low-cost quasi-no exit. I participated in many trade negotiations for 40 years, and my experience is that it usually works when you start with a stage in which you narrow the options, what in our trade vocabulary is referred to as discussing, framing, and agreeing about “modalities” – a sort of users’ notice where you reduce the universe of possibilities to something which starts making sense. My view is that if a deal doesn’t go through, the cause can be found in the excessively wide present spectrum of the next stage. If I am right, then you have to try to close it. Of course it would entail a compromise. Not a compromise between the EU and UK – but this story has never been a negotiation between the EU and UK – but between the UK and the UK. There was a bit of negotiation on what the rights should be for Europeans on British soil and the other way round, what bill should be paid for rent and petrol, but that was not the serious negotiation. The serious negotiation is about how much politically and how much economically. So that’s, I think, where it has to go and only then will we have a proxy for what the final relationship will be. And then it will be probably a bit more precise and people will be able to make a judgement on what Brexit is really about.

Saying this, I know I am using a concept that, including in this House, is a bit strange in this country, which is “compromise”; a world that is largely unknown in British politics. And that’s a big difference with the continent, and I am saying this as a French man because the only other European country where “compromise” is a strange word in politics is France. Compromise in France, a bit like here, looks like a ‘compromission’, whereas on the rest of the continent people are usually happy when they succeed in negotiating a compromise. So what’s next is either to do it within the next month or to start understanding why it can’t be done during the next month.

The British need to be presented with something that allows them to make a judgement on the proper trade-off between economics and politics in their future relationship with the continent.

This is not the case for the moment. Many thanks for your attention.