August 30, 2016
Brexit facts on the ground
The debate about the future relationship between the UK and the rest of Europe is now starting in earnest. Yet, some Brexit facts continue to be created on the ground. We noted a story by Reuters that London financial firms have given up hope of single-market access and are already preparing for a hard Brexit. It cites the share trading platform Bats, which benefits from the single passport, and which is now looking for a second location - in Dublin - unless it receives assurances of single market membership.
In this context, we noted a significant proposal by Jean Pisani-Ferry, Norbert Rottgen, Andrew Sapir, Paul Tucker and Guntram Wolff, who favour a system allowing the UK to impose quotas on migration while maintaining full access to the single market. It sounds too good to be true from a UK perspective, so we need to ask whether such a deal can fly politically - we think not - and whether there is a catch - our answer is yes. The proposal is, nevertheless, worth discussing because it is worked out in some detail, not just as a list of demands and red lines. The authors are seeking a new deal between core EU members and ante-room group. They call it the "continental partnership", a form of associated member status.
When people discuss the future of the EU, the first question a reader should always ask is: does it require treaty change. In this case the answer is surely yes. This is not a simple Art 50 agreement, but a major institutional reform of the EU, as it affects fundamental rights and sets up new institutions.
The authors' starting point is the correct observation that none of the existing models is suitable for the future relationship between the EU and the UK. What they are proposing, in essence, is a deal within which the UK imposes immigration quotas, has full access to the single market, has no co-decision over rule-making but the right of deep consultations, and contributes to the EU's budget.
The most controversial part of this paper is the observation that, from an economic point view, the freedom of movement of labour is of a different quality than the freedom of movements of goods, services and capital. They are connected, up to a point, but not completely inter-dependent. It is possible to freely exchange goods and services in a deeply integrated market without freedom of movement of workers, the authors argue.
But, surely, from an economic point of view, capital and labour are factor inputs, while goods and service are outputs. The EU's four freedoms were not a random collection of rights - but there was some purpose behind them. It is, also, technically possible to exclude capital from the list. But does it make sense?
There are also important political reasons why the four are not easily separable. Many EU countries are net importers of capital services from the UK, but net "exporters" of labour. Why should they agree to this? The authors concede that some form of labour mobility is essential - to allow companies to transfer workers for temporary periods. So these proposals benefit large companies, but not individuals. It also needs to be mentioned that the UK would need to mirror all EU single market legislation without any formal say in the process. This is unlikely to be politically sustainable.
We thought the single most interesting sentence of the entire paper was a small footnote, which is worth quoting in full. It tells us how complicated it will be able for the EU to agree such a system.
"We assume that the EU will define a joint migration policy. We would reject a quota system by which the UK would impose quotas on individual EU countries."
A joint migration policy is unlikely. And we don't think that a points-based immigration control system, based on educational levels, is consistent with EU's stipulations of non-discrimination. The UK is thus in some danger of ending up with the wrong type of immigration.
The Brexit commentary in the UK, meanwhile, focuses on a second referendum. We would recommend William Hague's well argued article in the Daily Telegraph in which he dismisses any likelihood of a second election, or some procedural ruse to boycott the result. He said he himself voted Remain, but says a second-best course is to not frustrate the result, but leave the EU with clarity, certainty and purpose. He says Theresa May will almost certainly, from a legal perspective, not need to consult parliament for the Article 50 trigger, but she would be wise to get parliament to ratify the referendum outcome, to forestall any future plots. He said the real threat is not from civil servants frustrating the result, but from the likes of Owen Smith, the Labour leadership contender, who is campaigning for a second referendum. A parliamentary vote could forestall that.
Wolfgang Munchau writes that freedom of movement was the DNA of the EU - like the holy ghost to the Catholic Church - not something you can easily dispense with. So, if the UK government prioritises immigration control, it will have to look for a different arrangement. He says there is a possibility of an EEA-type interim agreement. But it is absurd to think that Britain can export financial services to the EU from London, while restricting the movement of plumbers into London. He also criticises the erstwhile Remainers for going on a tangent by pushing for a second referendum. Not only will this not happen but, more importantly, they are leaving the entire debate to the Leavers.