Why a hard Brexit is not inevitable
As so often in life when you are confronted with an apparent impasse, there is a tendency to look for extreme solutions. This is why there has been a groundswell of opinion in favour of a hard Brexit. While even we cannot see the option of full membership of the single market in the way of the Norway model, there are potentially shades of grey between the EEA and a hard Brexit as a long Britain finds a way to control immigration without actually controlling immigration.
Denis MacShane offers a few ideas of how that can be accomplished. For starters, the freedom of movement does not apply to the public sector. Secondly, you could introduce discrimination into the tax system, making tax-free allowances contingent on minimum residency periods; and you could ask for qualifications for certain jobs in a non-discriminatory way. Some of these ideas may be worth looking at, though the public sector idea is a non-starter. While Art 45 mentions that the freedom of movement does not extend to the public sector, the ECJ has interpreted this clause in a fairly narrow sense - by restricting it to jobs that are essential to the functioning of a state. In other words: the government can discriminate in the recruitment of spies, but not of nurses.
As for taxes, the recent Apple ruling by the Commission illustrates that national tax laws are not entirely national if they interact with EU business. But residency rules are ok, for as long as one implements the same rules for British citizens returning home after a period of absence. Qualification requirements are ok, but note that the UK would have to respect foreign equivalent qualifications. The combination of some of these measures might control the inflow of unqualified workers from the EU, but would also discriminate again unqualified British workers. What it does not do, of course, is offer a lever to produce a numeric immigration target. But with such a system in place, the UK and the EU would be in a position to agree a much closer market access agreements. It would still not give the City the single passport, but would produce similar rights if the UK is recognised as an equivalent regime under MiFir - the regulatory twin to MiFid.
That would seem a sensible compromise to us - at least during a prolonged transitional phase, of say ten years or so. There are those who want to go further. We note a comment by Simon Nixon in the Times, who says that regulatory equivalence only works for a small subset of financial activities - mostly trading and asset management - but not for banking or insurance. And he makes the point that what is deemed to be regulatory equivalent today, may not be so in the future. So regulatory equivalence cannot be a long-term solution. The difference between a single passport and regulatory equivalence is akin to the difference between the right of residence and citizenship. The first can be revoked.
We think there is a great benefit to long transitional arrangements based on the EEA. The transitional regime would still honour the referendum result. It would lead to a hard Brexit eventually. And it would minimise the economic costs, by providing planning certainty for business, and stretching the costs over a number of years. There would be no backdoor way into the EU since the UK would have to go through an Article 49 accession procedure - and even if it did, there would be no automatic opt-outs from the euro and Schengen. This is in many ways a no-brainer compromise unless, of course, you are committed to numerical immigration targets immediately.
A hard Brexit will have economic costs. While we cautioned the pro-Remain campaigners against exaggerated economic claims, there is no doubt that a hard version of a Brexit would have at the very least frictional costs. We noted a story in the FT according to which Nissan is delaying investments in its Sunderland plant until after the UK has concluded the Article 50 negotiations. We expect this will not be the last such story.
The uncertainty is unlikely to persist for some time, until the government reaches a clearer position on its Brexit negotiation strategy. A study by the Institute for Government says the government will ned to hire some 500 new staff at a cost of £65m per year, just to plan its approach to Brexit. It is also important that the ministries end the turf wars. There will also need to be a strategy to deal with the regional impact of Brexit. All that will take some time. The point we would like to add that when this time comes - presumably at some point in 2017 - the uncertainty should end quickly.
The impact of Brexit on the UK economy has been modest so far. So far it also had little impact on the rest of Europe. In view of this we were surprised to read that the Italian government is now using Brexit as an excuse for the terrible economic performance of their country. The Italian budget document puts the impact of Brexit at 0.5-1% of GDP during the 2016/2017 period, which strikes us as excessive. We assume that the Italian government is looking for a scapegoat.