Britain must pursue its EU exit options

3/7/2016

By Wolfgang Münchau

Joining the EEA is one solution, or the country could pursue a bilateral trade agreement

Whoever wins the leadership contest of Britain’s Conservative party will have to deliver Brexit, or risk their own political future. There are theoretical scenarios in which Brexit does not happen. But they are as likely as the EU blowing up in an act of spontaneous self-combustion.

Those who still cling on to the hope of a miracle forget that the real-life facts of Brexit are being created in front of our eyes. EU residents in the UK are beginning to apply for citizenship. In September, EU leaders will meet without Mr Cameron, prime minister, to discuss the bloc’s future. Companies, such as Deutsche Börse, that were attracted by London’s position as Europe’s financial centre will start to make alternative plans.

Nor will the EU bend over backwards to get Britain back. EU leaders wanted Britain to vote Remain. The last thing they needed was another crisis. Now that it has happened, they have accepted the result. They listened to Nigel Farage, the UK Independence party leader, dish out insults in the European Parliament. They read about racist outbursts after the vote. And like the rest of us, they followed the campaign. It is hard to say what they must have found more shocking — the lies of the Leave campaign, or the failure by the Remain campaign to make a positive case for the EU.

So instead of engaging in the futile search for the undo button, our time is better spent focusing on what lies ahead. The first decision Britain will have to take is which of the realistic exit options to settle for. I only see two.

The most straightforward option, and the one I favour, is membership of the European Economic Area, currently a group of three countries — Norway, Iceland and Liechtenstein — that have unhindered access to the single market. I am aware of the obstacles. The quid pro quo would be full acceptance of the EU’s four freedoms, including the most important one: the freedom of movement of labour. Britain would also have to pay in to the EU’s budget. Theresa May, the home secretary and frontrunner in the race for the Tory party leadership, seems to have ruled out this option. Michael Gove, another candidate who led the Leave campaign, will not accept this either.

The EEA or Norway option is utterly inflexible. You cannot negotiate a bit less market access for a bit less freedom of movement. If you choose the EEA, there is in fact not much to negotiate.

The second option for the UK would be a bilateral free trade agreement — of the kind the EU is negotiating with Canada. This is not to be confused with single market access. Under a bilateral free trade agreement, the City of London would inevitably lose passporting rights — the ability to offer services throughout the EU without having to subject oneself to financial supervisors in other countries. There is no way the EU would allow UK-based companies post-Brexit to undertake financial transactions into the EU. Even Germany would not accept this. A bilateral agreement would allow for the free flow of goods and some services. But it is clearly not the same as being part of the single market.

The reduction to only two categories of deals means that there will be a direct trade-off between passporting, available in the EEA, and control over immigration, possible under a free-trade agreement. The UK can have one or the other, but not both. Nor can it have a portion of both. It will have to make a political choice. Maybe it will be possible to sequence the two. Britain could opt for an EEA treaty, and then go for a free trade deal later. That might be a compromise — though it might require trust, and may fail for that reason.

After deciding its negotiating position, the UK government then needs to decide when to trigger Article 50, the EU’s so-called exit clause. The most important consideration here is the French election. Brexit is already the central issue in the campaign. Marine Le Pen, leader of the National Front, will campaign for Frexit — a French exit from the EU and, by extension, from the euro. President François Hollande wants to make Britain pay for Brexit.

Under these circumstances it would be unwise for the UK to trigger Article 50 before May 7, 2017, the day of the second round of the French elections, unless it got informal assurances that the EU is ready to discuss Britain’s preferred option in a constructive spirit. Without such assurances, London would waste valuable time if it triggered Article 50.

Once it is triggered, a two-year countdown to departure starts. In theory, the negotiating period could be prolonged but it would be folly to rely on this. Renewal requires a unanimous vote.

My assumptions are: that Brexit will formally take effect in the second or third quarter of 2019, one year ahead of the next UK general election; that London will choose one of the two negotiated options — either an EEA agreement, or a looser bilateral trade deal; and Britain will be able to prosper under either scenario.

My advice to the Remainers is to get over it. You lost the battle a long time ago. The best course of action is to accept the result, and try to influence the negotiations in a constructive spirit. When this is over, Britain and the EU will need to be on speaking terms. They will remain partners in Nato, the Group of Seven leading economies and the Group of 20. And both will find that there are bigger problems in the world than their mutual relationship.

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