The most positive aspect of the letter invoking the Lisbon Treaty’s Article 50 – the one that has now formally initiated Great Britain’s withdrawal from the European Union – is its conciliatory tone. Just submitted to European Council President Donald Tusk, the document opens a two-year window for talks to unwind decades of British ties not just with the EU but also with several of the UK’s closest allies. In the carefully phrased, historic letter, Prime Minister Theresa May promises to negotiate “constructively and respectfully.” There is no longer any mention of her provocative mantra that “no deal is better than a bad deal.” Instead, PM May says “we want to make sure that Europe remains strong and prosperous and is capable of projecting its values, leading in the world, and defending itself from security threats. We want the UK, through a new deep and special partnership with a strong EU, to play a full part in achieving these goals. We therefore believe it is necessary to agree the terms of our future partnership alongside those of our withdrawal.”
It may be assumed that the British government will try hard to protect both U.K. companies established on the Continent and their counterparts with investments in the UK. Whitehall, of course, wants to make the separation as painless as possible. The letter promises that while the negotiations are going on the UK will continue to fulfill its obligations as a member state of the Union. It calls for the negotiation of a bold and ambitious free trade agreement, while stressing that Great Britain will not seek membership of the single market (“we understand and respect your position that the four freedoms of the single market are indivisible”). It speaks of legislation that will provide “certainty for UK citizens and for anybody from the EU who does business in the UK,” and it pledges that Whitehall will negotiate for “one United Kingdom, taking account of every nation and region of the UK,” which is to say Scotland, Wales and Northern Ireland.
None of this should fool one into believing, though, that that upcoming talks will be easy and free of tension likely to hurt business confidence, investment and – intermittently – the British pound. Mrs. May is a tough lady and consummate politician who prefers to deal in facts rather than personal relationships, which has already prompted a number of observers to describe her as frosty and undiplomatic. She likes to be in control and has the patience not to take a firm stand until the last minute, but she tends to accept compromise only when all other options are exhausted. This puts her at odds with many of her Continental European counterparts as she seeks to proceed on the basis of her calculations of British national interest. She is well aware that many on the other side of the Channel are far from eager to reward the UK and will drive hard bargains, and she knows all too well that her room for maneuver will be circumscribed, while the timetable is exceedingly tight.
If she pushes too hard, she could generate so much ill will among her opposites that she opens the door to a worst-case scenario: An exit from the EU with no deal. Tariffs would go up, border controls would be reinstalled and there would be huge economic disruptions. She would incur the wrath of UK businesses across the board, lose all support in parliament, and even see the United Kingdom disintegrate as Scots and people in Northern Ireland decide to go it alone. Efforts are already underway to arrange for a referendum on Scottish independence and in Northern Ireland Sinn Fein, the second-largest party, has renewed calls for a vote on leaving the UK and joining the Republic of Ireland. Spain is about to dust off its claims to Gibraltar. But if Mrs. May gives too much ground too easily her party will abandon her for selling Britain short. She cannot possibly have forgotten that European problems helped topple the past three Tory Prime Ministers and that the talks will have to cover a mind-bending array of issues, from aviation to the jurisdiction of the EU court.
Britain is not without leverage. It is a permanent member of the United Nation’s Security Council and a critical component of the North Atlantic Treaty Organization (NATO), in fact, the organization’s foremost European military power, rivaled only by France. It is a major player in global intelligence gathering and counter-terrorism. Cooperation in these fields is where the UK has the most to offer Europe. Its citizens, moreover, are not the only ones, as I noted on an earlier occasion, who have gained the conviction that the EU is run by an unelected supranational elite totally out of tune with the people it aims to govern, that there is a mushrooming administration of “nameless, faceless bureaucrats” imposing its one-size-fits-all rules often in conflict with the wishes of national governments. As political elites without accountability are wont to do, those in Brussels live high on the hog at the expense of ordinary people who in large parts of the European Union have had to deal with slow or no growth in incomes, a shortage of permanent full-time jobs and pressure on public services.
European leaders know that these sentiments have taken root in other member states as well and that, somehow, they need to be addressed before the anti-establishment Eurosceptic forces become too hard to contain. Thus, the EU has a clear interest in keeping the United Kingdom as a close and trusted friend, but by the same token it cannot allow Westminster to cherry-pick what it would like to keep from the EU while dropping obligations it does not want. Fortunately, while in the runup to the referendum predictions of economic disaster were the main weapon of the “Remain” camp, the economy at this point is doing quite well. In fact, I believe that there is a good chance that real GDP growth will accelerate to 2.5% or so this year, from a downward revised 1.8% in 2016, considering that a tight labor market is driving up wages more rapidly than inflation (which puts some recent months of declining retail sales into perspective) and Britain will be freed from European protectionism. Tariff changes will be a negative, but there are expectations that the effect will be more than offset by the trade benefits reaped from a softer pound.
Still, the months to come will be tough for PM May. She is determined to preserve the Union, which will require hard political decisions. It is likely to mean that many powers returning to Britain post-Brexit will have to be devolved to Edinburgh (for her, a breakaway of Scotland is certainly unacceptable), to Cardiff and to Belfast. She has also made it clear that her government will fight Spain to retain control of Gibraltar. In fact, one would be hard put to find a rationale under which it would make sense for Scotland to claim independence. It trades vastly more with the UK than with Continental Europe. It and the rest of the UK share a currency, some 63% of Scotland’s exports go to the UK (one-third of its economic output) and Scottish finances would be unsustainable in the event of a separation, given that the deficit of the administration in Edinburgh is 10% of GDP.
But, just because a separation does not make sense is no guarantee that it can be safely ruled out as a possibility, just as the emergence of a “hard” border between the Republic of Ireland and Northern Ireland should be, but ultimately may not be, avoided. As for Gibraltar, before Spain decides to do something rash and seeks to establish a fait accompli it would do well to remember the Falkland Islands and what happened to Argentina, there. But, again, the ability of people to do stupid things should never be underestimated.
Mrs. May has said she wants to pursue a “clean break” from the EU, returning to Britain control over immigration, jettisoning the jurisdiction of the bloc’s courts and exiting the common market. But this means replacing the European Union’s many trade agreements with bilateral deals, untangling thousands of EU-related laws on UK statute books as well as over 12,000 regulations that cease to apply the moment Britain leaves, and reconfiguring Her Majesty’s Government to cope with the new situation. Most of the agreements reached with Brussels will require approval by no fewer than 40 European national and regional governments and there is also the issue of how much the UK will have to pay to exit from the bloc. EU officials say Britain owes between 55 billion and 60 billion euros to cover budget commitments already made, future pension liabilities, and other items. Mrs. May in her letter hinted that her country is prepared to make some payments, but will want to discuss “how we determine a fair settlement of the UK’s rights and obligations as a departing member state.” In short, the divorce will doubtlessly be extremely complicated. It would be in everyone’s interest if it did not become contentious. But this will obviously not depend on Mrs. May alone. It will hinge – perhaps even more so – on how sincerely Brussels is prepared to put common sense ahead of politics. This is where my main doubts are focused. This is a factor that business interests on both sides of the Channel should watch.
Global Perspectives by Dr. Hans Belcsak