14 Feb 2018

Five Fault-lines. The EU-27 have been strikingly united on Brexit so far. This may not last

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The arrival of, for much but not all of the country, half-term creates a natural break in terms of domestic politics. This is especially welcome for an administration that does not have an overall majority in the House of Commons of its own. The Government is, nonetheless, moving towards a collective position on its preferred outcome or ‘end state’ in terms of the UK’s relationship with the EU. This will be flagged via a series of speeches over the next three weeks before a (distinctly) high-level set of core principles are sketched out in advance of negotiations that will only start in earnest once the transition arrangements currently under (somewhat tetchy) debate have been finalised.

Yet it is all too easy to forget that when we move to ‘phase three’ it takes, as Michel Barnier and David Davis have put it, “two to tango”. For all the understandable UK focus on the challenges that our own ministers face in uniting around a coherent line of argument, it can easily be forgotten that the EU is in a difficult position as well. Up to now, the EU-27 have managed an impressive degree of unity in their dealings with the Brexit question. That cohesion may become more difficult to retain.

This is for three reasons. First, the opening stages of the Brexit process were shrewdly framed by the European Commission. They involved two matters (the scale of UK financial contributions to the EU and the rights of EU citizens in the UK) on which it was straightforward for the 27 to agree and one more (the Irish border) where 26 out of 27 bluntly did not care but were content to defer to the one that did. The second element, a little counter-intuitively allowing for the first, is that certain players really did not believe that Brexit would actually occur until ‘phase one’ was completed and are only now focused on it properly. Third, electoral politics within the EU is about constantly shifting sands.

And it cannot be underestimated what a serious event Brexit is. In crude statistical terms, it is about one member of a club of 28 departing. But it is not just any old member. The UK is (as of today) the second largest member of the EU by population. It is (depending on exchange rate calculations) the second largest economy in the EU. It is plainly the second largest contributor to the EU’s budget. It is a ‘Big Cheese’. As Mr Hans-Olaf Henzel, a German MEP who is an ex-President of the BDI (the German CBI), observes, the UK quitting the single market is the equivalent of the 19 smallest economies in the single market all leaving it on the same day (strictly speaking 18.75, but he is right in essence).

All of which means that maintaining a united (and tough) EU line in the talks on the end state of the relationship is destined to be a challenge. There are likely to be five key fault-lines in practice.

A vacuum of political leadership in the largest EU member states

It is customary here to view our own Cabinet as weak and divided. Everything is relative. Last week the Christian Democrats and Social Democrats produced a draft 177 page agenda for yet another ‘Grand Coalition’ in Berlin that almost everyone involved dislikes. The Christian Democrats loathe the fact that Angela Merkel has conceded both the finance ministry and the foreign ministry to the SDP (and the interior ministry to their Bavarian junior partner, the CSU). The SDP membership (whose endorsement is required in a ballot for the pact to proceed) fear that continued participation in any deal with the CDU will bleed their support yet further and strengthen the extremes in German politics. On balance, they will accept the terms, but it will be the most loveless marriage in history.

It will chime with wider arrangements among larger EU states. Spain has an enfeebled minority

Administration whose two main participants are in competition with one another and face the mother of a constitutional crisis in Catalonia. Italy is about to have elections (on 4 March) that is likely to create a Parliament in which an explosive cocktail of Forza Italia (with Silvio Berlusconi pulling the strings), a more Eurosceptic Northern League, a neo-fascist entity entitled ‘Brothers of Italy’, and the hyper-populist but utterly unpredictable Five Star Movement, struggle for authority.

The counter-example is France but even this is not a certainty. Emmanuel Macron has a majority in the National Assembly but his victory was an extraordinary fluke and his polling numbers, having picked up in the last quarter of 2017, appear to be heading on a downwards direction once again.

Northern European economic interests favour a softer Brexit

The geography of the UK’s economic relationship with the EU in goods (where we have a large deficit) is stark. It may be a single market of (presently) 28 nations but UK trade is skewed towards a northern tier consisting of France up to and including Paris, Germany down to about a line that can be drawn from Frankfurt, Ireland, the Netherlands, Belgium, Denmark and Sweden. Services constitute a modest positive in the other direction but not at a strength that alters the fundamental that all of these countries or regions have reasons to favour a liberal free trade accord with the UK. As the end state debate becomes truly serious, expect national economic interests to operate.

Central European political interests favour a softer Brexit

The UK’s almost 30-year role as the ‘stroppy teenager’ in the EU house is being seized by others even before we have left the arena. Poland’s Law and Justice Party has swiftly assumed the part recently played by the British Conservative Party, causing real friction with Brussels. Warsaw has potential friends, however, not only in Hungary (a well-established up-start) but also the Czech Republic and possibly Slovakia. Austria’s new government, which includes the highly controversial Freedom Party, is another which has an incentive not to allow the European Commission and the European Parliament to run the show on Brexit but to champion the authority of the nation states instead.

Eastern European security interests favour a softer Brexit

Then there are those who share a border with Russia. Those in that position have become ever more concerned about the credibility of NATO (not least with the Trump factor thrown in) and think that only a determined European security initiative is any kind of counter-balance to a Putin-led Moscow. The idea that this would rely exclusively on France if the UK were to engage in a bitter withdrawal from the EU is profoundly unattractive. For Poland, the Baltic states, Finland, and to a degree both Bulgaria and Romania as well, retaining a benign relationship with the UK for security purposes is immensely important. It is no surprise, therefore, that the first of the ‘future state’ UK speeches about the EU will be delivered by the Prime Minister about security matters on this Saturday.

Money

The final and probably fundamental dimension is cold, hard cash. The loss of the UK means that a whopping 20% of the EU budget after 2020 will disappear. This is hugely problematic. It would be less so if London were willing to make an obviously smaller contribution in order to acquire access to the single market and retain an association with a small number of important EU agencies in which there would be mutual benefit in both sides continuing to engage with one another.

Referring to the earlier point about the size and scale of the UK as part of the EU, if it were to continue to put in just one-fifth of what it places in to the EU budget as of now, it would still be the fifth largest contributor to that budget, despite the UK not being a full member of the European Union. There is manifestly a bargain to be explored, rooted, as outlined in BVCA Insight last week on a ‘Reverse Ukraine’ treaty. The question is how long it will take for national economic and political interests to be re-asserted.

Tim Hames
Director General, BVCA


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