Brexit: The UK’s Fundamental Miscalculations on Europe

Unlike the UK government, the EU27 has been quite consistent, united and predictable in its approach to Brexit.

Still, it helps to highlight the core tenets of the EU position occasionally, as this is what shapes the range of negotiating options that are actually available to the UK.

Brexiteer illusions

A few days ago, a soft-spoken pro-Brexit Tory MP made three points to me:

1. As the EU27 runs a surplus in its trade with the UK, the EU27 would have more to lose from a no-deal hard Brexit. Hence, the EU27 will in the end cave in.

2. The EU27 needs the services of the City of London. That gives the UK significant leverage.

3. The Irish border issue is just a red herring, resolvable by intelligent use of technology to allow Northern Ireland to stay fully aligned with mainland UK but deviate a lot from the Republic of Ireland without any need for border controls.

Without saying it quite that explicitly, this politician seemed to imply that it would only take a more determined pro-Brexit Tory leader to call the EU‘s bluff.

The EU position

Over the last three years, I have heard these arguments quite regularly in the UK. In contrast, on the European continent, I have met very few people who see things this way, though.

For four reasons, the EU27 is unlikely to change its approach significantly, let alone to cave in:

1. The EU is about much more than commerce. As a result, the EU position is shaped by broader political considerations rather than narrow commercial interests. Preserving the political cohesion of the EU27 has become the continent’s top priority.

2. The EU27 empowers its smaller member states. To the surprise of Brexiteers who see the EU largely in commercial terms, the EU27 consistently puts what Ireland considers its supreme national interest above the commercial interest of industry in its other member countries.

The EU27 uses its sheer size to let the Republic of Ireland shape the terms for the post-Brexit economic future of Northern Ireland even at the risk of complicating overall post-Brexit EU-UK relations.

If Theresa May wants to change the “Irish backstop” — the permanent guarantee for no hard border in Ireland — she would need to convince Ireland’s Leo Varadkar, not Angela Merkel and Jean-Claude Juncker.

3. In absolute numbers, more jobs in the EU27 depend on cross-Channel commercial exchange than in the UK.

However, in relative terms, the much smaller UK is much more exposed. The UK earns about 12% of its GDP by exporting goods and services to the EU27, whereas EU27 exports to the UK account for just about 3% of EU27 GDP.

The EU27 thus has the much stronger hand, as the result of the Brexit negotiations shows.

4. The EU27 is well aware that the City of London supplies vital services which no financial center in the EU could replicate in the foreseeable future. As a result, any final Brexit deal will come with a lot of cherry-picking.

However, it will be the big EU — rather than the smaller UK — that will do the picking. The EU will decide which financial services can continue to be sold freely to the EU27 from London and which aspects of which services may face restrictions or may have to shift onshore.

EU unlikely to re-negotiate

That even holds for a no-deal hard Brexit. For example, the European Commission’s contingency plans for a hard Brexit would allow a clearing of euro derivatives contracts through London for one extra year beyond 29 March 2019.

As a result, the EU27 is highly unlikely to re-negotiate the current deal. The EU27 can offer kind words of “clarification,” but not genuine concessions such as de facto dropping the Irish backstop.

Of course, if the UK were to shift its approach dramatically and apply for the Norway-option (single market but not customs union) or full economic integration (single market and customs union), then the EU would be ready to consider that, and change the declaration on post-Brexit co-operation accordingly.

But as long as Ireland maintains its position, any Brexit deal would have to keep Northern Ireland in the EU customs union and in regulatory alignment for goods with the EU27 unless and until an alternative is found which satisfies Ireland’s demand to avoid a hard border.